Is it difficult to create digital sound money? – cardanians.io
Every investor searches for a project that will succeed in the future. In the digital world, projects have coins or utility tokens. The ultimate question is whether project coins are good for anything sensible and how it will influence their price. The possibility of the creation of sound money might be the most promising investment. However, are we able to create something like that in the digital world?
In our article, we focus on a property that is mostly overlooked despite the fact that it is the most important one.
Comparing cryptocurrencies with fiat and gold
There is plenty of articles on the internet showing the advantages of cryptocurrencies over gold or fiat. You can see one of the many comparison tables below. However, the key property is missing. It is stability.
Before we explain what we exactly mean by the stability have a look at why we think it is difficult to create digital gold.
It is difficult to create a digital gold
Gold is a scarce natural resource. Bitcoin is a technology. Gold is just here and it is not dependent on nothing else to exist. It is possible to utilize gold in many industries or keep it as a store of value. Bitcoin, as a technology, depends on many unpredictable things. Bitcoin is a software and there might be a bug. All BTCs might lose significant value in a minute when some nasty bug appears. In the worse case, the network might collapse or Bitcoin might never get the trust of people back. It is hard to destroy gold and nobody does it intentionally. Bitcoin can disappear quite easily if it is sent to a wrong address or an owner lose private key. Currently, ~1/5 of coins are probably forever lost. Technically, all coins can be destroyed without any effort. A protocol is not able to ensure that digital wealth does not disappear due to silly human mistakes that cannot be taken back.
The value of BTCs is dependent on electricity. In case the protocol is not able to add a new block then coins will not be liquid basically immediately. Bitcoin requires a big amount of electricity to exist and again, it can hardly be considered as something stable. Bitcoin’s PoW requires a big amount of electricity in comparison with PoS. PoS can achieve stability much easier since significantly less energy is needed to keep the protocol work.
As a technology, Bitcoin will always have competitors and there is no generally accepted rule what to consider as digital gold. Any technological feature can be easily replicated and improved. We can measure the level of decentralization, security, speed of transactions, etc., but it does not help us. The majority of people choose the best solution for a given task. People’s preferences always differ so there will be more similar networks. It is not simply possible to create a unique feature that would ultimately determine the winner. Gold cannot be challenged by other natural resources. It can happen that we need some other resources more than in the past so they become more valuable. Still, gold is number one also due to public acceptance.
The team behind a protocol is also very important for the protocol. In an ideal case, the team should be decentralized. The team is maybe one of the most important properties of the protocol and any technology cannot exist without a strong team behind it. So also the stability and professionalism of the team play a vital role. We have described more details about the team in the following article.
Andrew Chow, Bitcoin Core Developer working for Blockstream, recently complains that Bitcoin developers are underpaid and considers that
as a key issue that was holding back Bitcoin’s growth. He mentioned that contributors and developers who were working for the Bitcoin core network had to invest time and effort but they did not get paid until their contribution was significantly high and based on the long term. He said:
“It takes quite a bit of time before you can get funding to really work on Bitcoin core.”
It is not good news for Bitcoin. A few issues are reported every day and currently, there are over 750 open issues in Bitcoin’s GitHub. You can clearly see how important is establishing a governance model and project treasury. Long term existence of any decentralized open-source requires a professional team and a lot of money for them. Only with that, Bitcoin will not be threatened by innovations like quantum computing and others. At the moment, it is a significant weakness of the Bitcoin protocol.
The majority of the population has no doubts about gold as a store of value. Only 1-3 % of the population believes in Bitcoin. The future success of Bitcoin depends on adoption. So the question is how it will evolve. We do not think that it is going to happen via price speculation. The adoption of cryptocurrencies via real utility is more probable and it might be faster. You can read our article about it:
The most attractive property of cryptocurrencies is decentralization. We try to achieve decentralization from the 19th and 20th centuries and using distributed networks is just a continuation of our effort. Bitcoin was decentralized at the beginning when coins were mined on desktop computers and later via 3rd cards. Nowadays, the reality is that Bitcoin is criticized for centralization. The most important property changed within 10 years.
What we mean by the digital stability
As you can see, it is probably impossible to create a reliable level of stability similar to natural resources via digital technology. Digital technologies are everything but not stable and reliable. With every new version of the software, some bugs are fixed and some new unexpectedly introduced. There are so many unpredictable factors in the real-world and the internet that building digital gold is a very bold attempt.
Technology can never achieve the stability of natural resources. Still, if we wanted to define what have to be done to at least to approach optimal stability it would be the following properties.
- The minimum level of bugs in the protocol.
- Resistance against human mistakes leading to loss of digital wealth.
- Minimum possible dependency on external resources like electricity.
