Blockchain Expectations: Normalising the monetary theory of alt.coins!

It’s the wild west in the alt.coin space right now, just at the wrong moment from the perspective of a monetary econometrist looking at a currency to trade. A cliché yes but none the less valid, in the medium term 90 out 100 of these alt.coins have no real long-term value. Mixing metaphors in alt.coin land helps articulation since the mechanics of bits and bytes is arid. British GQ has just done a piece this week on a gentleman’s view of ETH[1] but Mr Joe Average (Daily Mail reader in the UK) only sees stochastically active traders gyrating on the latest alt.coin exchange who can’t explain the market to themselves; without reference to something called SegwitNx[2]. They are naive traders, tooled in the fastest tech., with no understanding at all of the history of monetary theory or of securities trading techniques. Of course one could argue after the GFC[3], who would want that dinosaur experience anyway?! But the alt.coin markets exhibit no kind of ‘Rational Expectations’[4] and drive further away from equilibrium every hour.

The current is Litecoin[5], it implemented a Segwit a month ago and has had no issues and is listing on the Luxembourg based Bitstamp[6] exchange imminently, this has made for a massive increase in trading volume driven by high popularity in Korea and China, consequently driving up the price. Bitcoin meanwhile is set to split in two (which Ethereum has already[7]) because of Segwit; one chain implementing the upgrade, the other not; this will lead to its total demise, the extreme doomsters forecast. Confused? You wont be!

Mr Joe Average, reading the ‘red top’ or the broadsheet only sees techno-vapourware and bluster, probably doesn’t like techno and will not enter the market whilst its so inexplicably volatile and technically oaque. But any securities market needs the ordinary Joe, he is the source of that final injection of liquidity which closes off exuberance, grabs that final percentage of profit and normalizes the security or in this case the token of money. The alto.coin market needs regulation and we know the Bank of England[8], the Bundesbank and the ECB are looking seriously at that. Regulation will come with a serious business use case which by definition creates demand from Jane public and large corporate alike, after all the point of money is a transaction, is it not?

At a recent central banking conference, alt.coin and DLT[9] were recognised as being important, skeptics argued that there was no clear business-driven use case for DLT and therefore that arguing about technology out of context of real business need risked being irrelevant and futile. Without DLT, alt.coin has no use case, it has as Aristotle defined it no ‘Use Vale’[10] sometimes equivocated for ‘value in use’[11] which in monetary terms really makes no difference. The point is that without a DLT platform the alt.coins have no value and these platforms like Hyperledger or CORDA R3[12] (which is in essence a Hyperledger application) are as yet little-known and misunderstood. There are a number of very interesting blockchain startups in my home city, Edinburgh, now and a welcome residence of this technology in the ‘Open Source’[13] world. This is serious technology, still behind the opacity barrier but offering the opportunity of a genuine revolution in data processing. Interestingly the blockchain structure pivots the foundational data structure of a ledger, used since the Greek abacus, on its head.

The mathematics of alt.coin mining can be bewildering[14]. Back in the day Bitcoin was seen by the ‘inner’ techno-community as being understood from two directly opposed perspectives, two mutually exclusive paradigms; it was either a ‘store of value’ or had a ‘value in use’[15]. This opposition was ideological and political. But its nonsense, sequentially; Aristotle, Smith, Marx, Keynes and Hayek underpinned the theory of money; logically money had to have both; it couldn’t be a store of value without having a value in use and vice versa. This logic now seems obvious to me, fundamental. One cannot see alt.coins in abstraction from the theory of money, which is where the techno-naivety is located. As Karl Popper defined the idea; a scientific proposition evolves through time via the method of ‘conjectures and refutations’[16] we treasure but do not maintain the validity of all of Galileo or Newton anymore, we have the two Einstein’s; relative and general and further into Quanta and Chaos. The alt.coin will evolve similarly and rapidly, leaving the originators far behind. Resolving the Segwit is just one more step from origination to the chaotic future since it achieves another fundamental aspect of a currency, referred above in the discussion of Central Banks; scalability, if the alt.coins cannot scale they have no ‘use value’.

