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Chapter 12

The Future of Cryptocurrencies

Cryptocurrencies are here to stay. They can’t be uninvented no matter the restrictions imposed on their usage by governments. Bitcoin restarted the process of denationalization of money by getting the money production out of the hands of central authorities. Satoshi reformed the financial system the same way Martin Luther reformed the Church. In fact, Bitcoin’s contribution to the world of finance is similar to the one of number zero to the world of mathematics. In both cases we can say that for most of history, humankind could get by without them, but once they appeared they fundamentally reshaped their overarching systems and became the critical constructs of our civilization. Robert Breedlove drew an fabulous analogy in this regard:

When zero reached Europe roughly 300 years later in the High Middle Ages, it was met with strong ideological resistance. Facing opposition from users of the well-established Roman numeral system, zero struggled to gain ground in Europe. People at the time were able to get by without zero, but (little did they know) performing computation without zero was horribly inefficient. An apt analogy to keep in mind arises here: both math and money are possible without zero and Bitcoin, respectively—however both are tremendously more wasteful systems without these core elements.

The open-source nature of the space ignited innovation and competition in the field of privately produced monies. The fundamental value of independent money has been largely misunderstood by the public, but it is the first prerequisite to maintain civil liberties and individual freedom in other areas.As manifested many times in different countries from Hong Kong to Venezuela, supporting and donating to some (undesirable) causes can make things complicated for citizens’s lives in many ways. The degree of economic and social freedom varies in different geographical areas, but more importantly, it dynamically changes over time. The uncensorable layer of privatized money is universally needed across the globe. Ethereum and the like expand these properties beyond the financial system and build the backbone of the future multiverse that is inevitable to emerge, and whose glimpse of we have witnessed in different virtual worlds since the early 2000s. In two decades, the sheer relevance of digital economy have evolved from paying a couple of dollars per virtual accommodation in Second Life, through paying hundreds of dollars for ICQ numbers and game items in World of Warcraft or DotA to the sale of Beeple’s digital art for whopping $69 million.In 2021, the liquidity on virtual land market is comparable to the one of many small towns in Europe. Axie Infinity as the first Ethereum-based game recorded $1 billion in revenue while around 20% of its players don’t even have a bank account, and the price floor for any piece from the most notable NFT collections such as Cryptopunks or Autoglyphs is above $100 000. There are people already now making their living solely in the digital economy.For a true metaverse to emerge, though, there is still a long way to go. The infrastructure is not there yet to support millions of concurrent users interacting with each other. Even the Marshmello’s concert in Fortnite with over 11 million attendees had to be sharded into thousands of instances each capped with 100 players. Overcoming the scalability challenges is merely one of the areas in which the progress needs to be (and will be) made in order to reach the Oasis. Such a metaverse will need to be persistent, a single shared space accessible 24/7. It will support free and voluntary economic interaction of its users, and it will be built upon open standards for media and programming languages. Lastly, interoperability of such a space is crucial in order to form a real multiverse. It is difficult to predict whether the above mentioned will be built by Amazon, Facebook, NVIDIA, someone completely unknown or the combination of all those.

The realities of the digital and physical world will become even more blured. We will see the understanding, interaction with as well as the impact of the metaverse to be unevenly distributed which will just deepen the wealth gap. On the plus side, it may decrease the entry barriers to participate in the global economy and increase the social mobility. Naturally, cryptocurrencies as well as all the other areas in digital economy operating on their infrastructure will be targeted by regulators in their fight to stay relevant which will become harder and harder in the world where technology allows to disintermediate the middlemen even when it comes to governance, and the rules are enforced by the code.

The power clash is inevitable and resistance from the incumbents is to be expected. The past few years manifested it more than enough times. While more authoritarian governments like the ones of China or Venezuela decided to declare an outright war on crypto, the western democracies have been more receptive. Even though there the tension will be rising too as harsh and often preposterous regulations are proposed, and sadly enough, often passed. Cryptocurrencies allow us to boost the inclusivity (especially in finance) which so often talked about in political circles, but rarely pursued in their action. At the contrary, most of the products of political litigations do the opposite by directly placing obstacles and artificial barriers into human interactions and hindering the progress and innovation. This goes for anything from the Bitlicense in the state of New York imposing insane compliance obligations on crypto businesses, the US Infrastructure Bill requiring all the wallet providers, nodes and validators to report to IRS, through EU’s MiCA, or draconic AML reporting standards created by FATF-GAFI that sneakily spread in the western world, and are enforced by the network effect, without going through any democratic voting outside of legislation. As Phill Bonello puts it, Bitcoin is all of the below at the same time:

