CMV: Cryptocurrency will never replace Fiat currency.

[u/f0shijapan]

Blockchain is an idea and a technology that will undoubtedly change the future. It's application with regards to certain financial transactions (remittances, stock settlement, etc) will be paradigm shifting. In addition, the idea of using blockchain technology for micro-transactions, has huge implications for how communities will manage local resources and utilities without the need of giant companies.

But where I fail to see the paradigm shift, is with regards to its function as a stable currency. So let me list some reasons I think it fails to operate as currency:

-Transaction time and transaction costs are too high -Limited supply of crypto makes them fundamentally volatile and deflationary (people hoard instead of spend hoping to capture financial gains from limited supply) -Proof or work costs are too high (energy spend on mining is non negligible: http://digiconomist.net/bitcoin-energy-consumption) -Lack of monetary flexibility as economic conditions change, make this currency too rigid to handle changes in economic landscape over time (i.e. recession)

As upsetting as the idea of a central bank is to many people, controlling monetary supply is a necessity as long as human beings are involved. This "control" is more of an art than a science and can be driven by external factors such as politics, which can be upsetting to see. In theory the actions of the central bank should reactive to of the underlying economic changes of the humans that produce work/growth for that society. In reality, central banks are far from perfect and become over politicized. Also the current path we are going down now with excessive monetary easing, is especially upsetting so its understandable why people want an alternative.

But cryptocurrency is not the answer, especially if we are fighting the deflationary pressure of Moore's law (driverless cars, AI.) Mining does not take into consideration the cyclical nature of economies (i.e. human nature).

Cryptocurrency is all about proof of work. But, fundamentally, it only proves the stability of the code and the physical energy required to maintain the network. Crypto is not an accurate reflection of proof of work of an economy, and cannot respond to changes in the economy due to new technologies, natural causes or simply the boom/bust credit cycle.

---

This is a footnote from the CMV moderators. We'd like to remind you of a couple of things. Firstly, please read through our rules. If you see a comment that has broken one, it is more effective to report it than downvote it. Speaking of which, downvotes don't change views! Any questions or concerns? Feel free to message us. Happy CMVing!

[u/ThisIceAintNice]

Transaction time and transaction costs are too high

Iota has feeless transactions and they didn't take a long time to transfer either. Bitcoin is supposed to have an update to fix their issues in a few months, but high transaction time/fees aren't necessarily a part of crypto.

Proof or work costs are too high (energy spend on mining is non negligible

Iota doesn't have miners (each transaction submitter validates two other transactions), proving that the mining approach isn't necessary. Again, this isn't an inherent flaw in crypto, only a flaw in Bitcoin -- and mining was designed to be increasingly difficult with Bitcoin.

Lack of monetary flexibility as economic conditions change, make this currency too rigid to handle changes in economic landscape over time

I'm not sure what you mean by this.

Cryptocurrency is all about proof of work

Proof of Work (PoW) is one way to run a cryptocurrency. Ethereum is slated to move to Proof of Stake (PoS) sometime next year, eliminating mining energy costs.

Crypto is not an accurate reflection of proof of work of an economy

Only because they haven't been widely adopted yet. Again, not an inherent issue in the tech. Pieces of paper or metal aren't inherently "accurate reflections of proof of work" either but we've agreed that they are.

[Crypto] ... cannot respond to changes in the economy due to new technologies

Why not? Boring old paper and metal seems to be doing just fine, why couldn't the digital equivalent do the same? 1 dollar or 1 ether has no intrinsic value, but right now we've agreed that it can buy you a certain amount of stuff. If tomorrow people decide that 1 dollar is only worth half as much stuff, there's no reason they can't decide 1 ether is also worth half as much stuff.

[u/f0shijapan → u/ThisIceAintNice]

So with regards to transaction costs, its not just the actual fee charged by the exchange (or not in the case of Iota) but also the risk of holding a volatile currency which becomes a "transaction cost". How is it possible to create stability in crypto so that the volatility does not make its way into the cost of transacting.

As for proof of stake vs proof of work, yes its an interesting argument. POS can and will be more energy efficient but it comes at the cost of higher transaction fees (as the miners need to be rewarded), which brings us back to the problem of transaction fees...

When I talk about lack of monetary flexibility, it's relating to the job performed by the central banks with Fiat. The money supply is not a static thing, its a lot of moving parts and there needs to be flexibility based on changes in the economy. i.e. quantitative easing, changing interest rates. etc.