This alt.coin market needs to be normalized, the pressure from the bottom (Joe Average) and the top, the central banks, is enormous, the techno-irrational exuberance is going to get squeezed out, the frontiersmen of wildness will get left behind. It always happens, the corporates (and the ordinary Joe) will enter the supply chain and smooth it out, normalize it. IBM, SAP and J P Morgan[17] are members of Hyperledger[18], the DLT platform which enables alt.coins very existence ‘in use’. Think of the once pure Open Source pedigree of the R (statistical programming) language[19] and look at it today; comfortably nestled in the bosom of Microsoft Advanced Analytics[20] and what an amazing job they are doing. R always had governance in place to manage the open source CRAN and plan and govern the upgrade process which it seems to me BTC singularly lacks[21]. Joe Average needs a market with liquidity and compliant AML and the central banks need combined clearing and settlement in a single transaction, in a scalable manner. The alt.coin markets need old fashioned market making and order book management. If that happens, a second phase of this permanent ‘Cultural Revolution’ will probably ensue.

There are good technical propositions out there, where the DLT platform and the alt.coin combine to meet defined use cases, that’s why Putin gave ETH the nod last week[22] and so do most of the large corporates experimenting with the alt.coin phenomenon, Thomson REUTERS are importantly getting on the blockchain next week[23]. The techie alt.coin traders should wake up; the primacy of etherum[24] has nothing to do with a segwit its all about adoption in use, its about the business use case, that is what both Joe Average and the Central Banks want. Its coming and the holy grail for Joe Public will be the invention of a wallet which can exit alt.con to fiat (real) money, which Joe or Jane can spend on an ice cream or beer[25] in this hot summer weather.

Right now everything looks in pattern and shape like the dotcom boom of the millennium turnover, the hottest sign is the stream of ICOs (legally, what exactly are ICOs?[26]) now spluttering in regiment through the alt.coin exchanges. The voracious hedge funds are interested; normalization is coming so long as nothing explodes on that road this summer. The blockchain and its enabling alt.coin is no longer a political or ideological movement its going mainstream where that is defined by enabling a transaction by having a ‘value in use’ and thus accumulating ‘store of value’. Everything has a ‘value in exchange’[27] and a currency crypto, alt or otherwise, doesn’t function unless it can intermediate that exchange.

[1] http://www.gq-magazine.co.uk/article/what-is-ethereum

[2] https://cointelegraph.com/explained/segwit-explained

[3] GFC = Great Financial Crash ’07 — ’08: http://asymptotix.eu/lx7

[4] https://uneasymoney.com/2017/06/17/hayek-and-rational-expectations/

[5] https://litecoin.com/

[6] https://www.bitstamp.net/

[7] https://medium.com/@WhalePanda/what-happened-with-ethereum-eth-and-ethereum-classic-etc-3c69fc7cbb69

[8] http://www.bankofengland.co.uk/research/Pages/onebank/cbdc.aspx

[9] Digital Ledger Technology

[10] https://en.wikipedia.org/wiki/Use_value

[11] https://en.wikipedia.org/wiki/Value-in-use

[12] http://www.r3cev.com/blog/2017/4/18/corda-designed-for-commerce-engineered-for-deployment

[13] https://en.wikipedia.org/wiki/Open-source_software

[14] http://www.coindesk.com/math-behind-bitcoin/

[15] http://nakamotoinstitute.org/mempool/the-two-ideologies-in-bitcoin/

[16] https://en.wikipedia.org/wiki/Karl_Popper

[17] https://www.hyperledger.org/about/members

[18] https://www.hyperledger.org/

[19] https://www.r-project.org/about.html

[20] https://www.microsoft.com/en-us/cloud-platform/advanced-analytics-products

[21] https://www.reddit.com/r/btc/comments/6huepf/the_problem_with_bitcoin_is_not_the_lack_of/

[22] http://www.vanityfair.com/news/2017/06/a-mysterious-new-cryptocurrency-is-surging-after-being-endorsed-by-putin

[23] http://www.reuters.com/article/us-thomsonreuters-blockchain-idUSKBN1950RZ

[24] https://motherboard.vice.com/en_us/article/okay-wtf-is-ethereum

[25] http://www.heraldscotland.com/news/homenews/14111665.Glasgow_bar_to_except_Scotcoin_for_beer/

[26] https://www.linkedin.com/pulse/why-your-initial-coin-offering-probably-regulated-law-wan-cipp-us

[27] https://en.wikipedia.org/wiki/Paradox_of_value