I’ve followed Professor Roubini’s work – his views on the economy, interviews, and books for years. And in general, I could be categorized as being a big fan of professor Roubini. But his latest article “The Big Blockchain Lie” on the state of the digital asset ecosystem is an utter disaster. I think Nouriel should take a step back and examine why he is so violently against all cryptocurrencies and blockchain in general.
Let’s start with discontinuing calling these assets “currencies” to avoid the confusion; instead, let’s call them digital assets, as these are secure digital records, certificates that have transparent and programmable (predictable) supply growth, that are auditable and immutable, not subject to whims of all the despotic governments around the world.
Obviously, not all cryptocurrencies have these characteristics but this is the premise, and the good thing is, cryptocurrencies that don’t have these characteristics will have a very hard time pretending that they do.
We can argue about any given cryptocurrency, it’s security, governance, fundamental values, etc. There is no argument however that 99% of all the coins/tokens out there have no real value and will disappear. Most of the projects have no real utility or use case, just like most of the dot-com companies of 1999 had no business of existing and raising money.
Dismissing the whole concept seems illogical and narrow-minded. Especially Bitcoin, which is transparent and not controlled by any group, has been remarkably stable, and predictable from an operational point of view. Nouriel has called Bitcoin and other cryptocurrencies the “mother of all bubbles”.
That is, at best, a major exaggeration. What about the dot-com bubble? Or the 2008 financial market meltdown based on the cratering of housing prices across the globe?
It’s been almost 10 years since Bitcoin was created, let’s examine the evidence:
1) One block is generated every 10 minutes with predictable mining rewards as intended 10 years ago.
2) 21M cap — many Bitcoin clones were created via hard forks and there will be more forks but the original Bitcoin is still set to have only 21 million coins mined.
3) SHA256 — as intended 10 years ago.
4) There were many hacks of exchanges, wallets, etc., but no problems with Bitcoin MainNet.
5) A strong open source community still pushing the project forward
6) Decentralized –large mining pools do present theoretical problems but no practical problem has yet presented itself.
7) Each block produced is still immutable as intended 10 years ago.
8) Bitcoin is still by far the most successful cryptocurrency, still growing, attracting retail and institutional investors.
Let’s now look at some of the criticisms that Nouriel voiced:
So BTC based on PoW is dead while the new chimera of crypto dreamers is PoS. @VitalikButerin promised PoS in 2013. Still nowhere to be seen. And anyone with any clue in crypto knows that PoS will be an even more centralized mining oligopoly — and thus not secure — than PoW
PoW is dead? Well, Bitcoin is not dead and PoW is doing just fine. It is using a lot of electricity but it doesn’t mean it is dead (I’ll address PoW later in this post). As for the PoS, true PoS is not implemented for Ether yet, but it doesn’t mean PoS is a failure, we can look at EOS or Tendermint for working examples of PoS.
$11 million a day divided by 170K transactions per day gives you a transaction cost of $65 per transaction. & crypto nuts don’t get it: someone somehow pays this transaction cost in the system. The Mother Of All Transaction Costs! Leaving aside the environmental disaster BTC is
The Bitcoin Blockchain is producing 1800 Bitcoins a day (at the current rate of 12.5 Bitcoin generated every 10 min), that comes to about 11.3 million dollars if we assume the current price of Bitcoin is 6,300.
Divide that by the number of transactions per day and Nouriel came up with a conveniently scary number of $65 per transaction. But that is not true, there is no direct cost of $65 dollars, instead there is an inflation cost, currently there are 17.3 million Bitcoins in circulation, so 1800 mined every day represent just over one basis point 0.0104% multiply that by 365 days and the annual increase in Bitcoin supply is 3.78%.
One can argue that the increase in supply should cause inflation and in a perfect world, we should see 3.78% inflation. But adoption of Bitcoin is increasing and a number of people and institutions interested in Bitcoin is growing a lot faster than 3.78%.
Also since Bitcoin supply is growing every day but the number of new Bitcoins produced every day is stable (for now) on a percentage basis the growth of supply is slowing down and in 2 years this growth will be halved which will farther reduce the inflation. So the $65 per transaction is a sensational number but very misleading.
An amount (of electricity) so huge that it represents an environmental disaster. And this disaster would wipe out the planet if crypto-currencies were to be widely used. Luckily 99.9% of shitcoins are in meltdown and disappearing. Good riddance!
Now let’s talk about electricity, the amount of electricity used in PoW process is enormous, PoW is wasteful, I don’t know anybody in the crypto community who doesn’t agree with that. That is one of the reasons people are looking for alternative energy sources and different consensus models such us PoS or DAG, etc.
But also, let’s not pretend that cryptocurrencies are the only wasteful activity humans are engage in, I can think of a million examples of wasteful activities: leisure travel, television, anything military, etc. High current consumption of electricity doesn’t mean cryptocurrencies should not exist.
