{"id":32198,"date":"2018-10-29T13:02:53","date_gmt":"2018-10-29T07:32:53","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=32198"},"modified":"2018-10-29T13:02:53","modified_gmt":"2018-10-29T07:32:53","slug":"the-age-of-crypto-economics","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/the-age-of-crypto-economics\/","title":{"rendered":"The age of crypto- economics\u00a0"},"content":{"rendered":"<p><a href=\"http:\/\/www.thehindu.com\/opinion\/op-ed\/the-age-of-crypto-economics\/article22399215.ece\"><strong>The age of crypto- economics<\/strong><\/a><strong>\u00a0<\/strong><\/p>\n<p><strong>Context<\/strong><\/p>\n<p>The Finance Ministry recently issued a statement warning against investing in bitcoin and other cryptocurrencies (CCs). Likening CCs to \u2018Ponzi schemes\u2019, it linked them to terror-funding, smuggling, drug-trafficking, and money-laundering. The stern advisory came after three other warnings issued by the Reserve Bank of India<\/p>\n<p><strong>Why the distrust?<\/strong><\/p>\n<p>Two aspects of the bitcoin phenomenon have attracted great interest<\/p>\n<ul>\n<li>The challenge it poses to states and central banks<\/li>\n<li>The potential of its underlying technology to unleash a new wave of creative destruction.<\/li>\n<\/ul>\n<p><strong>CBDC <\/strong>(<strong>Central Bank Digital Currency)<\/strong><\/p>\n<ul>\n<li>It would be safe to say that the world\u2019s top central bankers have finally realised the futility of trying to control CCs.<\/li>\n<li>They are preparing to join them \u2014 by issuing their own Central Bank Digital Currency (CBDCs).<\/li>\n<li>A CBDC is a complex tool whose functionality is still being researched. But there is one flaw endemic to any CBDC: the contradiction between the centralising tendency of a CBDC and the decentralising technology that underpins cryptocurrencies.<\/li>\n<\/ul>\n<p><strong>CCs emerged due to distrust of bankers<\/strong><\/p>\n<ul>\n<li>What economists conveniently forget when discussing CCs such as bitcoin is the trigger for it: distrust of bankers.<\/li>\n<li>The global financial crisis of 2008-09 raised a simple question: what option do people have if banks are not to be trusted?<\/li>\n<\/ul>\n<p><strong>Financial Crisis of 2008 gives rise to Blockchain<\/strong><\/p>\n<p>A man (or a group of people) named Satoshi Nakamoto provided an answer: a peer-to-peer, \u2018trustless\u2019 electronic cash system based on a technology called blockchain.<\/p>\n<p><strong>Why is it attractive?<\/strong><\/p>\n<ul>\n<li>In order to be functional, a virtual currency must solve the problem of double spending.<\/li>\n<\/ul>\n<p><strong>The Question<\/strong><\/p>\n<p>Given that anything digital can be copied, how do you prevent someone from spending the same unit of currency twice?<\/p>\n<p><strong>How the traditional banks do it?<\/strong><\/p>\n<p>Today\u2019s cashless economy tackles this through a centralised ledger maintained by a \u2018trusted\u2019 intermediary \u2014 often a bank \u2014 on its own servers. But as per the definition of the problem, banks can\u2019t be trusted, remember?<\/p>\n<p><strong>Decentralised ledger to track double spending<\/strong><\/p>\n<p>Nakamoto solved the double spending problem by designing a decentralised ledger that bundles data about transactions into blocks, timestamps them, and links each new block of transactions with the previous one in an immutable chain of blocks that are copied, authenticated, and updated continuously, and publicly, on thousands of computers \u2014 the blockchain.<\/p>\n<p><strong>Motivating members itself to validate every transaction<\/strong><\/p>\n<ul>\n<li>The blockchain uses economic incentives (payment in the form of bitcoins or other CCs) to motivate members of the network to do the work of validating every transaction<\/li>\n<li>It does away with the bank\u2019s role as an intermediary, and this is what differentiates CCs from (the digital version of) fiat currencies.<\/li>\n<\/ul>\n<p><strong>Central banks not happy to give the initiative to somethingwhich eliminates their role<\/strong><\/p>\n<p>Not surprisingly, central banks and states are not pleased to have the rug of the cashless economy \u2014 with which they\u2019ve been smothering ordinary citizens \u2014 pulled from under their feet by a technology that regards them with disdain.<\/p>\n<p><strong>Why bitcoins remain attractive?<\/strong><\/p>\n<p>It has been pointed out that bitcoins, unlike a stock or a bond, are a purely speculative asset untethered to a material basis of value. While this is somewhat true, it doesn\u2019t explain why bitcoins continue to remain attractive as a store of value<\/p>\n<p><strong>Deflationary nature<\/strong><\/p>\n<ul>\n<li>A major reason seasoned speculators find bitcoins irresistible is its deflationary nature, which makes it inflation-proof<\/li>\n<li>Since there can only ever be 21 million bitcoins, unlike a fiat currency, it cannot suffer a loss in value due to inflation.<\/li>\n<\/ul>\n<p><strong>CCs may usher in the era of neo-liberal economics<\/strong><\/p>\n<ul>\n<li>In this regard, cryptocurrencies such as bitcoin may herald the next stage of neo-liberal economics:<\/li>\n<li>The privatisation of currency and disciplining of the state (no more quantitative easing!) by reducing the fiat currency into one of many competing currencies.