The transformative potential of cryptocurrencies

by bejaq3 min read5th Feb 20218 comments

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In many ways, at the moment cryptocurrencies are mostly used for speculation and maybe that's the reason that it doesn't get much attention  within the EA community (apart from being relatively more accepted as as source of donations compared to other communities).
I think that might be an oversight.

So far I would say cryptocurrency was mainly transformative in three ways:

1) Allowing (pseudo-)anonymous transactions world-wide, which allows for more safety when conducting transactions in a context that could lead to persecution (buying high-quality drugs online seems to be the most widespread one)
2) Smart individuals (or lucky early-adopters) can become, or have become quite rich by utilizing the enormous growth of the crypto market which certainly is transformative for the individuals in question
3) It has created a new eco-system in the technology/financial space, where money and ideas flow quite differently than before

I think 2) is quite relevant to EAs because crypto-trading is likely a more accessible way of  making lots of money to give away compared to many alternatives like getting a very high paying job. The crypto market is a very inefficient market with enormous returns due to its extremely dynamic nature.
Yes, it is relatively risky, but this can mitigated quite well by risk management, and with respect to "earning to give" expected value is more important than volatility.

But this is not what I want to focus on in this post.
What I mostly want to point out in this post is the great transformative potential of cryptocurrencies as it relates to the economy and the distribution of money:

4) Cryptocurrency allows for decentralized creation of money instead of money creation by central banks

So far the total market cap of cryptocurrency is in the billions (barely reaching a trillion now), so the total economic effect is relatively subtle, but as it stands there seem to be little reason for the crypto market to stagnate or shrink over the long-term.
As I see it, the only realistic possibility that would lead to cryptocurrencies not mattering too much in the future is if they get suppressed by governments.
But I feel the economic benefits to governments that do not do this will likely be too big for that to happen on a large scale.

The implication of 4) is that depending on the trajectory of cryptocurrencies, they could lead to vastly different economic and societal effects.
One possibility is for them to be a tool for people with privileged access to wealth and education and a high affinity towards new technologies to become rich (for example through mining, investing, trading, founding,...) at the cost of leading to devaluation of traditional currencies.
For now, that seems to mostly be the case.

The more idealistic possibility is that cryptocurrencies would be distributed more fairly, based on need and merit, but so far this only happens on a very small scale.  
Nano for example was distributed through faucets, which while quite arbitrary and susceptible to manipulation (eg click farms) at least had the intention of distributing the currency without preferring privileged people.
Some currencies like GoodDollar have an even more radical approach and want to give every person that verifies themselves as unique a basic income on an ongoing basis. I like the idea, but I feel it's likely not fleshed-out enough and just a bit too ambitious at the moment. I think unfortunately the value of the basic income will likely never be enough to make significant change in the lives of the recipients.
So as I see it the creation of truly fair (relatively) decentralized money with a high positive social impact is hugely neglected right now, and depending on what the market share of cryptocurrencies will be, this could literally be about trillions of dollars.

What such a currency would look like is of course a complex question when it comes to the details, but there seem to be realistic ways of making huge improvements compared to present distribution models.
Voting seems to be an obvious mechanism to decide how to distribute funds, but this would have to supplemented with adequate identity verification, rules against abuse and an organization behind it that works with stakeholders and representatives to make sure funds are not only being distributed with a degree of participatory legitimation, but also in an effective manner (of course it should not have too much authority which would go against the idea of a decentralized currency, but serve more of an educational, regulatory and representative function).
I favor a certain initial distribution with an additional ongoing distribution with an infinite, slowly rising monetary supply, as to not lock-in the decisions too early.
Maybe some form of cooperation with governments would be ideal so that the currency will not perceived as a competition to traditional money, but as one of the most compliant and beneficial cryptocurrencies.

It could be that some projects along these lines do already exist, but so far I haven't seen anything quite like it and I have a relatively solid overview over the crypto-sphere.
So if it exists it must be quite small and in great need of support.

Of course this a big idea, and my abilities and connections are quite limited, but I felt it's important to start somewhere and raise awareness of this potential cause area.
I hope this inspired some of you to think more deeply about what impact cryptocurrency could have in the future, and maybe you have some ideas or suggestions on how this cause area could be developed further.

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Howdy,

The outlook for cryptocurrencies as a cause area seems rather mixed from my pretty uninformed viewpoint. I'd like to highlight some reasons outside of their speculative potential. I think the best argument can be made for cryptocurrencies adding value through poverty alleviation.

Epistemic disclosure: Any knowledge comes from reading the news not studying the topic.