Wealth in the crypto universe is even more concentrated than it is in North Korea. Whereas a Gini coefficient of 1.0 means that a single person controls 100% of a country’s income/wealth, North Korea scores 0.86, bitcoin scores an astonishing 0.88. BTC inequality is worse than NK
Professor Roubini is using the Gini coefficient to show that Bitcoin is more centralized than North Korea. That’s a very sensational statement. But how was this coefficient calculated? There are many wallets that hold coins for multiple owners. Look at the companies like Coinbase, Binance, or Grayscale, as they hold coins for all their clients in their master wallets.
How many clients do they have? If these wallets are taken as a sign of Bitcoin centralization it would be completely misleading. Schwab and Etrade don’t hold stocks in clients names. Should that cause an alarm? No, not really.
I can go on an on, but I will address one point that many people in Crypto space agree with Mr. Roubini.
75% of use cases in DAPPS are crypto-kitties, Ponzi/Pyramid schemes and Casino Games. The rest DEX that NO ONE uses even to trade a shitcoin for another. And Ethereum does nothing to stop these Ponzi scheme as they are blood suckers who profit from these criminal enterprises – or, Yes crypto land has been the mother of all price manipulations: pump n dump schemes, spoofing, wash trading, front running, insider trading, conflicts of interest of exchanges, Tether & other pseduo stable-coins created by fiat propping up BTC by 80% as a scholarly study proved
There are a lot of problems in Crypto land, 99% of altcoins or as many call them ‘shitcoins’ are worthless, there was a lot of fraud with the ICOs, the market is being manipulated with wash trades, etc. That’s not much of a revelation.
It’s very early for this market, there is a lot of experimentation and abuse and most of the projects will fail. All rational people will agree with that. A lot of people see these issues as opportunities and are working to address these problems.
We can look at the dot-com boom and see exactly the same pattern, but looking back it would be very foolish to call for the elimination of the internet just because 99% of the original projects have failed.
In 1999 adding dot-com to a company’s name was a quick way to raising capital and most of those companies have failed shortly thereafter, but today 100% of the companies are the internet companies, and all the failed projects of 1999–2000 had some role to play in the advancement of the internet.
I think Blockchain like any other invention should be looked at with a critical eye, but let’s not dismiss it outright. Any particular project can fail, technology will evolve, but the concept of distributed consensus is very powerful. The market will sort things out.
I think cryptocurrencies represent something very new, a worldwide free enterprise phenomenon. There are developers from India and Ukraine, miners from China and Russia, entrepreneurs from every corner of the world working together to build this borderless system. We haven’t seen this kind of international cooperation before.
And I am not suggesting that regulation should be ignored or taxes should not be paid, no, we should all abide by laws of the countries we call home, but cryptocurrencies will put pressure national fiat currencies and make politicians take notice. Governments will have to institute policies to attract capital of even it’s own citizens to participate in the local economy.
Especially for failing states with failing national currencies like Venezuela and Iran their citizens now have an alternative. Cryptocurrencies make it easier for regular citizens to control their own capital without entrusting it to one government or another. And that is a very powerful and far-reaching capability. All these things will make the world a better place and that is even before I start talking about fungibility, asset-backed tokens and what we are building at the Fungible Network.
And here’s my final point. There are facts and there are opinions. We can argue about opinions, we can even argue about facts, and we probably would agree on the facts in this case when it comes to all bad things that are happening in the crypto world. Yes, there are scammers that use ICO to raise money from a gullible public. Yes, a majority of the projects thus far will fail. Yes, there are price manipulations and all sorts of abuse going on on the trading venues (I have a hard time calling these crypto exchanges), but none of that negates the value of blockchain and cryptocurrency idea of cryptocurrency overall.
At end of the day, none of that matters. Nouriel may not change his opinion any time soon, and many crypto enthusiasts will continue preaching the great future of the decentralized world.
What matters is the market, and the market will determine the price of Bitcoin and any and all of the rest of the alt-coin universe.
With all its faults and subjectiveness the market is objective. If adoption of cryptocurrencies expands prices will go up; and if it doesn’t, blockchain may fizzle and disappear. And the divergence of the opinions makes the market work.
So let Professor Roubini play his “Dr. Doom” caricature all he wants and let the crypto cheerleaders do their job – the market will ultimately be the ultimate arbiter of who wins.
Entrepreneurs will continue working on thousands of different projects and it’s the success of these projects that will determine who is right and who is wrong about the future of blockchain and cryptocurrencies.
**This article was written by Dan Raykhman, CEO of RFO Capital.
Full disclosure, my firm RFO Capital is offering algorithmic selling services, for more information click here: http://consignment.rfocapital.com