Opinion: Some of the Top Cryptocurrencies Aren’t Really Cryptocurrencies
Cryptocurrency comparison websites like CoinMarketCap and Messari’s OnChainFX allow visitors to look through the details of thousands of different crypto assets. From coins that run on their own blockchains to ERC-20 tokens, there is a wide variety of assets listed on these sites.
But what defines a cryptocurrency? Why isn’t a virtual currency like World of Warcraft gold listed on these sites? Obviously, it would be difficult to calculate the value of all World of Warcraft gold in existence due to a lack of data around supply numbers, but another key reason this sort of virtual currency is not included on cryptocurrency comparison websites is that in-game currencies tend to be too centralized to be worth comparing to actual cryptocurrencies.
But how decentralized must a digital currency be to be considered a cryptocurrency? Bitcoin’s seemingly sufficient level of decentralization and censorship resistance is what allowed it to succeed where countless other digital cash schemes failed, so this should be viewed as the interesting aspect of the technology that must be preserved. In other words, this is why we’re here.
Having said that, it’s unclear if a number of other top “cryptocurrencies” are more similar to Bitcoin or World of Warcraft gold.
Why Bitcoin is interesting
In Bitcoin, Proof-of-work is used to figure out who gets to add the next block of transactions to the ledger. This system is referred to as dynamic-membership multi-party signature (DMMS) in the sidechains white paper. To quote the paper:
“A DMMS is a digital signature formed by a set of signers which has no fixed size. Bitcoin’s blockheaders are DMMSes because their proof-of-work has the property that anyone can contribute with no enrolment process. Further, contribution is weighted by computational power rather than one threshold signature contribution per party, which allows anonymous membership without risk of a Sybil attack (when one party joins many times and has disproportionate input into the signature). For this reason, the DMMS has also been described as a solution to the Byzantine Generals Problem.”
This excerpt from the sidechains white paper describes Bitcoin’s key innovation: the ability to order the history of transactions without the use of known, trusted entities.
After all, Liberty Reserve and E-gold were both shut down because it was rather easy to simply target the known entities who were processing pseudonymous transactions on the internet. Bitcoin is much more resistant to regulatory attacks, which is why it is often compared to the file-sharing protocol BitTorrent.
Due to use of DMMS, Bitcoin is not issued and controlled by a specific entity. This is part of what underpins Bitcoin’s “digital gold” comparison.
This is not to say there isn’t plenty of room for improvement in the realm of DMMS. For example, the level of centralization found in Bitcoin mining today is often viewed as a deterrent to the existence of secure SPV sidechains. Due to the current lack of privacy in Bitcoin, mining centralization also opens up the possibility of transaction censorship.
Defining a cryptocurrency
If the key breakthrough with Bitcoin was the ability for potentially-anonymous actors to order transactions and prevent double spending, then shouldn’t this be the threshold by which cryptocurrencies are defined? One would think so, but some of the top cryptocurrencies today (as measured by market cap) do not meet this basic requirement.
Ripple and Stellar are the two most obvious examples of items listed on cryptocurrency comparison websites that aren’t really cryptocurrencies. Both of these projects run on systems that require users to choose which entity or group of entities they wish to trust with solving the double-spending problem. As hinted at in the aforementioned sidechains white paper, these trusted entities cannot be anonymous because that opens the system up to Sybil attacks.
Yes, it’s true that the validators in these systems are potentially dynamic, but that isn’t as important as anonymity because it is the potential anonymity that allows the system to persist in the face of a worldwide government crackdown.
The level of censorship resistance available in Ripple and Stellar is an open question at this time, as these systems are likely somewhere in between Liberty Reserve and Bitcoin in this regard. The question must be asked: What would happen if criminal activity became rampant on these systems? Who would decide to publicly advertise themselves as one of the operators of the system? And if they did, how difficult would it be for various governments around the world to outlaw the system? It’s not like governments don’t already work together on issues like money laundering and tax evasion.
Imagine if Bitcoin was originally structured like Ripple or Stellar. What would have happened when US Senators Chuck Schumer and Joe Manchin demanded a crackdown on Silk Road and Bitcoin back in 2011? Would the peer-to-peer digital cash system still exist?
It may be true that systems like Ripple and Stellar can only provide censorship resistance for as long as the technology remains overly complex to regulators. For now, “blockchain” may be a technology that provides regulatory arbitrage through its name more than its real-world functionality.
Even some proof-of-stake systems are potentially too centralized to be considered true cryptocurrencies. EOS, which is currently the number four “crypto asset” ranked by market cap uses a system where EOS token holders effectively vote on who will be processing transactions. Much like Ripple and Stellar, EOS faces an issue where these entities cannot be anonymous. After all, users need to know 15 of the 21 block producers aren’t the same person.
These networks also tend to have higher costs associated with node operation (as compared to Bitcoin) due to their allowance of more on-chain activity and a general acceptance of increased resource requirements for operating a node. This has the side effect of further limiting who has the ability to order transactions on the network. Drivechains creator Paul Sztorc has written about the cost of operating a full node as a measure of decentralization for Bitcoin.
A related issue previously occurred with Steem, which is another system that runs on a consensus algorithm similar to what is used by EOS. Steemit CEO Ned Scott listed the growing cost of operating full nodes as a reason the company was forced to downsize its work force last year.
A proof of stake-based system (especially one using the delegated-proof-of-stake model) that doesn’t have many users, is relatively centralized in terms of coin distribution, and has a high cost of operating a full node will not be substantially different than what’s offered by Ripple and Stellar.
Various stablecoins, such as Tether, also face issues similar to what is seen in Ripple, Stellar, and EOS because there needs to be some trusted entity to hold the real-world asset, such as US dollars or gold, that backs the stablecoin. Additionally, more decentralized stablecoins based on collateralized crypto assets need to have some trusted oracle or group of oracles to function properly, although projects like Augur and Bitcoin Hivemind intend to find a decentralized solution to the oracle problem.
With all of this in mind, perhaps it would be prudent for crypto asset comparison websites to create more stringent standards for inclusion, or at least make it clear that all “cryptocurrencies” are not created equal.
Update: This article has been updated on 3/4/2019 to remove a specific claim regarding the total size of the EOS blockchain from another source that has since been further clarified. Additionally, the article has been updated to note that a malicious party or parties need control over 15 out of the 21 EOS block producers (rather than a simple majority) to attack the network.