Pros:

  • May make it much much easier / far less costly to send remittances which make up larger and arguably more helpful inflows than aid in many LMICs. I think this is worth thinking about.
  • Similarly it can compete with incompetent central banks & provide a means of transaction in a country experiencing hyperinflation / economic collapse. This seems potentially valuable but I wonder if this could release pressure on bad governments in critical moments. I'm not too interested with how it competes with what I view as generally competent central banks (found in most HICs)
  • Experiment with with new governance strategies and voting techniques. Those techniques can obviously be experimented with in other places, but perhaps not to the same scale as quickly.

Cons:

  • Massive energy consumption. I'm thinking of bitcoin, the mining of which reportedly sucks up ~0.3% of the world's energy consumption. If so, that's a lot. Supposedly miners mostly use renewables, but it wouldn't surprise me that bitcoin's impact on the world was net negative even if only 10% of the energy used to mine it came from coal. I'm not sure if that energy, counterfactually would be used.
  • This one is not strongly held: It may be a talent black hole. I don't know if this view is some vestige of at one time having more leftist sympathies, but I still worry that complex financial markets can siphon off scientists from having a much higher impact.
  • General reservation: For comms reasons I think EAs should be conservative / cautious on the margin around controversial topics or cause areas that'd distort our image in such a way that could damage our LR growth.

Mixed: Making drug / illegal markets more efficient.

  • Funds criminal organizations. This view may be a little old fashioned, but criminal organizations have large negative externalities. Particularly Latin American drug cartels which may benefit from cryptocurrencies.
  • Increases safety of consumers of illegal drugs.

One generic argument I see raised in this post is "here's a way that lots of money could be made so --> earn to give / save." Keeping the mostly-efficient market hypothesis as a prior, I'm skeptical of most propositions that include the first part of that quotation.

In summary: Cryptocurrencies probably aren't going anywhere. Supporting their use in failed states / their use for remittances seems potentially useful if a currency could be found that's not so volatile. Making them less energy hungry seems potentially useful if someone is well placed to do so.

Thanks a lot for you take.

One thing I would note is that cryptocurrency as a cause area is independent of cryptocurrency having have a net benefit or a net harmful effect; potentially cryptocurrency could destabilize global financial systems, so if one has a less positive view on cryptocurrency, regulating cryptocurrency (whether by governments, or by self-regulation within the ecosystem) and making sure at least some cryptocurrencies have a positive impact (thus reducing the overall net harm) could still be a potential cause area.

To address a few other points:

Massive energy consumption. I'm thinking of bitcoin, the mining of which reportedly sucks up ~0.3% of the world's energy consumption. If so, that's a lot.

Indeed, bitcoin is outrageously bad in many aspects of its technology.
This isn't a universal problem for cryptocurrency though, the whole Nano network for example could approximately be powered by a wind turbine while having much higher throughput and speed compared to bitcoin.

It goes to show how the crypto market right now is not guided by the right values, the bar for positive change here is quite low.

This one is not strongly held: It may be a talent black hole. I don't know if this view is some vestige of at one time having more leftist sympathies, but I still worry that complex financial markets can siphon off scientists from having a much higher impact.

I am pretty sure that's a real problem, the complexity of blockchain technology is quite high, and there are powerful monetary incentives while the social benefit is far from being automatic.

General reservation: For comms reasons I think EAs should be conservative / cautious on the margin around controversial topics or cause areas that'd distort our image in such a way that could damage our LR growth.

I agree, it might not be suitable as a widely presentable cause area in the same way poverty is.

Funds criminal organizations. This view may be a little old fashioned, but criminal organizations have large negative externalities. Particularly Latin American drug cartels which may benefit from cryptocurrencies.

I don't think it's old fashioned but still highly relevant.
For example, cryptocurrency being banned instead of being regulated in a sensible way could potentially to lead to criminal organizations benefitting from cryptocurrency while devaluing legal currencies, so I see a real risk here.

Keeping the mostly-efficient market hypothesis as a prior, I'm skeptical of most propositions that include the first part of that quotation.

I am not sure the concept of an efficient market is a very useful concept with regard to cryptocurrencies as it's now.  
As a former poker player I see more similarity to poker in that there are rational ways to get an advantage, but the market as a whole is rather irrational, driven more by circumstantial information (eg Elon Musk making a tweet) rather than well-informed investors.

The big difference to poker is that cryptocurrency is not a zero-sum game for the players, and at least in the past it was a positive-sum game in a rather dramatic way, as it was such a relatively small market which had incredible unrealized growth potential.

This is decreasingly the case as the market becomes saturated, but it seems realistic the market cap of cryptocurrencies could still grow to a multiple of its size over the coming years, making the average crypto investment potentially quite profitable.

One thing I would note is that cryptocurrency as a cause area is independent of cryptocurrency having have a net benefit or a net harmful effect; potentially cryptocurrency could destabilize global financial systems, so if one has a less positive view on cryptocurrency, regulating cryptocurrency (whether by governments, or by self-regulation within the ecosystem) and making sure at least some cryptocurrencies have a positive impact (thus reducing the overall net harm) could still be a potential cause area.

