Bitcoin and Co. snowball system

Permissionless blockchain technologies require crypto assets as objects for speculation.

Using keywords such as innovative, digital, decentralized, anti-fraud, and token-based, advocates of the crypto scene know how to hide the underlying mechanisms. Blockchain technology is electrifying, and the simmering fear implicitly of missing out on something that “has enormous potential” trumps experience through emotion.
In order to be able to ask critical questions on the topic of crypto assets, that is, digital rights, which are usually assigned in encrypted form in a distributed database, it is necessary to understand how databases are organized. Database management, an umbrella term for organizing data that has some form of commonality, must ensure that data is stored consistently and without inconsistencies. Thus, a single central organization is always more efficient than multiple decentralized organizations. A distributed database can only justify the high costs if there are good reasons not to trust the responsible central authority.

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Decentralized databases

If, for whatever reason, the decision is made in favor of a decentralized data organization (“distributed ledger technology”), trust in the lost central instance must be replaced by a technical solution that regulates access and validation of changes in the distributed database. If blockchain technology is used for this purpose, access can be regulated privately or publicly, and verification can be regulated with or without consent. All crypto assets, starting with Bitcoin, are built on a public and unauthorized blockchain. The sounds – see the keywords mentioned – are attractively harmless, but form the core of the hierarchical scheme. why?

In order to prevent tampering with the corresponding blockchain, entering and continuing the chain (“mining” a new block) requires effort that is inherent to the system. It must be so high that the cost of processing the entire blockchain exceeds the potential return that would result from allocating the values ​​represented in the blockchain. The massive amount of resources required to solve (unfeasible) computational problems in order to reach agreement on the viability of a new block was the innovation of Bitcoin known as Proof of Work.

Inevitable speculation

Since there is no responsible authority or operator of the crypto blockchain, compensation for validation and persistence must come from the crypto asset system itself. This can only be achieved by “pushing” using precisely this default crypto asset. However, the huge expenditures of the resources that are ultimately lost – computers and electricity – have to be paid by the miners with real money. And they only get that if they find people using legal tender (“real” money) to buy the crypto-asset. Only a constant flow of real money speculating on price gains can maintain the system, which is consistent with the description of the Ponzi scheme.
Cost and efficiency reasons, as well as high price volatility as assets without intrinsic value (“bubble assets”) make crypto unsuitable as a means of payment, apart from trading with other crypto assets. As an investment case anyway: the idea that digital currencies represent sustainable values ​​and that systems based on them have a social benefit remains a fiction.

author

Peter BranderEconomist and co-founder of Die Weis[s]EE Economics, is a lecturer at the University of Vienna and an expert in empirical economic and financial market research at the Ministry of Finance. He worked at Wifo, at IHS, at the University of Vienna and at the Austrian National Bank.

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Peter Brander

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