End of Cryptocurrencies? Think not…

Originally published on Medium, 16 November 2022.

I am not heavily invested in any cryptocurrency (“crypto”), but I have been studying them since 2015. I have generally been positive towards how crypto could streamline inefficiencies in our existing payments infrastructure.

Recent demise of FTX made me reconsider my position on crypto. It definitely made me more circumspect in terms of immediate investments in crypto, but in general I still remain open minded. Here is my take on it.

Store of value or Medium of Exchange

With respect to crypto, there are two functions worth considering that typically the money or currency serves: a) store of value, and b) medium of exchange.

Medium of exchange

A medium of exchange facilitates a reliable and effective way for goods and services to change hands (or exchanged). Most common form of medium of exchange is fiat money.

In crypto space, the effectiveness of a medium of exchange is going to be defined by criteria like assets being exchanged, how decentralised is it, what is the governance structure for the crypto, how much are the gas fees/rates, how widely is it used, what is the transaction settlement time, who is using it, etc. Common form of medium of exchange in crypto is layer-1 blockchain protocols like Bitcoin, Ethereum, Solana, Polkadot, Algorand, etc.

There is incredible value to having a really effective medium of exchange. And the effectiveness of this medium of exchange is the crypto’s intrinsic value.

Store of Value

A store of value is an asset which normally retains it purchasing power into the future. For an asset to be considered as a safe store of value it should have a reliable demand for the asset so as to manage the risk of asset loosing value. Again money is the most common form of store of value.

And at present, this reliable demand is where crypto currencies fail as an independent store of value. In the long run, the store of value (coins or tokens) will represent the crypto’s intrinsic value or effectiveness of its medium of exchange.

Medium of exchange and store of value have contradictory drivers when it comes to crypto. By definition medium of exchange should be widely spread and available in the market for interested parties to transact on. And a store of value by its nature is a precious asset, which becomes more valuable when it is sparsely available in the marketplace.

I suspect investors and stakeholders are going to take a bit of time to around the notion of doing the right thing by crypto as a medium of exchange for that crypto to have a stable value (or crypto being an effective store of value).

As an example if one is interested in what is being built on Ethereum, then it is worth supporting that ecosystem; considering it simply as a store of value is unlikely to pay dividends reliably.

Ponzi schemes continue in crypto

There is an argument that crypto is meant to prevent people from loosing their investments due to events like the collapse of FTX. To be honest this is an unfair if not uninformed criticism of crypto.

Crypto promises transparency of on-chain data

Crypto inherits two properties from blockchain, namely immutability and decentralised nature. Meaning that data on the blockchain is shared across multiple participants and it can not be modified or tampered with.

This on-chain data is available for everyone to audit and inspect.

It is different to us trusting a bank with our deposits in fiat money. Where and how these banks invest our deposits is not shared with us. We are asked to trust third party audits, which have proven to be ineffective in preventing customers loosing their life savings. A good case study is the collapse of Lehman Brothers in 2008.

FTX is not decentralised

FTX is an exchange which allowed trading in crypto, but the exchange systems itself were confidential and proprietary FTX. So users were trusting FTX to do the right thing.

Even user wallets that held customer owned crypto was held in these proprietary systems, known as custodial wallets. So the relevant data was never available for auditing.

So what next…

Following topics are worth considering before investing further in crypto. These items offer better custody of your crypto assets potentially at the cost of a lesser user experience and higher fees.

Decentralised Exchange (DEX)

DEX is a marketplace to facilitate direct peer-to-peer transactions between the crypto traders. Peer-to-peer transactions avoid need for a centralised bank or exchange to act as an intermediary. UniSwap and SushiSwap are example of decentralised exchanges.

Noncustodial wallets

Also known as offline wallets, offer sole control of the crypto assets stored in the wallet. Noncustodial wallets achieve this by keep the user’s private key confidential. Whereas in custodial wallets this private key is managed by the wallet provider. Metamask is an example of noncustodial software wallet and Ledger is an example of noncustodial hardware wallet.