Crypto Network Design:
Collaboration VS Competition
In my last article, I pointed out how bitcoin and similar crypto networks are not bullion based currencies like gold, where the token itself is valuable, but cryptocurrencies are actually a new type of fiat currency where the value is derived from the entire system. This article will go over why they are fiat, how fiat system design affects the valuation of the currency, and why you should be very skeptical of any coin that derives its value from scarcity driven by “proof work”. This article goes into the specificity of the design of Bitcoin, and questions some key decisions: namely “Proof-of-Work” and looks at other networks that are improving on those design decisions around group consensus.
This article will give investors the tools they need to start making sense of the crypto market. By looking at The Loop and finding the IN’s and OUT’s you will have a great start to understanding the fundamentals of the field. This will give insight on making real long-term investments, and not just look at the crypto space as way to gamble on asset price inflation and fluctuation.
My position is that cryptocurrencies and distributed ledger technology are the future of finance, government, and computing. I’m not a bear to the field, just to some early implementations that are very dangerous and can scare off the rest of the public if there is a bubble-pop. We have to be doubly assured that bitcoin is the system to bet on, because it represents BTC yes — but also the entire field of cryptocurrencies to the general public. But let’s jump right in…
The best way to understand why the bitcoin system is super inefficient is to imagine the whole system as the “Pony Express.” For those that don’t know, the Pony Express was a relay system in the late 1800’s that had horse messengers cross small distances quickly, and then pass off the letter to the next rider. With that idea as our base, we can start a scenario. Imagine that we had 1000 miles to travel in order to deliver a letter between two cities. We also have 1000 horses — how would you do it?
Well the way I would do it, is to have a relay system where each horse runs 1 mile, then passes off the letter to the next rider. The horse can then spend the rest of the hour walking back to his farm, casually regaining strength, and we could then use the horse to send another message or to do some work on the farm if there is no message to be sent. This ensures healthy use of our assets, the horse in this case.
The bitcoin system works differently. It sends all the One-Thousand horses to the final destination in a race to see who is the fastest. The first horse that arrives is the winner, get’s to deliver the message, and receives a bitcoin. However, in this system, we now have horses who are doing the pointless task of running most of the way to deliver the message for no reason.
Those horses could have been working on farms and producing real value for the country, but instead, they were wasted by optimizing the wrong thing in the system. When delivering messages, the optimization question is not “Which is the single fastest horse?” but “what is the fastest horse- system, that maximizes the value of the assets for the community.”
In the first case, we have a collaborative system that gets more efficient with scale, the more participants the faster each one can go, making the entire system faster. The second example, the bitcoin-like example, increases it’s inefficiency the more it scales — as there is only one winner, but the size of the losing population increases with scale, increasing the amount of wasted work.
This reveals that while “proof-of-work” is real work for the person who wins the race, it is also “proof-of -waste” as the number of losers, and inefficiency of the network, scales with the system. The scaling issue makes it harder and harder for each rider (or miner) to win, and more likely you will lose and waste your horse’s energy — running nearly one-thousand miles for no reason.
Why would bitcoin make such a silly design choice? The real inefficiency is in the opportunity of what you could be doing with all those horses. You could use all those “horse hours” for real good, not for the purpose of spending horses ie. The bitcoin system is only considered “good”, if you wanted horses to be expensive — not if you wanted to send fast and cheap messages — This reflects the actual BTC network, with slow and expensive transactions! That’s the issue, the BTC network was designed not to be useful, not to send fast and cheap messages (transactions) and create farms (dapps). The bitcoin system was designed to make horses (bit-coins) expensive!
In fact, the proof-of-work algorithm that BTC is based on, comes from a Usenet spam filter, designed to slow down message transactions! The opposite of what you want, speed and efficiency, when delivering messages.
Other people have already seen this issue and are actively trying to make systems that are much more sensible. Over time, these more sensible and usable systems are going to out-compete bitcoin, as they are cheaper to operate and do more things.
OKTOY — RNDR: https://rendertoken.com/
The one first up is Oktoy’s RNDR. They are taking the power of the “extra horses” (computers) and using them to render photon clouds, a very computationally expensive task that’s normally done by server’s called render farms. How RNDR works, is that instead of doing a race, the computers collaborate, and use the bonus efficiency from the collaboration to do the real work of rendering computer animation. In this example, since it is collaborative, all of the horses win, and because of that, you get the bonus of the farm, ie the Dapp in being able to render out imagery. So rather than “proof of work” which is also “proof of waste” this is “proof of usable work, in rendering.”
File-Coin: https://filecoin.io/
Another coin that I really like is based on some great tech in IPFS. File coin creates a market for HDD space over a distributed back-end. In this case, “proof-of-work” may be used to some degree, but it does not create the value proposition and only keeps the system in sync. The value comes from the ability to buy distributed file system similar to AWS, or google cloud.
What you can start to see is “The Loop” — A good currency will have a loop that moves money into and out of the system. In both RNDR and File Coin, the broadcasters (miners) are rewarded for creating the network with tokens. To use the network, you have to purchase coins on the market from the broadcasters and turn them back in for the use of the system. This means that the network does a task and performs a function. If the network does not perform a task, it is not an asset but an expense.
In this way, there is a full loop. The broadcasters make something useful, and sell the use of it on the market through the issuance of currency. To borrow from Wittgenstein, “the meaning,” or the value “is the use.” Value is not made from the creation of the token through artificial scarcity and asset speculation. A real investment has outputs that are useful and not just a store of speculative value. To on one hand, criticize the stock market for not being accurate in producing an index of real value — not speculation, and on the other hand be ideologically into bitcoin because of it’s correction of the broken system, is missing the point that bitcoin doesn’t create an index of real value either, and is only based on market demand, not real returns.
A quick way to see if a cryptocurrency is a scam is to see if there is a loop. If there is no loop, then you are buying an expense, not an investment. An expense is something you spend money on because you like it, it’s not an investment that is seeking returns. For example, bitcoin has no loop, it is a group of miners spending real time and energy making a very expensive and specific piece of code that only works in the bitcoin system, then the miners are selling the bitcoins, and taking in national currencies. There is no loop — hence why bitcoins are capped at a certain number of coins that will ever be created.
The system is a one way transaction where the mining network is selling digital beanie-babies, for USD, Euro, and Yen — and not taking anything back in, so there is no real market force to price the currency accurately — as there is no function of the mining network — the only function of the BTC network is the transaction of bitcoins, but they are priced as fees, and most non-fee transactions are ignored. Ie there is no connection to the bitcoin system’s use, or actual value, and the currency. The entire system is an expense in order to make digital codes, not a value add in order to make an efficient transaction network, and distributed computing platform. For this reason, the bitcoin network is the worst crypto network to invest in.
In closing, crypto is fiat. Fiat is based on the system design. Crypto system design changes drastically per system implementation. Using “The Loop” to check for IN’s and OUT’s we can find if the fiat system is providing a real value proposition based on usable work, not on asset price speculation of the token.
