Blockchains and the cryptocurrency craze
- By Heiko Khoo and Michael Roberts
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E-mail China.org.cn, October 2, 2017
Cryptocurrencies have experienced dramatic fluctuations, with prices taking a hit in recent weeks after China clamped down on Bitcoin speculation.
Asset bubbles come in many forms: Internet stocks went mad in the 1990s, and American house prices lost all relationship to costs before 2008. The price of one Bitcoin neared $5,000 last month, after rising 350 percent this year; then, it fell to $3000.
Bitcoin is supposed to reduce Internet transaction costs by eliminating financial intermediaries i.e., banks. However, its value is speculative -- maybe another "Ponzi-scheme?"
In modern capitalism, money is no longer backed by gold; it is "fiat currency," circulating as coins, notes, or bank credit. Governments and central banks print money and act as guarantor. Most fiat money is held as deposits, or claims on banks. For example, U.K. notes and coins make up just 2.1 percent of the total money supply of £2.2 trillion.
The Internet generated demand for low-cost, anonymous, and verifiable transactions online, with which to barter, and this fast settlement form of money is the result.
Cryptocurrencies aim to eliminate financial intermediaries by peer-to-peer (P2P) payments. They have no geographical constraints as deals are decentralized and circulation occurs outside direct regulation or monetary policy. The main innovation is the "blockchain."
This records transactions without any central authority, and produces a mutually distributed public cryptographic ledger. Network members verify "blocks" of transactions and are compensated in newly "minted" cryptocurrency. Block validation is supposed to prevent fraud, where no central authority or third party coordinates interactions or validates transactions.
Utopian technophiles, dreaming of a world beyond the realm of governments, find this exciting, as individuals and communities can conceal their incomes and wealth from the authorities. However, its real use depends on whether it reduces labor time and raises productivity; and, under capitalism, that means increasing wealth and profits. Can technology outside corporate and State control really bypass the laws of capitalism?
Bitcoin is mainly restricted to the Internet, although some physical coins do exist. Setting up a "wallet" to conduct transactions is complicated. To date, Bitcoin transactions have only thrived in the underworld of the narcotics trade on the so-called "Darkweb." Globally, there are three Bitcoin transactions per second compared to 9,000 per second using Visa.
Can Bitcoins be classified as money? Under capitalism, goods and services are produced as commodities to sell. Money serves three functions: It acts as a medium of exchange; it is a relatively stable accounting unit that permits cost comparisons between goods and services; and it is a relatively stable store of value.
If hyperinflation or sharp deflation sets in, this undermines "trust" in the currency. Then, the national currency is replaced by another, e.g., gold -- although it was cigarettes in Germany in May 1945!
Bitcoin relies on "miners" -- members that contribute computational power to solve a complex cryptographic problem and verify transactions. The miner who first publishes transactions receives a reward in Bitcoins.
The maximum block size is 1MB, which can deal with about seven transactions per second. The network automatically adjusts the complexity of the cryptographic problem to be solved to ensure blocks are published approximately every 10 minutes. Mining requires specialized equipment and demands a lot of electricity. Miners have to balance their technology and energy investments. That means the Bitcoin will only work as an alternative global currency if mining acquires sufficient scale. Indeed, about 1,000 people already own most of the world's Bitcoins.
However, if it becomes viable tender to pay taxes, for example, it will require a price relationship with the existing fiat money. So, government influence will remain.
A major obstacle to cryptocurrencies is energy consumption. Bitcoin mining consumes as much energy for computer power as the annual consumption of a country like Ireland. Temperatures near computer mining centers have rocketed. These costs may end up deterring blockchain expansion.
Capitalism strives to bring cryptocurrencies under its control. Mutual distributed ledgers (MDLs) provide public transaction records of integrity, which are globally available, verifiable and cannot be tampered with. So, large banks and financial institutions are interested in developing blockchain technology to save costs and control Internet transactions.
One critic of blockchain has said: "For one, we're not convinced blockchain can ever be successfully delinked from a coupon or token pay-off component without compromising the security of the system. Second, we're not convinced the economics of blockchain work out for anything but a few high-intensity use cases. Third, blockchain is always going to be more expensive than a central clearer because a multiple of agents have to do the processing job rather than just one, which makes it a premium clearing service --especially if delinked from an equity coupon --not a cheaper one."
Cryptocurrencies will not become the medium for a world of free and autonomous transactions; and they will probably rem
ain on the micro-periphery of digital money -- just as Esperanto never became a universal language, despite being a good idea.
Nevertheless, the crypto craze may continue for a while, as global capitalism indulges in another speculative binge.
Heiko Khoo is a columnist with China.org.cn. For more information please visit:http://www.china.org.cn/opinion/heikokhoo.htm
Michael Roberts is a London based Marxist economist. He published the "The Great Recession" in 2008 and "Essays on Inequality" in 2014
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn
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