Common Misconceptions and Fallacies about Cryptocurrencies - Part 2

This is the second post in the series of blog posts which aims to debunk popular myths and provide logical counterarguments to some of the most common misconceptions about cryptocurrencies.You can read the previous post here.

Popular Belief #3: “We like blockchain, but not Bitcoin”

Blockchain-not-Bitcoin-Meme

The excitement about blockchain (but not its native token, Bitcoin) in the mainstream media and amongst the ecosystem of large, legacy technology companies reached its crescendo in 2015, but has recently been taken up again by the research departments of large banks and financial institutions that are coming under increasing pressure from their clients to frame and articulate actionable views. The problem with this perspective is that it fundamentally misunderstands what a blockchain is. It makes the false assumption that there is such a thing as a blockchain platform which is independent and separate from a Bitcoin or token that transacts or operates across the platform.

The basic problem with this type of argument is that it does not actually understand the technical nature of the blockchain or Bitcoin. The argument is based on imperfect analogies and does not accurately reflect the actual technical architecture of the system or underlying technology. Blockchain and Bitcoin are not separate, indeed they are inseparable, because Bitcoin is the mathematical / logical construct the encapsulates the public / private key permutation that specifies an address value in the database. In other words, the Bitcoin or crypto token is the logical operand that performs and records the read/write operation in the database. Put simply, the Bitcoin or Crypto token operates in the manner of a paid API key that is required to access and interact with the data that resides within the distributed, data structure that is a blockchain. Also, the monetary, real-world value represented by the Bitcoin token is what incentivizes Bitcoin miners to lend computational power to the Bitcoin blockchain, thereby rendering it censorship-resistant and protecting it from manipulation by bad actors.

If the database structure has value, then the network has value. The more that people value the network expressed in terms of wanting to use or interact with the network, the more a read/write operation to the database network has value, the more that the read/write operation has value, the more that the token that enables the read / write operation has value. Standard LOESS predicts price movements and price signals commensurate with Metcalfe’s Law. Simply put, people are finding this type of database structure increasingly valuable and therefore the value of the token that performs the read/write operation to merely reflecting the value that is being ascribed to the underlying data structures or blockchains. Whether this read/write operation or the token is available to all participants or merely to a restricted set of pre-qualified participants is the only difference between a private blockchain vs a public blockchain like Bitcoin. This is a separate matter and is typically conflated in most “Blockchain but not Bitcoin” pieces put there.

For a more detailed articulation, please refer https://eng.paxos.com/blockchain-separating-hype-from-substance-part-2

Popular Belief #4: “Fiat currency is backed by national governments. Crypto is backed by nothing at all.”

The idea that Fiat currencies are backed by the full faith and credit of nation states is a widely held belief that is worth exploring in more detail. Let us focus our attention on the US Dollar, the national currency of the world’s dominant political and economic power. The US Dollar was established as sole legal tender in the US in 1913 by the Federal Reserve Act, which was an Act of Congress that created and established the Federal Reserve System, the central banking system of the United States. As a consequence of the Federal Reserve Act, the Federal Reserve acquired the exclusive right to issue new money. Until 1971, the US operated some version of a Gold standard which held that a US Dollar could be exchanged for a certain amount of Gold. Most other national governments also operated their own versions of a Gold standard. In 1971, President Nixon ended the Gold standard. Under the Bretton Woods system, all global currencies were priced in terms of U.S. dollars and were thus indirectly linked to the gold standard. The need for the U.S. government to maintain both a fixed US Dollar per troy ounce market price of gold and also ensure stable conversion to foreign currencies caused economic and trade pressures, further exacerbated by a gradually globalizing and inter-dependent global trade economy. By 1971, this was proving incredibly complex for the US to manage efficiently.

The lifting of the gold standard had profound implications for the meaning of money. Before 1971, you could take a US Dollar bill and exchange it for a pre-determined amount of gold. At one point, a US dollar bill would say “This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury or at any Federal Reserve Bank.” The reference to “lawful money” is a reference to gold. Today, a US Dollar bill simply says; “This note is legal tender for all debts, public and private.” To be clear, you can no longer exchange it for gold or “lawful money”. This begs the question, what does “backed by the full faith and credit” of the US government actually mean? It means that the US Dollar is now merely legal tender. The US Dollar is therefore backed by nothing. To be precise, the US Dollar relies on the US government’s ability to enforce it as the mandatory “token” for accessing the US (and Global Petrodollar) trade economy. The logic of fiat is therefore the logic of centralised enforcement and violence. Bitcoin, on the other hand, is backed by a distributed network of computers or miners that contribute computational power totaling > 200x that of Google to secure the integrity of its blockchain. Miners contribute their computational resources completely voluntarily, in line with their own rational, economic self-interest, and their reward is mathematically constrained to be proportional to their contribution to the network. The logic of Bitcoin (and by extension, Crypto) is therefore one of contribution, not coercion.

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