When Bitcoin was born ten years ago, the world was torn by financial crisis.
It was 2008. Major governments had piled up massive debts. Lehman Brothers failed, triggering a chain reaction of even greater failures in the banking system. Governments responded by printing unlimited quantities of money. And Bitcoin was born as Satoshi’s indignant response to the mess they created.
The dream: To create a peer-to-peer system of electronic cash, killing three birds with one stone:
First, Bitcoin would unshackle money from the control of those who created the financial crisis.
Second, it would replace their behind-the-scenes deliberations and manipulations with the first-ever form of money that has a built-in monetary policy.
Third, the monetary policy would be stable, predictable and completely transparent — visible to everyone.
That was the dream. But it has not been the reality.
Bitcoin will more closely resemble a store of wealth (like gold) than a system of electronic cash.
Here’s what happened …
When Bitcoin creators looked at fiat money, there was little desire to sort out the good from the bad. Instead Bitcoin’s specs were deliberately designed to be the exact antithesis of every critical aspect of existing monetary policy. Specifically …
1. Fiat money supply is unlimited and forever expandable. Bitcoin’s money supply is strictly capped and immutable.
2. Access to fiat digital money is dictated by banks. Bitcoin is free for everyone and anyone to use as they see fit.
3. The fiat money system is made up of multiple gatekeepers and asset custodians that have to be regulated by a central government and trusted by the people. Bitcoin’s code stipulates that there are no gatekeepers, custodians, regulators or governments in the mix. In fact, there’s supposed to be no authority whatsoever.
That was the theory. But in practice, these design choices have taken a heavy toll on the Bitcoin network over time:
1. Since Bitcoin is scarce, most people are usually reluctant to spend it. Instead, they simply hoard it in the expectation that, with time, its value will always go up.
2. Since there is no formal authority, there has emerged an oligopoly of miners who control the minting of most new Bitcoins.
3. And since Bitcoin lacks adequate governance rules to select custodians, certain groups of developers have seized control over most of the network’s development.
So, with the benefit of hindsight, it’s now evident that Bitcoin was an overreaction to the financial crisis and to the monetary system that allowed the crisis to occur.
End result: Instead of functioning as an efficient peer-to-peer system for transferring cash, Bitcoin is evolving into a store of value like gold. But unless dramatic changes are made, that could wind up being its only function ten years from now.
What’s worse, if current trends continue, Bitcoin could become an asset that’s mostly mined by an oligopoly of large corporations in the East … but mostly owned by large financial institutions in the West. (See “What might happen if China declared war on Bitcoin?”)
The good news: Like gold, Bitcoin still retains the potential to rise dramatically in value. Moreover, the fact remains that Bitcoin introduced the first public, open, digital asset the world has ever seen. Bitcoin was the first successful experiment with Distributed Ledger Technology (DLT). And in recent years, that revolutionary technology has evolved rapidly.
So, what comes next? Looking ahead to the next ten years, we can see how …
DLT could contribute not only to the evolution of money and the stability of monetary policy … it could also enhance economic productivity, political governance, social cohesion and more.
DLT could revolutionize democratic elections, transform the world of lending and massively disrupt social media. So, the potential for cryptocurrencies to change the world is big, much bigger than originally expected ten years ago.
In fact, whether or not Bitcoin can deliver on its original promise is now a moot point. Other cryptocurrencies are rising to the occasion to fulfill the original dream … plus much more.
Yes, the invention of Bitcoin broke the ice.
• It unleashed teams of developers and thinkers who are passionate about a decentralized digital cash system, who are fixing the deficiencies of Bitcoin and fine-tuning their algorithms to create a currency for the masses, and …
• More recently, it has also unleashed a parallel trend of a very different kind: Regulators and gatekeepers of the traditional financial system see the handwriting on the wall. They have become increasingly aware of the powerful advantages that DLT could bring to the table. And they are already looking for ways to adapt, adopt — or co-opt — the new technology to modernize the existing system.
Depending on which of these prevails, there are two possible scenarios on how cryptocurrencies evolve over the next decade:
Scenario A. Decentralized DLT
Public open ledgers and their native cryptocurrencies begin to replace the fiat currency system. Instead of saving, spending or investing dollars, euros or yen, people begin to do all of those things with cryptocurrencies like EOS, Cardano, Ripple, Stellar or Holo.
A growing share of the population transitions from government-issued currency to public cryptocurrencies. They are attracted to crypto by handy, practical distributed applications (dApps), powered by free and open cryptocurrencies.
This activity is not controlled by government or government-regulated institutions. It’s governed by the consensus of each community.
Initially, governments resist. But eventually, they accept the new reality. They realize they can no longer control the monetary system the way they used to. Instead of bucking the trend, they begin to recognize these new forms of money as legal tender.
No currency emerges as the sole winner. Rather, a select group of cryptocurrencies becomes dominant, thanks to superior technology, the most practical applications and the broadest mainstream acceptance.
Scenario B. The Centralized DLT Scenario
Governments of the world’s largest economies — the U.S., the European Union, China and Japan — lead the way toward adopting Distributed Ledger Technology. If not, smaller countries take the lead and the larger ones follow. They realize that digital money is the wave of the future. And they see that the single, most-efficient form of digital money is based on DLT.
BUT instead of creating open, decentralized systems, they focus on digital money systems that mimic the fiat system already in place. Yes, the technology is similar. But the governance is not: The new kinds of money remain under the direct control of central banks.
For political leaders who crave more power and control, it’s a massive upgrade: Government agents gain the ability to directly monitor every single transaction in the system. They are empowered to freeze accounts with a few clicks of a mouse. And once various kinds of property are digitized, a government decree to confiscate assets of targeted groups can be executed in seconds.
The technology is still distributed ledger. But instead of opening the network to everyone (a permissionless system), those who wish to join must first get the government’s OK (a permissioned system). And instead of relying on the rules embedded in the code to ensure fairness (a trustless system), participants must accept the authority of the rulers (a trusted system).
In a country with strong democratic traditions and judicial protections, this would not be of immediate concern. The government is expected to act in the best interests of the people. It’s assumed it will use its new digital superpowers strictly against rogue actors.
But in countries already leaning toward autocracy or with no independent judiciary to speak of, the picture goes from dark to darker: Governments use centralized DLT to snuff out whatever individual freedoms remain.
How can two starkly different scenarios be enabled by the same technology?
Remember: All technology is inherently neutral. It can be tool of evolution or a weapon of destruction; a blade for harvest or for war.
DLT is a prime example. It’s one of the most revolutionary technologies on the planet. It can help enhance individual freedom, guarantee property rights and build wealth. Or, it can be used by authoritarian governments to install a draconian surveillance state.
Ten years from now, which will it be? A lot will depend on which scenario prevails: Decentralized DLT or centralized DLT?
My guess is that, for now at least, we could wind up with an unholy mix of both. But in the longer term, decentralized DLT will always have two major advantages:
First, DLT derives its greatest power from voluntary mass participation. But centralized DLT represses that mass participation. It’s contrary to the essence of what DLT does best.
Second, even if governments can create their own form of cryptocurrency that’s fully under their control, it will be almost impossible for them to ban decentralized DLT networks.
In the end, the same dynamic that ultimately makes democracies stronger than dictatorships will also make decentralized DLT stronger than the centralized alternative.