# Cryptocurrencies ## Blockchain-based Blockchain-based cryptocurrency: - Allows to create a currency and a set of rules that govern it - You define how transactions in the currency happen, and side-effects to transactions - The goal is something like money; something you can store, trade, etc - Ethereum and the like go further and support Smart Contracts, where the side-effects can be "execute this code", allowing to create fun things like [[Distributed Autonomous Organizations (DAOs)]] ## Technical achievements - A system where nodes can cooperate without trusting each other - Solved by the currency itself - By cooperating you earn money in proportion to how much you've contributed to the system - If you don't cooperate, you don't get paid - The problem of abuse has been solved by making every action cost money (or computing time, which also costs) - Over-use of network resources is solved by making it prohibitively expensive - The possibility to run code on the distributed system: [[Distributed Apps (dApps)]] ## Benefits > Saying that crypto is for money lovers is true, but just as trains are for transportation lovers and jackets are for clothing lovers. There is nothing inherently wrong, it's just a piece of human culture and interaction mechanics. Creating a self-sustaining network of computers that model a currency is enough for some people, just like WoW and Fortnite are enough for others. Crypto creates an MMO where the game is "currency speculation". And it's quite realistic, because real money is at stake. If you win the game, you get real money. [[Non Fungible Token (NFT)]] add another layer to the game. ## The bad ### Environmental impact [[Proof of Work (PoW)]] networks are wasteful by nature, which is the most serious objection to most popular [[Cryptocurrencies]] such as Bitcoin, Ethereum, Solana, etc. But there are solutions that are less wasteval such as [[Proof of Stake (PoS)]] cryptocurrencies. The problem is now for people to massively migrate to [[Proof of Stake (PoS)]] chains. ### Interactions at boundaries A bigger problem with a lot of the potential applications for crypto is that the things that are happening inside of the network happy **only** inside of the network. It's the case both for NFTs and DAOs: - [[NFTs have a major boundary problem]] - [[DAOs have a major boundary problem]] ### Governance All projects govern themselves differently, but there's a common thread among many: the size of investment is proportional to your voting rights. In Bitcoin, this investment has to take the form of actually buying computer time and hooking them up to the network; in others (and especially DAOs) there are actual voting systems (e.g., https://docs.ens.domains/v/governance/process) In practice, the majorities of tokens are always held by early adopters. Nearly a third of all bitcoins are held by 0.01% of its users. The ENS early contributors controls ~50% of the voting rights. So it's not democratic, and it's similar to how current generation startups work. The concentration of power is just greater and longer-lasting. So it's a complicated and expensive duplication of the existing real-world system. The utility of starting a DAO to perform an action vs starting a regular corporation or non-profit is unclear. There's a simple solution to this problem though: establish a fairer system to distribute voting rights long term. ### Transaction costs and abuse at scale Another fundamental problem of using crypto to build functioning software at scale is that the same good features that help solve the tricky problems begin to become anti-features at scale. A big one is transaction costs. Everything that happens in such a system is a financial transaction. Considering a Twitter clone, we could imagine that it would cost some very small amount of money to read tweets (or not) and some money to post tweets. The money earned from posting could be re-distributed to people whose tweets are read a lot, to encourage them to tweet more. The problem is to know how much it should cost to tweet. If it's cheap to tweet, then the system will become over-run with bots, spam & abuse. Twitter has huge & expensive systems to deal with that. CryptoTwitter has to solve that problem with financial engineering. If you make it expensive to tweet, nobody will do so, earnings from popular tweets will fall, people will tweet less and the network will die. (same with other features) This is true for anything that wants to operate at scale. If you want billions of users to post millions of times per second, the transaction costs are going to have to be tiny. If the transaction costs are tiny, then it becomes too easy to abuse. ### Incentives for participation What keeps computers in the network running and keeps them cooperating is money. Either users must pay per transaction and reward the computers that way, or there are tokens produced that have some intrinsic value and some kind of mining mechanism produces them. How would this work for Web apps as we understand them now? Consumers expect that using a Web app is generally free. Reading news is free, getting e-mail is free, sending messages is free, etc. Paying per transaction for these things creates a barrier to adoption. Money might come from somewhere else (e.g., subscriptions or advertising), but this brings back the same problems. If a crypto app is ad-supported, why run it as a currency? If users have to pay to use it, why would they do that when the former, ad-supported versions are free to use? What problem is solved by modeling a social network as a currency? What becomes easier? Where does the money come from when the existing alternatives are free? ### Web3 Chris Dixon says in "Why Web3 matters": "Tokens align network participants to work together toward a common goal — the growth of the network and the appreciation of the token". Not all systems make sense with that model. Why model playing games, making music, watching movies or sending messages etc as a currency. What would that improve? Is currency actually a practical money for general computing? ## The ugly There's a lot of ugly. All sorts of market manipulation, wash trading, ICOs turned into ponzi schemes, pyramid schemes, theft, scams, grifters, etc. Even if the ugly is removed from the equation, crypto still has major issues.