  • A prisoner’s dilemma for nation states
  • Digital gold - a money outside the reach of central banking
  • An uncorrelated alternative investment with asymmetric upside
  • A generational movement
  • A tool for survival, social good, and dissidence, especially in autocratic regimes and hyper-inflationary economies
  • A network that is driving the profitability of renewable energy initiatives
  • The best performing asset of the decade

Should the meticulous efforts of regulators to “protect” the consumers and fight the non-existent crypto terrorism financing fully succeed, cryptocurrency potential will be crippled and Bitcoin will become merely a white collar inflation protection asset.While all the above described is true for Bitcoin. Much of it applies to Ethereum as well. In addition, Ethereum also brings trustless statefulness to the Internet by creating a backbone infrastructure for the Web 3.0. This, in result, brings an unprecedented level of independence and freedom not only to finance but to any digital content, and possibly also any digital business model as well.Unfortunately, instead of combating the external threats, Bitcoiners have spent a great deal of time with infighting. As Nic Carter concluded, the most enduring source of conflict within the Bitcoin community derives from incompatible visions of what Bitcoin is and should become. These visions for Bitcoin are not static and do evolve over time. From E-cash proof of concept, through anonymous darknet currency and cheap P2P payment system to censorship resistant digital gold. Other visions have become so incompatible with Bitcoin that they had to fork off and live within their own circles of Ethereans, DAOists, Holonauts and others.The future development will just manifest the limits of Bitcoin maximalism and its narrow-minded stance on almost any and all blockchain innovations happening outside of their beloved chain. In their efforts to advocate for the importance of the state-free internet-native money, Bitcoin maximalists focused too much on monetary application of Bitcoin. Undoubtedly, this is the single most important feature that is largely understated by the public. Yet, while accenting the unique monetary value of Bitcoin, to preserve its status against wanna-be Bitcoin killers, Bitcoiners have developed an allergic and dismissive reaction to any non-Bitcoin advancement in the field of algorithmic money. Unfortunately, Bitcoiners’ unbounded use of the term scam has been analogous to the use of money printers by the FED. With religious passion and liturgical tone, they inflated the term’s presence in the crypto space to an extent that depreciated their own original message, sadly. This often led to an emotional and facts ignoring discourse over the potential of blockchain technology.While it is true that Bitcoin becoming a dematerialized monetary commodity, distinct from gold, is revolutionary, the same goes for blockchains in general as an alternative to platform monopolies. This is extremely important as in the past two decades we have seen a massive consolidation of internet services among a few corporations. Blockchains offer us an alternative in the form of radical marketization and disintermediation of society. Vitalik Buterin summed up his view on Bitcoin maximalism in the following words:

I view single-coin maximalism as an oligarchic rent-seeking ideology that seriously constrains the possibilities of cryptocurrency innovation and makes it dependent on a political process (Bitcoin governance) rather than market competition? Open services powered by crypto networks will present unprecedented opportunity for a new generation of developers and entrepreneurs to innovate.

While sympathizing with the passionate activism of Bitcoiners I second Vitalik’s opinion. Too many times in the past entrepreneurs run into regulatory troubles that could have been avoided should there be a more decentralized infrastructure available. While the example of Napster is well-known and documented, there many lesser-known cases such as, a torrent tracker that came to be known as musical library of Alexandria, and which got raided by the French Authorities in 2016, an event that resulted in the loss of many terabytes of music from different niche genres. More recent example is the lawsuit against the Internet Archive’s Wayback Machine. The online library makes available scanned books — both public domain and under copyright — via its site Open Library. After a decade of operation in a limited way that allowed borrowing of books to only a handful of readers, the service reacted to the global Corona pandemic with loosening the restrictions allowing unlimited borrowing. The key book publishing players such as Wiley, Pinguin Random House and more reacted swiftly with a lawsuit in May, 2020. At the time of writing the result fo the lawsuit has not been known yet. Nonetheless, the Web 3.0 infrastructure powered by permissionless blockchains could make the cases like this phenomenon of the past.

