How idea of cryptocurrency is widening its cracks even in scientific credibility

view original post

The cryptocurrency market has been left quite shaken by the dramatic plummet last week, the second time since May.

By close of the week, Bitcoin, one of the most prominent health indicators of the market, was selling at below $20,000 from nearly $70,000 in November last year—a plunge of 70 per cent.

It is probably obvious to say, but few buyers of the coin have been left unscathed, even in Africa. While we cannot be certain of the extent of the loss Africans incurred in the price decline, we do know that the continent receives about 2 per cent of the global value of all cryptocurrencies.

 We also know that the African market has been growing at a tremendous rate. Between July 2020 and June 2021, people in the continent received $105.6 billion worth of cryptocurrency payments—an increase of 1200 per cent from the year before.

Few African countries are not represented in the Global Crypto Adoption Index, and within the East African Community, only Burundi and South Sudan are not included in the index. Nonetheless, many in the region must be counting substantial losses. 

Though the dramatic collapse of price cannot be viewed apart from the rising inflation and the drop in global stock markets, it largely also has to do with the nature of cryptocurrencies.

Unlike traditional assets which are regulated and guaranteed by the central bank, cryptocurrencies are unregulated and have no intrinsic value to support them. For this reason, their value has been viewed by some critics as hinging on the desire to acquire them, whether for quick profit or whatever reason.

Because of their desirability without credible support, US billionaire and philanthropist Bill Gates, for example, was widely quoted last week dismissing cryptos as a sham. He likened their business model to pyramid schemes.

The model describes a commercial enterprise where an earlier buyer of an asset sells to a later buyer at a profit. In this way, the price reaches a lofty height as in the $70,000 for Bitcoin, before collapse leaving the one still holding the asset with an expensive loss.

However, that view of the enterprise as a Ponzi scheme is not shared by the more invested proponents of the crypto, who are banking on the Bitcoin rising again as it has on more than a couple of occasions previously.

There is hope therefore, even as there is disdain. But scientists have, in the meantime, been looking into the truthfulness of the digital currencies’ basic assertions, foremost of which is the inviolability of crypto decentralisation that provides a cloak of anonymity. 

When the idea of the cryptocurrency was first put forth in the late-2000s, some of its selling points were the ability to hide the identity of a user as well as do away with banks or governments, which arbitrate transactions.

The key innovation underpinning this is the blockchain technology, a ledger of decentralised data whose protection is enabled by networks of computers that verify transactions. This is the aspect that is supposed to make cryptocurrencies tightly secure.

Doubts are however already being expressed about the truthfulness of this assertion. The work of security agencies such as the FBI has also undermined the very notion of anonymity.

That many cybercriminals have been ferreted out by the agencies and their loot in cryptocurrencies confiscated shows that the presumed security decentralisation is supposed to ensure can be breached.

This, in essence, is what the scientists affirm. They show how the idea of decentralisation has played a rhetorical rather than substantive role, binding together the crypto “community, much as other myths have bound together other communities, like nations.”

They managed to trace the founding miners of the Bitcoin, narrowing them down to fewer than 64 founders. Their study exposes how this pool of dominant miners became centralised.

The import of their findings is exposing the inherent vulnerability of the crypto systems. By applying game-theory scenarios that modelled the “social dilemma” faced by the founders, the study finds that while some miners had the power to attack the system, they repeatedly chose not to.

Rather, as explained by the New York Times, the controllers acted altruistically — preserving the cryptocurrency’s integrity, even though the decentralisation-based fraud-prevention mechanism had been compromised.

“In scenarios like this,” as one expert tells the Times, “it appears that people don’t like to kill the golden goose — they don’t like to spoil it for the group.”

But it is just as well because, without the cryptocurrency, central banks around the world would probably not as yet be contemplating the next phase in the evolution of money—for example, the digital dollar or the digital Rwandan franc.