What is wrong in the DB concurrency adoption forecast
Human vs machine economy
Recently, Deutsche Bank released an interesting study comparing the development of the Internet with the spread of crypto-currency. You can download it here.
I really enjoy the “money flower” on page 4, which immediately makes visually understandable the great variety of contexts in which we use currency.
And of course it is impressive to note the overlapping of the Internet adoption curve with the number of crypto-currency wallets.
Where’s the mistake?
The basic error that I identified in this study is the tendency to consider the adoption of Internet, measured in millions of users, comparable with the adoption of cryptos, measured in number of wallets.
In my opinion these two quantities are not comparable, for a simple reason: Internet is a network that supports multiple applications, wallets are a single application.
I superimposed on the DB chart the logos of the main platforms that have actually contributed to the adoption of Internet and the consequent development of the network, trying to maintain a consistent time sequence with the represented trend. The interval represented is from 1995 to 2010.
I think the point is easy to understand: the global development of Internet has been supported by new applications and new tools, that have produced significant benefits in many commercial and industrial sectors.
On the contrary, the DB study suggests that the progressive adoption of crypto-currencies is self-supported, or justified by reasons inherent in the wallet application.
Everyone does know that currently the possibility to use crypto-currency wallets to make real purchases is very limited. It can even be argued that it is not even an urgently felt necessity because of price volatility, which in turn is derived from the speculative nature of the main crypto-currencies.
For this reason, DB’s report claims that there is a large demand for stable coins, the availability of which could actually accelerate the spread of wallets, and it appears to be correct.
I therefore agree that if reliable stable coins will not be made available by the national monetary authorities, they will certainly be offered by economic operators of similar global reputation, such as Facebook or Amazon.
However, it seems clear to me that the demand for stable coins is not significant to measure real adoption. As an example, Amazon could easily create its own currency with a stable exchange rate against USD, that would be easily widely adopted without the need for it to be actually distributed, peer-to-peer and based on a permissionless network.
Real crypto applications
So, what is the adoption path for crypto coins that we can actually predict?
Practically, today there is only one great application for crypto-currencies: trading.
All the others have a marginal impact and are considered MPVs.
Clearly, this it is not an application destined to be widely adopted by generic users.
I believe that, as it happened for the development of Internet, specific applications that require and leverage the peculiarities of crypto coins will have to emerge .
And here emerges a problem though: the main peculiarity of cryptocurrencies, the one that is the reason for the rapid adoption and wide participation, is the reduced ability of financial authorities to control what happens in the markets. The principle behind these systems is “code rules”, i.e. we do not want authorities, monetary policies and processes based on human initiative.
Instead, we want a system that manages itself programmatically.
Finally, it should be noted that current digital payment systems, although not based on distributed networks, are widespread. I cannot remember a historical case where a “traditional” system has been replaced by a more “innovative” one in the absence of significant economic reasons.
- real crypto currencies are not manageable by financial authorities;
- the main advantages of crypto currencies are privacy, independence from financial institutions, lack of market regulation.
I think it is clear that these factors are very unlikely to produce wide and rapid adoption, especially in the presence of unfriendly regulations.
So, are the cryptos dying?
As it happened with Internet, we need to find those new applications that we are perhaps struggling to imagine today, but which will give a real boost to adoption.
In 1995 no one would have imagined that only five years later we would be able to make intercontinental calls for free with Skype. How many would have imagined that we could travel the world without having to get a detailed map, thanks to Google Maps? And who would have bet that it would become normal for anyone to publish photos, books and videos at no cost on Facebook, Medium and Youtube?
These are the advantages that have made Internet an indispensable tool, advantages that we can represent in economic terms, such as savings or increased productivity.
We must find the same advantages to say that cryptos will grow as much as Inernet did.
There is an additional technical aspect that makes the comparison between Internet adoption and crypto adoption completely inappropriate: Internet is designed to scale infinitely and has no fees.
Between 1990 and the birth of Internet as we know it, there has been a fierce battle between ITU (International Telecommunication Union) and IETF (Internet Engineering Task Force), in order to decide who was to manage the development of the network and how it had to be done. ITU basically wanted to charge for traffic and thought that an isochronous (synchronous) network would be indispensable to guarantee the support of audio-video services. Fortunately, IETF and the asynchronous network won and as we know, audio and video services are not affected at all.
Today, we have a technical limit to adoption that I think is very underestimated in the DB study: almost all cryto-currency platforms do not scale because they are synchronous and ask for a fee to send money.
If Internet had had these limitations, it would have never expanded the way it did.
I am not able to make exhaustive predictions about the many possible applications of the (real) crypto currencies that will certainly come, but I am able to highlight a fact already proven: there is a large demand for payment instruments that make trust a commodity.
In simple terms, this means being able to send small amounts of value as payment for a commercial transaction, in which a small amount of service or product has been obtained.
This miniaturization of trade allows the exchange between unreliable counterparties to take place without the need for a third party escrow.
This stems from the reduced risks that both parties can accept in the case the other party stops supplying or paying. The loss is so small that there is no need to cover the risk with agreements, penalties or insurance.
Obviously, miniaturization of transactions is not compatible with fees, and a large volume of transactions is needed to move a lot of value.
This makes this model unlikely to be used for human purposes, but it is perfect for the automation of industrial and commercial purchasing processes.
Thism thus explains my interest in IOTA, the only crypto platform that has an asynchronous backbone, and why OMG is working to create an industry standard for value exchange via DLT.
Yes: DB’s prediction of adoption will come true, but it is possible that wallet applications that are used as an element of comparison will not be used by humans, but instead by machines.