Tether, the cryptocurrency I researched a couple of months ago, has overtaken bitcoin in monthly transactions by more than 18%, making it the most widely used cryptocurrency in the world despite a market capitalization that’s 30 times smaller.
Meanwhile, Facebook’s proposed Libra is angering the central banks of several countries, who say it puts global banking at risk, while Beijing is putting the finishing touches to its cryptocurrency, which will likely be launched at the upcoming Singles’ Day. At the same time, Iceland is going ahead with its digital currency on the Ethereum blockchain, with daily payments now being made with it.
What does all this mean? In contrast to the best-known cryptocurrencies; the key to widespread adoption is about stability, efficiency, guarantees and reasonable allocation systems. What’s interesting about Libra is that Facebook, with its huge base of more than 2.4 billion users, can circulate its currency in the blink of an eye, and do so in a way that the initial allocation of funds makes sense: practically anyone with a Facebook account can acquire Libras. The danger here is that this is the privatization of money in the hands of an irresponsible company that nobody in their right mind would trust with managing their finances. If Facebook disobeyed the advice of the monetary authorities of half the world and launched Libra tomorrow, what would happen? The volume of transactions would pretty much wipe out every other cryptocurrency. Sure, Libra is a good idea in that it is a clear move toward the digitalization of money, which is where we’re headed. The problem is that it’s in the wrong hands, and the signs are that some of its partners are already aware of this, despite Facebook’s denials.
Similarly, China’s cryptocurrency can be put into circulation quickly and simply, and in a reasonably fair way in terms of allocation, and with the guarantees that the Chinese state can offer. It may not, strictly speaking, be a cryptocurrency. Call it what you want: it’s definitely digital money, and it will be in the hands of a lot of people in China and around the world.
What about Tether? Its stability, its relative opacity and its ease of use means it is used by many Chinese business people in Russia to repatriate profits to China, bypassing all kinds of controls and restrictions, and giving it some 80% share of all cryptocurrency operations in Moscow’s trading desks. No blockchain, no miners, totally stable; just a simple solution to a problem.
The adoption of cryptocurrencies, at least in their early stages, contradicts what the first enthusiasts originally calculated: the mechanism that assigns value to a bitcoin or an ether might be an elegant solution, but they’re unstable, which means users fear their price will fall and so only use them to store value. The idea that a bitcoin will be reasonably stable and therefore used in everyday transactions — what characterizes a real currency — is, today, a distant illusion. Meanwhile, anyone thinking of using cryptocurrencies tend toward “boring” stablecoins anchored to the value of a currency or basket of currencies, and with allocation mechanisms within reach of the bulk of the population. In other words, easy-to-understand currencies for anyone choosing simple consensus algorithms, usually based on proof of stake, versus the complexity and inefficiency of proof of work.
Classic cryptocurrencies, despite their undoubtedly brilliant theoretical design, only pass the test of use for a few: the vast majority of their potential users see them as complicated, with potentially dangerous side effects, irresponsibly speculative, controlled by a few bitcoin whales, and absurdly wasteful in energy terms.
As said, money will eventually — and soon — go digital. But the signs now are that it won’t be the pioneer idealist elites of the best known cryptocurrencies who lead this trend, but instead other players with more practical considerations. Stablecoins are boring, yes, but most people can understand how they work, and they are low risk, reducing the fear that speculators will send them out of control. Elegant designs and theoretically perfect consensus algorithms on paper, compared to simple mechanisms, security, operations and ease. When the moment of truth arrives, the most sophisticated and technically interesting designs are found to be wanting and it turns out that mass adoption depends on simpler, more conservative, less risky schemes. At some point down the road, when more people are familiar with their workings, there is nothing to prevent the development of those early models.
This is the way adoption processes tend to work… especially where money is concerned.
About the Author
This article was written by Enrique Dans, professor of Innovation at IE Business School and blogger at enriquedans.com.