<\/li>\n<\/ul>\n<p><strong>State still has the taxes under its control<\/strong><\/p>\n<p>In theory, the state still has a trump card: it decides the currency in which taxes are paid.<\/p>\n<p><strong>Might not make any difference<\/strong><\/p>\n<p>But that may mean little in a scenario where the political apparatus has been captured by finance capital, which is increasingly the norm in democracies where unknown donors contribute astronomical sums to political parties.<\/p>\n<p><strong>Blockchain world<\/strong><\/p>\n<p>Amid all the frenzy over bitcoin\u2019s rocketing values, it is easy to forget that it is just one version of one application (cryptocurrency) of a new technology (blockchain)<\/p>\n<p><strong>Just like the internet in its early days<\/strong><\/p>\n<p>In some ways, the present moment is analogous to the early days of the Internet, when Hotmail was an exciting new discovery and the Internet was synonymous with email.<\/p>\n<p><strong>So many CCs other than bitcoin<\/strong><\/p>\n<ul>\n<li>com, a website that tracks the market capitalisation of cryptocurrencies, lists 1,379 currencies<\/li>\n<li>Away from the hysteria around bitcoin, lesser known cryptocurrencies such as Omisego, TRON, Golem, and Storj are attracting investments that are helping to set up an entire decentralised ecosystem and payments infrastructure on blockchain platforms that could radically transform the way businesses transact with each other.<\/li>\n<\/ul>\n<p><strong>Fundamental value proposition of the blockchain<\/strong><\/p>\n<ul>\n<li>The fundamental value proposition of the blockchain is that it eliminates the need for trust \u2014 a commodity without which exchanges of value (transactions) cannot happen<\/li>\n<li>This means that individuals and businesses can do away with a whole bunch of intermediaries whom they pay for managing trust.<\/li>\n<\/ul>\n<p><strong>Example<\/strong><\/p>\n<p><strong>Ethereum<\/strong><\/p>\n<ul>\n<li>For instance, on Ethereum, a blockchain platform that calls itself \u201cthe android of the cryptocurrency world,\u201d you can set up an application that enables people to rent out idle storage space on their laptop<\/li>\n<li>Someone who needs cloud storage can pay you directly, instead of paying Amazon, a leading cloud storage intermediary<\/li>\n<li>You could thus monetise a resource that you didn\u2019t even know you had<\/li>\n<li>Ethereum, too, is listed on cryptocurrency exchanges, and it is worth $112 billion, not far behind bitcoin\u2019s market capitalisation of $259 billion.<\/li>\n<\/ul>\n<p><strong>Stori<\/strong><\/p>\n<p>Well, Storj is an application that does precisely that, and it already enjoys a market cap of $298 million<\/p>\n<p><strong>Programmable money<\/strong><\/p>\n<p>Programmable money is another example of a decentralised blockchain-based application. Since digital currencies are software programs, one can program a particular CC such that, say, it cannot be used to buy the product of a company that uses sweat shop labour<\/p>\n<p><strong>Areas of advantage: IoT and AI<\/strong><\/p>\n<p>Two domains that would gain immensely from blockchain applications and CCs are Artificial Intelligence and Internet of Things (IoT), since in an IoT world, thousands of devices would need to rapidly and seamlessly transact with each other in real time, without the devices\u2019 owners having to dig into their wallets every time.<\/p>\n<p><strong>No socialist paradise<\/strong><\/p>\n<ul>\n<li>Of course, as happened in the early days of the Internet, some of the claims being made about blockchain are plain sill<\/li>\n<li>It is true that the technology\u2019s peer-to-peer orientation renders it more democratic. But it is not about to usher in a socialist paradise<\/li>\n<li>Even the World Wide Web was supposed to be a decentralised, democratic space where everyone was equal. We all know how that turned out<\/li>\n<\/ul>\n<p><strong>A political promise<\/strong><\/p>\n<p>It so happens that right now any technology that drives decentralisation also carries some political promise by virtue of challenging the centralising tendency of power<\/p>\n<p>But that is a byproduct, and not to be confused with its intent, which remains the same as with any other IT innovation of recent times: efficiency and profit<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The age of crypto- economics\u00a0 Context The Finance Ministry recently issued a statement warning against investing in bitcoin and other cryptocurrencies (CCs). Likening CCs to \u2018Ponzi schemes\u2019, it linked them to terror-funding, smuggling, drug-trafficking, and money-laundering. The stern advisory came after three other warnings issued by the Reserve Bank of India Why the distrust? Two&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/the-age-of-crypto-economics\/\">Continue reading <span class=\"screen-reader-text\">The age of crypto- economics\u00a0<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-32198","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704664696},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/32198","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=32198"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/32198\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=32198"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=32198"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=32198"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}