Good point! I think I'd like to see more spelling out of how exactly it could transform things (for better or worse). With my lame understanding: once I see that cryptocurrency is a solid store of value, then I can see it potentially threatening central banks and the ability for states to generate revenue through taxes. However, I find it hard to believe governments would let cryptocurrencies get to that point -- if cryptocurrencies are in fact capable of getting to that point. 

Another thing that is worth pointing out with cryptocurrencies is how they interact with the digitization of the economy. In general greater digitzation may not be a bad thing. But it's possible that cryptocurrency led digitization may make corruption easier (I'm imagining it'd behave similarly to cash). 

>2) Smart individuals (or lucky early-adopters) can become, or have become quite rich by utilizing the enormous growth of the crypto market which certainly is transformative for the individuals in question

This is  called speculation, which you seem to be against. If you like the idea of your cryptocurrency being worth lots of dollars, you're not supporting the idea of crypto, but the idea of dollars.

>3) It has created a new eco-system in the technology/financial space, where money and ideas flow quite differently than before

This is a sentence constructed entirely of buzzwords.

>the only realistic possibility that would lead to cryptocurrencies not mattering too much in the future is if they get suppressed by governments

This is already happening, because without government intervention people start doing all sorts of immoral things with crypto, such as pumping and dumping, which is already illegal in the normal financial world

>The more idealistic possibility is that cryptocurrencies would be distributed more fairly, based on need and merit

This is called communism, we've already tried that many times.

>Nano for example was distributed through faucets, which while quite arbitrary and susceptible to manipulation (eg click farms) at least had the intention of distributing the currency without preferring privileged people.

Bad things done by well-intended people are still bad things.

>What such a currency would look like is of course a complex question when it comes to the details, but there seem to be realistic ways of making huge improvements compared to present distribution models.

It seems a common theme throughout your post that you admit that crypto has many problems and then just hand-wave the problems away.

>rules against abuse and an organization behind it that works with stakeholders and representatives to make sure funds are not only being distributed with a degree of participatory legitimation, but also in an effective manner

This is what a central government already does.

>not have too much authority which would go against the idea of a decentralized currency, but serve more of an educational, regulatory and representative function

Without authority, an organization has no ability to effectively regulate or represent.

>an infinite, slowly rising monetary supply

This is how normal currency already works.

>Maybe some form of cooperation with governments would be ideal so that the currency will not perceived as a competition to traditional money

If the cryptocurrency can be exchanged for goods and services, it is inevitably competition to traditional money

 

Money is a super tricky problem to manage. Upending the current system and replacing it with a new half-baked one will solve nothing and recreate many problems that we've already solved with fiat currencies.

Unfortunately you seem to miss the point.

I am not here to say how great cryptocurrency is, although it can undoubtedly be extremely profitable (for better or worse), but to point out shaping it positively is important.

I guess your argument boils down to suppressing cryptocurrency being more viable than shaping its development positively, but history shows that many goods cannot be effectively suppressed and if people derive a benefit from it they will continue to use them, with all the disadvantage a black market brings (I am talking about the drug market).

Also you have to seem a rather idealistic conception of government, where even if people have to deal with the consequences of dysfunctional monetary system (eg Venezuela), it's still preferable for people to suffer the consequences than to provide an alternative that is not sanctioned by the state.

I'm not saying it should be "suppressed", but that it should fall under similar regulations to normal money, to prevent abuse and fraud.

Cryptocurrency is a solution looking for a problem. Buying drugs is one of the only problems it's a significant improvement upon, everything else we can already do with normal money. I see no reason to believe it will ever account for more than 1% of the world's transactions.

And yes, if the monetary system is completely dysfunctional and a tool for stealing wealth from your citizens, like in Venezuela, then I guess internet money is better than normal money. In the case of Venezuela, Runescape money for example has been used for this same purpose.

Ah, OK, so I think your point is more along the lines of "it's relatively irrelevant" which I really didn't even take into consideration given the already significant effects of crypto (for example in terms of CO2 emissions which are already about 0.1% of total emissions) and the extreme growth the market has seen and is seeing.  
I would say the percentage of transactions is not really the main factor here, more the wealth held in it, and crypto already is well on it's way of holding 1% of the world's wealth.

Maybe you don't believe it solves any genuine problem for you in particular or for society as whole, but creating money out of nothing clearly is a very powerful tool if you happen to wield it, so I don't see it going anywhere.
Even if it does end up just being used in the black market economy, that is estimated to be >10% of global GDP.

Here is documentary that might give you an impression how creating new local currencies can successfully solve real-world problems, blockchain technology fits very well into that because of it's decentralized and digital nature, making it a lot easier to create, distribute and convert currencies (although the documentary doesn't focus on that aspect, but is explained more in depth on the website).

And here some research:
https://www.grassrootseconomics.org/research