Naturally, to reach such a state the current level of infrastructural decentralization may not be sufficient. As mentioned above, the regulatory pressure is likely to push back. While governments won’t be able to control the on-chain activities directly, they will go after all the links connecting blockchains to the real world. Should the world enjoy the full potential of cryptocurrencies, adoption of the mesh network will be necessary at least to some extent.This is mainly because while blockchain networks are decentralized, the internet networks are usually not. The majority of the Internet users connect to the network via ISPs (Internet Service Providers) that are in most of the countries subject to monitoring by intelligence agencies. Moreover, some of the even deploy a wide array of surveillance techniques that enable them monitoring the internet traffic in real time.This is where mesh networks come to play. In short, meshnets allow infrastructure nodes to connect directly to each other in a dynamic and non-hierarchical way. They can be either full or partial. Full meshnets have all the nodes interconnected while in the partial ones nodes are typically connected only to a few other nodes. The concept has been in use since the 1980s in military, and due to resources required it was not widely available to the public until recently. Fortunately, in the past years we have seen increasingly more community-organised meshnets popping up at least in some major cities worldwide. It is no surprise that a couple of crypto initiatives have already experimented with different ways for users to bypass ISPs when transacting cryptocurrencies. Most notably, Blockstream’s satellite implementation enabled users to broadcast Bitcoin blockchain from space. Another increasingly more popular device within the crypto community is Gotenna which is a wireless mesh antenna that allows users to not only send text messages without using cellular data, but due to integrations with Samurai wallet also spending bitcoins while being offline. Gotenna goes even so far that in order to mitigate the tragedy of commons in meshnets, users will be paying for transmitted data with bitcoins. Some other more notable projects working in this area include Spacechain, Rightmesh, SmartMesh, Nexus or LoraWan.As with cryptocurrencies, with meshnets’ too adoption may be driven in the developing countries with the lack of infrastructure. Developed countries may follow as advances in privacy, security and permissions access to the internet may be tempting to a part of the society. Nonetheless, setting up mesh networks is quite complex and there are many challenges ahead should the meshnets gain some meaningful traction. Furthermore, sooner or later, the Interplanetary Internet communication will be conceived, and likely made of mesh of satellites and (planetary) ground stations. Such a network will be in favor of a robust fault and delay tolerant systems such as Bitcoin or Ethereum. It is not farfetched at all to say that the first interplanetary financial transaction is more likely to be routed through the Bitcoin protocol rather than SEPA or ACH. Also, it is possible that the keys to sign such a Martian transaction will be generated by sourcing randomness from a biometric data.Another avenue that can helps us materialize all the benefits of decentralization is the emergence of the cryptographic primitive known as Indistinguishability Obfuscation (IO). Researchers speculated for many years if it can exist in practice, but only in 2018 the world received the first more tangible proof that this concept can actually work in reality. Application of IO could not only hide collections of data. But also the inner workings of a computer program itself. This would mean possibly a creation of a cryptographic master tool from which all other protocols can be derived. In crypto, all cryptographic protocols are as strong as the assumptions they rest on. The famous RSA algorithm depends on the (widely held) belief that standard computers won’t be able to factor the product of two large prime numbers. While the previous attempts to design IO built on untested and shaky foundations, the most recent one rests on security assumptions that have been used and studied in the past. Even though the protocol is far from being deployed in practice any time soon, at least it provides a theoretical outlook for a set of new cryptographic tools that were previously unattainable. Needless to say, that should such a protocol be real and implemented in a viable manner, the Cypherpunk dreamt-of society would come much closer to reality.

The benefits of the paradigm shift enabled by trustless stateful infrastructure won’t be only for dissidents. This infrastructure blended with the right incentives will affect a spectrum of areas of our daily lives. We can see it, for instance, in gaming. Some of the most popular games such as Fortnite, PUBG or Call of Duty have been generating tens of millions of dollars each quarter by deploying the Pay2Win model in which players pay for premium features and items that help them win. On the other hand, the new opportunities enabled by the blockchain metaverse have already been manifested by the multiple NFT games that brought the new model — Play2Earn. Axie Infinity has been leading the way here. Founded in 2018, the game introduced an interesting tokenomics that incentivized engagement of the players with multiple ways they can make money. They can do so not merely by playing battles and quests, but also by breeding little monsters — Axies, or providing liquidity for Axie tokens on decentralized exchanges such as Uniswap. Another option is to speculate on rare Axies, which is quite accessible since a bunch of them have been fractionalized. The last option, introduced in summer 2021 includes staking of the AXS tokens. The monthly revenue of the game reached a whopping amount of $170 million in July 2021. While this is still very early for the ecosystem, we can already now see the glimpse of what the future of Web 3.0 holds for its users.

One can hardly imagine all kinds of economic relationships that are about to form in this new economy. Only thing we can reasonably foresee is that it will be more intertwined than ever. With commodification and monetization of things like human attention, gaming items, virtual art, or domain names, or in fact all things digital the number of tradable resources expands. So does the infrastructure that allows us to embrace these in meaningful economic activities. Already now som projects experiment with providing crypto loans backed by ENS (Ethereum Name Service) names. MakerDao has been exploring options to deploy physical real-estate as a form of collateral for its protocol. My guess is that virtual lands will be more suitable for this. And so will other NFTs. It won’t take long before we see the first loan issued and backed by a Cryptopunk. All these virtual assets will be also fractionalized, utilized in financial instruments that were previously unimaginable, and made accessible for anyone globally. Should the Skynet once occur, Ethereum will be its main target and our biggest hope at the same time.

