Bit­coin and other cryp­tocur­ren­cies are use­less

For blockchains, the jury is still out

The Ukrainian Week - - CONTENTS -

The rise and fall of spec­u­la­tors

AN OLD say­ing holds that mar­kets are ruled by ei­ther greed or fear. Greed once gov­erned cryp­tocur­ren­cies. The price of Bit­coin, the best-known, rose from about $900 in De­cem­ber 2016 to $19,000 a year later. Re­cently, fear has been in charge. Bit­coin’s price has fallen back to around $7,000; the prices of other cryp­tocur­ren­cies, which fol­lowed it on the way up, have col­lapsed, too. No one knows where prices will go from here. Calling the bot­tom in a spec­u­la­tive ma­nia is as fool­ish as calling the top. It is par­tic­u­larly hard with cryp­tocur­ren­cies be­cause, as our Tech­nol­ogy Quar­terly this week points out, there is no sen­si­ble way to reach any par­tic­u­lar val­u­a­tion.

It was not sup­posed to be this way. Bit­coin, the first and still the most pop­u­lar cryp­tocur­rency, be­gan life as a techno-an­ar­chist project to cre­ate an on­line ver­sion of cash, a way for peo­ple to trans­act with­out the pos­si­bil­ity of in­ter­fer­ence from ma­li­cious gov­ern­ments or banks. A decade on, it is barely used for its in­tended pur­pose. Users must wres­tle with com­pli­cated soft­ware and give up all the con­sumer pro­tec­tions they are used to. Few ven­dors ac­cept it. Se­cu­rity is poor. Other cryp­tocur­ren­cies are used even less.

With few uses to an­chor their value, and lit­tle in the way of reg­u­la­tion, cryp­tocur­ren­cies have in­stead be­come a fo­cus for spec­u­la­tion. Some peo­ple have made for­tunes as cryp­tocur­rency prices have zoomed and dived; many early pun­ters have cashed out. Oth­ers have lost money. It seems un­likely that this lat­est boom-bust cy­cle will be the last.

Economists de­fine a cur­rency as some­thing that can be at once a medium of ex­change, a store of value and a unit of ac­count. Lack of adop­tion and loads of volatil­ity mean that cryp­tocur­ren­cies sat­isfy none of those cri­te­ria. That does not mean they are go­ing to go away (though scru­tiny from reg­u­la­tors con­cerned about the fraud and sharp prac­tice that is rife in the in­dus­try may dampen ex­cite­ment in fu­ture). But as things stand there is lit­tle rea­son to think that cryp­tocur­ren­cies will re­main more than an over­com­pli­cated, un­trust­wor­thy casino.

Can blockchains — the un­der­ly­ing tech­nol­ogy that pow­ers cryp­tocur­ren­cies — do bet­ter? These are best thought of as an idio­syn­cratic form of data­base, in which records are copied among all the sys­tem’s users rather than main­tained by a cen­tral au­thor­ity, and where en­tries can­not be al­tered once writ­ten. Pro­po­nents be­lieve these fea­tures can help solve all sorts of prob­lems, from stream­lin­ing bank pay­ments and guar­an­tee­ing the prove­nance of medicines to se­cur­ing prop­erty rights and pro­vid­ing un­forge­able iden­tity doc­u­ments for refugees.

NOTH­ING TO LOSE BUT YOUR BLOCKCHAINS

Those are big claims. Many are made by cryp­tocur­rency spec­u­la­tors, who hope that stok­ing ex­cite­ment around blockchains will boost the value of their re­lated cryp­tocur­rency hold­ings. Yet firms that de­ploy blockchains of­ten end up throw­ing out many of the fea­tures that make them dis­tinc­tive. And shut­tling data con­tin­u­ously be­tween users makes them slower than con­ven­tional data­bases.

As these lim­i­ta­tions be­come more widely known, the hype is start­ing to cool. A few or­gan­i­sa­tions, such as SWIFT, a bank-pay­ment net­work, and Stripe, an on­line­pay­ments firm, have aban­doned blockchain projects, con­clud­ing that the costs out­weigh the ben­e­fits. Most other projects are still ex­per­i­men­tal, though that does not stop wild claims. Sierra Leone, for in­stance, was widely re­ported to have con­ducted a “blockchain-pow­ered” elec­tion ear­lier this year. It had not.

Just be­cause blockchains have been over­hyped does not mean they are use­less. Their abil­ity to bind their users into an agreed way of work­ing may prove help­ful in are­nas where there is no cen­tral au­thor­ity, such as in­ter­na­tional trade. But they are no panacea against the usual dan­gers of large tech­nol­ogy projects: cost, com­plex­ity and over­cooked ex­pec­ta­tions. Cryp­tocur­ren­cies have fallen far short of their am­bi­tious goals. Blockchain ad­vo­cates have yet to prove that the un­der­ly­ing tech­nol­ogy can live up to the grand claims made for it.

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