Tech Innovation vs The Economic Paradigm
The technology powering cryptocurrencies is innovative and full of promises. However, it is important to realize that digital currencies do not shift the paradigm of the economic world.
Failure to recognize that entices people to engage in reckless investment behavior, inconsiderate speculation and other gambling ventures.
Lipstick On The Same Pig
Greek economist Yanis Varoufakis would remind us that the words “utility” and “debt” share the same etymology in Greek, respectively chresi (χρέος) and chreos (χρήση).
He traces the origin of Capitalism back to the time people started issuing debts prior to production. The problem being that whenever the production does not catch up with the debt created, when the present cannot produce the value that the future demands, trouble systematically ensue.
The subprime crisis is a typical example. I was working for a brokerage firm in London at that time. Many obscure financial instruments, with even more exotic names, would tick everyday on the trading screens. Collateralized Debt Obligations (CDOs), Mortgage Backed Securities (MBS) and Credit Default Swaps (CDS) were traded to finance a market now known as the housing bubble. People recklessly engaged in trading these instruments (currencies) because they had belief in them.
It turns out that the utility value did not match the production and trouble indeed ensued.
Similarly and despite the technical innovation, digital currencies are sitting on the same capitalist paradigm where debt is created before production – noticeably, the rise of the utility value (expected returns) is not correlated to growth in labor productivity.
How about the shift through decentralization?
To answer, let’s draw a parallel with the success story of Github, the most popular and innovative distributed version control platform.
Anyone who has been long enough in the business of software development knows how complex source control implementation has been for large projects. Everything was centralized to orchestrate file access, locking and merging.
Then comes GitHub with an abstraction and a distributed model. An elegant solution allowing us to do the same things (i.e. managing changes in software source code) while removing many obstacles in the way. But you see, we could still screw up the software release, we could still introduce bugs, we could still even wipe out the entire codebase by being careless.
GitHub did not shift the paradigm – it created a lighter, smoother and faster process.
In ancient Greece again, Socrates received the death penalty despite a fully decentralized justice system. And even within the decentralized Greek Cities (Poleis), political power was still orchestrated by few aristocrats.
The 1 Million BTC Sword of Damocles
Here is a reminder of the reality of our untamable financial markets.
On May 6, 2010, one large trader managed to crash the financial markets. It included the collapse of the S&P 500, the Nasdaq 100, the Russell 2000 and the Dow Jones Industrial Average which experienced the greatest decline in its history (SEC investigation report).
All it took was an automated sell order worth $4.1 billion and 36 minutes! The markets recovered only after discovering that the sell order was attributed to an automated trading software mistake.
This incident illustrates the snowball effect that a relatively small move (0.1%) can have on a multi-trillion dollar market. The Dow Jones alone had a market cap of $3.6 trillion at that time.
In the light of this, we should remember that a total of over 1 million BTC have been traced back to belonging to Satoshi Nakamoto, the inventor of Bitcoin. This figure represents 5.47% of all bitcoins due to the current consensual limit of 21 million total Bitcoins.
Comparing with the ratio of total U.S. dollars invested in financial markets ($70 trillion), it is like someone sitting on a $3.5 trillion investment. The only equivalent, that I could think of, is the total assets of the Federal Reserve.
So, with over 5% of the total market capitalization lying in the hands of one unaccountable individual, mainstream Bitcoin would become the gift of Dionysius to Damocles.
In the Bitcoin white paper, Satoshi Nakamoto wrote: “We have proposed a system for electronic transactions without relying on trust”.
From a tech point of view, this is entirely correct – the use of strong cryptography removes the need for trust between parties.
However, due to the current implementation, trust requirement has in fact shifted toward the good intentions behind the purpose of that large BTC reserve. But even with good intentions being assumed, it is paradoxical that a system intended to fight the status-quo of financial institutions has centralized so much equity from inception.
As the uneven distribution is rising, some individuals and businesses are already able to move cryptocurrency markets for political reasons – very much like the current financial institutions and central banks.
What is even more obscure is that these top 10,000 richest addresses are likely controlled by only a handful of individuals. Again, distributed systems (technology) do not, magically, bring equal distribution and access to wealth – technology can very much prosper within our existing system.
A Big Red Button?
We could keep on engaging into reckless, careless and uncontrolled behavior or we could, like these successful and innovative businesses, implement best practices right now.
The GitHub repository management page does a good job at warning users (see below) but it is all up to us in the end. We can always press that big red button, ignore the warnings, delete everything – screw up.
– “Errare humanum est” , Seneca.