Moving forward

Bitcoin started as a better form of protest. Protest against the current workings of the financial system, and production of money. It was the most impactful manifestation of the Cypherpunks values. And even though it deviated from its roots, it did so for the greater good so it can infect the masses with the notion of state-free money, and perhaps also pave the way for another iteration of the Cypherpunk ideas that went on to survive in other forms.

It will likely not achieve what Cypherpunks hoped for, dissolution of the state, but it will still do an important job. According to Charles Schwab’s report on self-directed brokerage accounts (SBDAs) within retirement plans for 2019, GBTC was the fifth-largest holding in millennial accounts ahead of Netflix, Microsoft, or Alibaba. In the survey, millennial SBDAs represented only 13% of all SBDAs at Schwab. Bitcoin will indeed become a widespread asset across the continents, as well as spectrum of actors including ordinary people, banks, pension funds, and eventually also central banks and governments. Ether, and some other bluechip crypto assets will as well.El Salvador leads the way in their bold move to adopt Bitcoin as legal tender. More countries outside of the walled garden of Dollar and Eurozone will follow suit. Hopefully in a more organically driven fashion. Historic data suggests that monetary systems survive in average about a century. The dollar standard has been intact for over a hundred years. The next monetary standard will be purely based on a digital currency. Likely the one that is not under control any singular entity or government. The global economic agents won’t want to suffer from the irresponsible monetary action of a single player (the US). While the western countries are likely to be on good terms with dollar, Bitcoin loads the guns in the fight against the monetary colonialism present in developing countries. And its not only the US dollar that holds hostages. The francophone part of Africa will too likely make an action at some point. When opting out from the Fiat currencies and current monetary regime Bitcoin will be the shelling point. One should not underestimate the network effect of transactional freedom. Naturally, the shift from Fiat to Bitcoin will take a lot of time, perhaps another decade. I’d dare to believe that proliferation of Ether will be subsequently faster, and that both will serve the function of global reserve currencies.

The proof-of-work algorithm will get increasingly more passionately criticized given the rising urgency and of the climate crisis. The mining facilities, once the source of Bitcoin’s resilience, may become its physical points of failure and will be pressed to mine compliant blocks that adhere to AML and reporting standards and that exclude any transactions from and to the blacklisted addresses. There are multiple conceivable Bitcoin forks we can expect to see in the future. The compliant Bitcoin or the green Bitcoin. When it comes to environmental pressure, clean and renewable energy sources for mining will just slightly, if at all, mitigate the public’s concerns and pressure. Even if the public will be satisfied with largely green mining, we may still witness premium-priced green bitcoin UTXOs that will be superior to the regularly mined bitcoins, that will be of course still superior to tainted bitcoins. Even within the single Bitcoin blockchain there will be bitcoins of different value.Furthermore, it may take a few decades, but eventually we might also see a version of the Bitcoin software with a more sustainable network security budget a.k.a inflated supply. What nowadays sounds like a heretic idea that is totally out of the Overton window in the Bitcoin community may once be the new “block size” debate. The “block reward” debate will aim to balance the soundness of money with the network health and security, and will likely result into competing software implementation. Perhaps we will even witness Ethereum’s EIP1559 equivalent on Bitcoin.

If there is one thing clear when it comes to the future of cryptocurrencies, it is that the their narratives as well as the visions of the crypto tribes will be changing. The process of “gentrification” in crypto is set to disrupt its original vision of dissident technology. At the same time, crypto will be the biggest transfer of wealth in human history, and will empower the bold builders and utopians. Some of them will follow the Cypherpunk ideology by build ing and designing code that will aim to preserve individual freedom and enforce the right to privacy. There are voices calling for renaissance of the “dark tech” already today, one of them, Amir Taaki summed it up:

We’re in this very strange place inside of crypto culture where we’re facing significant challenges to the technology, of it being co-opted by external actors, by actors who don’t necessarily have a philosophical vision or goal we originally had in mind,” he said. “Maybe I’m talking about people like ConsenSys, or maybe I’m talking about central bank digital currencies or Facebook … Bottom line: The only way that we’re going to overcome these challenges is by having coherent analysis, a system of organization and some kind of narrative so that we can develop something that’s coordinated.

Let’s just hope (and act!) that these wonderful technologies empowering all the humans equally by protecting their rights and privacy won ’t have to stay at the outskirts of our society. I remain hopeful that cryptographic tools and protocols will not serve merely as the unnecessary toy for the dissidents, but rather as the foundations of the healthy cyber society of the future. If there is a single one message this book aimed to communicate it is to bring all the cyber tribes together, appeal on more tolerance and acceptance of their differences as well as all the humans. The fight for freedom is continous and ceaseless. Should we stand a chance in it we need to stand together.

Chapter 12
00 — Intro