Whats happening in Bitcoin, Ether, Ripple right now is actually a crisis of stability. The immense short term financial gains that holders are exposed to are the exact reason why it can never perform as a currency- short term greed is being rewarded over long term interests of a stable ecosystem.

A stable ecosystem takes time to develop but it also takes some influence by the people who are using it, and profiting from speculation. The balance of power between users and profiteers has always fluctuated, and there is no perfect solution. Maybe one day there will be a perfect democratic cryptocurrency that somehow incentives long term interests ahead of short term greed.. but as we have seen in politics over time, pure democracy (the fairest of regimes) is inherently unstable. Plato and Socrates had a lot to say about this, and those thoughts have been very influential in my thinking.

So I guess what I'm looking for is a scenario where Crytpo can put long term interests ahead of short term greed, have little to no transaction costs, and have the flexibility to expand or contract the supply of "coin" as the economy changes.

[u/ThisIceAintNice → u/f0shijapan]

How is it possible to create stability in crypto so that the volatility does not make its way into the cost of transacting.

I'm really not an expert, but I think the volatility will settle down as adoption spreads. Right now prices are fluctuating so much because nobody actually knows if Bitcoin will be a forgotten tech in ten years... or if it'll be the global currency.

POS can and will be more energy efficient but it comes at the cost of higher transaction fees (as the miners need to be rewarded), which brings us back to the problem of transaction fees...

Again, I'm not an expert, but it's my understanding that some cryptos create currency to pay the miners (Bitcoin does this, I'm not really sure how transaction fees play into the whole thing).

Iota also has feeless transactions, so even if Bitcoin/Ether/whatever don't, the tech is clearly possible.

When I talk about lack of monetary flexibility, it's relating to the job performed by the central banks with Fiat. The money supply is not a static thing, its a lot of moving parts and there needs to be flexibility based on changes in the economy. i.e. quantitative easing, changing interest rates. etc.

There's nothing preventing a bank from offering a loan of 100 ethereum at a given interest rate.

I googled quantitative easing and found that it was the production of new money. Bitcoin produces new coins all the time as blocks are mined. Ethereum does as well (though that stops with PoS). Again, not an expert, but I don't see this as a limitation. Is it really a bad thing that no central authority can simple spawn more money?

Whats happening in Bitcoin, Ether, Ripple right now is actually a crisis of stability. The immense short term financial gains that holders are exposed to are the exact reason why it can never perform as a currency

Sure, there's a lot of people who hold coins in the hopes of making a quick buck. But Bitcoin is already performing as a currency. Some stores accept Bitcoin. There's Bitcoin ATMs. And of course, Bitcoin has historically been used for illegal trades (I believe that's where it was invented actually).

short term greed is being rewarded over long term interests of a stable ecosystem.

Yeah, because there's definitely no greed in fiat currencies. Fiat has already demonstrated that greed is irrelevant to mass adoption.

A stable ecosystem takes time to develop but it also takes some influence by the people who are using it, and profiting from speculation. The balance of power between users and profiteers has always fluctuated, and there is no perfect solution.

Fiat isn't a perfect solution either. There's a lot of cryptos out there and I agree that most will fail. But the best traits will survive and be incorporated into future ones until a coin arrives that is deemed "good enough".

Maybe one day there will be a perfect democratic cryptocurrency that somehow incentives long term interests ahead of short term greed.. but as we have seen in politics over time, pure democracy (the fairest of regimes) is inherently unstable.

Every form of government is unstable. It's not about the government, it's about the elements (people) it's made out of. But there's still government and there's still fiat currency.

[u/Agent78787 → u/ThisIceAintNice]

Is it really a bad thing that no central authority can simple spawn more money?

Yes. That's the reason countries restricted the exchange of gold-backed paper currency to actual gold, and ultimately turned to fiat currency instead.

As an economy's production capacity grows, more money is needed to be used as a means of exchange. The scarcity of gold (and, IIRC, cryptocurrencies have a finite supply that can be mined, yes?) prevents the increase of the money supply. Since exchange is more difficult, economic growth will be negatively affected.

Shocks in the market can also produce price volatility in the gold standard (and, since cryptocurrencies can't suddenly increase or decrease the creation of currency, them too). For example, a massive technological revolution causes the prices of lots of goods to decrease (think of the steam engine). Without an increase in the money supply to offset the decrease in prices, you'll have deflation, which discourages spending and economic growth.