- Team stability and professionalism. Reliable reward mechanism for people behind the protocol (if needed).
- High level of decentralization.
We also talked about an open competitive environment where projects always challenge each other. There could be established one project as the absolute winner. However, it would have to be publicly and globally accepted without any doubts. It is not probably possible within any technology. Nobody would claim, that operating system Windows is the best one and will be here forever and everybody must or should accept it as a fact. It is not a common mindset in the technology world. Contrary to that, we wait for innovations and better features. We do not care about a producer, type or owner. We care about utility and search for benefits.
Can we achieve a solid level of digital stability
We hope we have not scared you much. We do not want to tell you that it is impossible to create digital scarcity. We obviously have a few running networks. We wanted to show you the difference between the stability of gold and technologies where we are not able to achieve the same qualities. We should definitely continue with improving current networks and do our best to achieve the best possible quality.
What would be the simplest definition of digital sound money if we closed an eye and do not see our definition of stability?
It must be ensured that anybody, and even significant minority with direct influence to distributed network consensus, is not able to change the max supply of coins in circulation. In other words, the decision power must be distributed to as many independent entities as possible. The most important property of digital sound money is decentralization. It is what distributed cryptocurrencies networks are about. There is a piece of software installed on many independent computers and they try to come to a mutual consensus to change ownership of coins via transactions.
Decentralization is never a constant value. It permanently changes as external conditions change. As we have already mentioned, Bitcoin centralization is disputable and PoW is not probably the best approach to create digital sound money.
To build digital sound money is difficult from a technological point of view but even more difficult from the adoption point of view. People must believe in the protocol and the best way how to do it is to let people use it. Why is it so important?
We already have established a store of value and it is gold. If we want to create a digital analogy we definitely need more than just scarcity. We already have scarcity in the physical world. If we have a look at the current cryptocurrency adoption, including Bitcoin, people do not care much about digital scarcity.
Our point here is that we need to add some extra features or abilities to achieve mass adoption. We need to offer abilities that fit into the internet world. It is definitely the scalability since if we want to have a digital store of value or digital wealth, the transfer must be as fast as sending an email. New digital wealth should be programmable. It allows replacement of institutions and it is added value that gold does not have. We need to bring people higher freedom and allow them to take care of themselves. If technology can help her it will be valuable.
Cardano approach
Cardano decided to take this approach and offer a bunch of useful features. To succeed here, the protocol must be decentralized, must scale and must be secure. Cardano has the best team in crypto-space that consists of many researchers and developers. The project attracts new people from the academic world. They see what the IOHK team has done so far and want to help. Thus, from a technology point of view, Cardano will be competitor number one for all other projects.
In our view, it is easier to create a decentralized network with a bunch of useful features than digital gold with a limited feature set. A useful network can directly compete with current big internet companies and banks in order to take over some functionality. People are used to consuming some services and even pay for them in some way. Either directly or indirectly. If there is a competitor offering better features then it is very likely that at least part of consumers migrates to new service. The adoption of the service can rise as more and more people find it useful.
Can this approach lead to establishing digital sound money? Yes. Imagine the situation that a significant part of the population uses the Cardano network as a financial backbone of the world. In this case, it will be a very valuable and important network. ADA will be used to govern the protocol. Moreover, every holder of ADA will get a staking reward. Keeping the Cardano protocol running is cheap. If there is a big amount of transactions than ADA holders get a very nice reward.
Let’s have a look at our stability definition and try to check whether Cardano can succeed. As we have already mentioned, Cardano has the best team in crypto so there is a high probability that the number of bugs will be minimized. The team tries to help people avoid silly mistakes during sending transactions. For example, the protocol SYRE. Still, 100% resistance against bugs and mistakes is impossible to achieve. Cardano will build a governance model and treasury system so there will be enough resources to maintain the protocol. PoS is better than PoW from the stability point of view. PoS consumes less energy and the protocol might be more decentralized. We need both these properties.
Summary
It might be difficult for Bitcoin to just keep the narrative about digital gold without interesting features, with scalability issues, underpaid development team, and debatable decentralization. The bitcoin team works on improvements. We will see whether the adoption or acceptance of the narrative increase in the future.
Cardano has the potential to be a very successful project. It makes no sense to speak about digital gold in the digital world since we cannot achieve the stability of gold. It is a fact that can hardly be denied. Cardano will offer a valuable network with bunch of features. All users might own a proportional part of the network and benefit from it. There will be no single owner or group of owners. There will be people using Cardano and decide about the future. In our view, it is a true digital value. And, we cannot necessarily call it digital gold.
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#cardano #crypto #blockchain #bitcoin #PoS $ada $BTC #decentralization #PoW #DAO
Published at Sun, 03 Nov 2019 16:29:44 +0000
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