- technology novelty
- safety and reliability
- libertarian ideology
- who, in the end, makes money?
The topic of the crypto industry periodically appears and disappears in our information field. I will try to review the basic facts on this topic. The purpose of the article is to inform people who invest in this industry.
For those who do not work in the IT industry, it seems that blockchain technology is incredibly new. But in fact, this name is given to a bunch of fairly well-known technologies, here is their listing:
1. Databases based on consensus algorithms (e.g. Paxos) have been in practice since 1989.
2. Binary hash tree patented by Ralph Merkle in 1979.
3. The Hashсash algorithm was published in 1997, and already as a reward system, albeit to protect against e-mail spam.
4. At the same time, outside the context of the blockchain, smart contracts have existed since 1998. And this fundamental element was proposed only in 2015 by the Etherium cryptocurrency.
Thus, the technologies that underlie the blockchain are on average more than 30 years old, so the novelty of the blockchain is questionable. Be they really basic, this is a long enough time to find their ubiquitous use.
Safety and reliability
The security principle of many popular blockchains such as Bitcoin and Etherium is based on a “Proof of work, PoW” method. This method of reaching consensus in them is based on socioeconomic assumptions, relying on the hypothesis that people interested in “fair” system functioning will always have more computing power than attackers. Therefore, there may be cases of collusion or malefactors attack 51% or the miners themselves. Considering that about 70% of all miners’ capacities are located in 6 Chinese pools, then the probability of collusion is not zero. Because security solutions are not purely mathematical, but socioeconomic. There are a number of scenarios in which block tampering is possible.
When talking about blockchain, many consider it to be a reliable database. However, strictly speaking, the blockchain in most cases is not a database, since does not store the current state of the system and does not provide access to data. The blockchain stores only changes in the state of the system, i.e. is an event log. Therefore, in addition to mining, someone must save the data itself, otherwise the database will be lost. There are examples of blockchain networks where the first thousand blocks were lost because no one simply saved them.
Bitcoin was conceived to address the issue of trust in financial transfers, without the participation of the classical banking system, which is the guarantor of trust. Blockchain is generally a peer-to-peer network with no sources of trust. Therefore, the only suitable task is one-time transfers of large amounts by persons who do not trust other network members and financial institutions, sources of trust generation. Initially, Bitcoin’s manifesto stated that it would make fast and cheap micropayments, but over time this was removed because it was not suitable for that.
Bitcoin was launched in 2009. For 12 years, there is not a single blockchain application that would be useful and competitively capable. Interest is shown in this industry only when speculative activity appears.
For example, read about Facebook or Tesla and other companies, what they have achieved over the same 12 years of development.
Some people talk about the capitalization of cryptocurrencies as a defensive argument, although in my opinion this is not appropriate. Capitalization is used for an asset that generates income. In this case, the opposite is true, for the network to work, it is necessary to burn a huge amount of PoW electricity, so this is more likely the destruction of capitalization.
I would like to recall the example of the bubble in the shares of the South Seas company at the time of 1720, the capitalization of which was all the cash in Europe. And then she declared herself bankrupt, because the inflow of money for the rise in the stock price ended.
The danger of bubbles is that money and resources are invested in things that are unproductive, so when the HYIP goes away, prices fall below the levels, before the start of growth. In this case, there will be no infrastructure left from reinvestment in crypto assets, only the smell of burnt out computing devices, be it video cards, processors or anything else.
Until now, no one knows anything about the creator of Bitcoin. There are versions that Bitcoin, declaring anonymity and decentralization as its basic properties, was a particular solution to the purely ideological problem of cryptanarchism. This is a radical current of libertarian ideology, within the framework of which the question of the possibility of the existence of payment and monetary systems independent of states with private emission centers has been studied for a long time. This issue is discussed in detail in an article by the Norwegian scientist Henrik Karlstrøm.
Who, in the end, makes money?
First of all, mining pools and companies producing mining equipment make money on bitcoin. A miner doesn’t need to be competitive, they just need to find a free socket. It looks like some kind of cheat code in the capitalist world. But it may not last so long. For the rest, making money on Bitcoin and the crypto industry in general is organized according to the principle of the last fool. As long as there are people who buy, the price will go up, as soon as the flow of money ends, as in the example of the South Sea Company, it is likely to collapse. For people who have already invested in crypto, the main thing is not to become bagholder.
From the point of view of fundamental analysis, bitcoin and the crypto industry in general can be regarded as rubbish. Perhaps this is more of a psychological phenomenon of modern society, which scientists of the next decades will be able to appreciate.
Based on the above, I would not recommend anyone to invest in crypto. If you are a trader and understand technical analysis or own trading bots, then you will like the minimum spread on crypto exchanges until everything collapses. I choose an observant position and recommend investing in something that has a fundamental basis.