A lot of bad things have happened in cryptocurrencies over the past few years.
Especially FTX, but also Three Arrows Capital, Terra, Celsius, and many others. However, there are some promising developments for crypto realists. And when it comes to mainstream thinking, pragmatism is not a word typically associated with cryptocurrencies.
Take, for example, a recent Financial Times article written ahead of the sentencing of former FTX CEO and crypto-shy Sam Bankman Fried. This hot take sums it up best:
“But what will be our verdict on cryptocurrencies? Have we learned the lessons from the catastrophic collapse of digital assets in 2022? Judging by recent movements in the crypto market, the answer is Looks like no.”
This article has some good points, but I disagree with it. The crypto ecosystem has very real anti-fragility, even in the face of a formidable number of bad actors. This is one of the reasons why the market will recover in 2024.
The anti-fragility of cryptocurrencies is due to the components being interconnected but never locked in. This concept can be easily conveyed using toy bricks, Lego, in the new world of financial “configurability.” This concept means that the future of finance will increasingly be “composed” of many components, rather than being centralized.
Think of it like Lego blocks, built on the foundations of consensus, blockchain, cryptocurrencies, and smart contracts.
break the blocks
The crypto world is made up of various components. Each piece is unique and used to build something bigger. These can also be disassembled, but that doesn't mean some blocks won't break or disappear.
This is exactly why Bitcoin was proposed by Satoshi Nakamoto over a decade ago. This was a response to the highly centralized financial system that collapsed catastrophically in 2008, which triggered the Great Recession.
It is important to note that FT's work focuses on centralized and opaque actors like FTX. There is no focus on the new technical aspects of the cryptocurrency ecosystem, namely the decentralized components that work together to build a system that has worked well since the advent of Bitcoin.
However, I am not surprised that many people do not realize that the perceived centralization of cryptocurrencies in light of FTX does not reflect reality. A good way to think about this concept is from a basic building block approach.
consensus This is how each cryptographic network can secure its network in a decentralized manner. As examples, Bitcoin uses proof-of-work mining, Ethereum uses proof-of-stake, and Iota uses direct acyclic graph (DAG)-based consensus. The FT article mentions “consensus” only once, and in the context of identifying it as a “difficult subject.” That is definitely not the case, and it is one of the most important fundamental concepts to grasp, especially when thinking about decentralization of cryptocurrencies.
blockchain It enables transparent records that do not require third-party verification. This can be made public like the Litecoin blockchain. Or you can make it private like HyperLedger's fabric. There are also hybrid models that combine the strengths of private and public blockchains. However, the fact that blockchain can be separated from cryptocurrencies, which is important, is completely denied by the FT article.
cryptocurrency It is a digital asset protected by encryption. These digital assets are most often built and created on blockchain to ensure transparency, but some of them are privatized, like Monero. There is no denying that there has been a lot of criticism against privacy coins, but regulators are moving cautiously to find ways to crack down on them without impacting transparent cryptocurrencies.
smart contract A programmable contract to automate your money and assets. For example, consider the vending machine concept of the ICO token funding model. An investor sends a digital asset, such as Ethereum's Ether (ETH), to a smart contract in exchange for another asset. The FT article is correct that the majority of cryptocurrency transactions are stablecoins, but it ignores the importance of smart contracts and how they are building a new financial system that is truly different from the old one. doing.
how the pieces fit together
After underlying technologies such as consensus, blockchain, cryptocurrencies, and smart contracts, blocks fit into crypto infrastructure in different ways. It depends on how developers want to build with these basic Lego blocks.
Consider NFTs. In Ethereum, non-fungible tokens are a special type of cryptocurrency that requires the use of an underlying blockchain and smart contracts. In Bitcoin, Ordinal NFT uses the smallest unit of BTC, Satoshi, the underlying blockchain, and the order of Satoshi from consensus proof-of-work mining.
Another example: Ethereum’s switch from proof-of-work consensus to proof-of-stake consensus is certainly not an easy task, but it is a case of exchanging the underlying blocks.
No matter how a cryptographic infrastructure is built, these fundamental, sovereign building blocks are used to collectively create something resilient to failure. This is exactly why centralized bad guys like SBF cannot bring down the entire system with their complete and utter narcissistic tendencies. This is because each component is independent and has its own will. Although bricks are interconnected, they are also independent technologies.
lastly
Many people only see fraud, hacking, and cheating in the world of cryptocurrencies. And there is no denying that fraudulent and false actors roam this space. However, LEGO, the building block of the cryptocurrency, keeps the system operating stably.
The industry experienced a crypto winter in 2022 and 2023. And there's a thaw happening right now for a very good reason. Did any of the major underlying technologies such as consensus, blockchain, cryptocurrencies, smart contracts, etc. stop working for technical reasons during this period?
no.
Did other stablecoins survive when Terra collapsed? Did the market cease to exist when Three Arrows Capital collapsed? When FTX collapsed, were crypto trades still moving in and out of other exchanges?
The answer to each is a resounding “YES.''
Terrible actors are certainly a problem. But those people did not bring down the core technology of the cryptocurrency ecosystem.
Fraudsters come and go, but Lego, the building block of this industry, remains.
Daniel Corey has been involved in the crypto industry full-time since 2013, including as an editor at CoinDesk. He is the author of his 2020 “Mastering Blockchain” and his 2023 “Understanding Crypto” books, both of which he can purchase on Amazon.
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