It is an uncontested fact that capitalism, from its most unbridled to its shiest versions, is the organizing force of our international economic order. And since the 1980s—when the financialization of economies, aka advanced capitalism, began to trend--great concentration of power and wealth, intra and inter-country, has been the defining feature of this order.
To banks especially, advanced capitalism has been staggeringly generous—even in calamitous climates. Bank assets in 2008, the year which threatened to bring about wholesale economic collapse, were valued at $160 trillion. Only two years into the crisis, they had risen to $200 trillion. Corporations, not surprisingly, have also fared quite well under it. In 1980, the combined market cap of the S&P 500 companies was just shy of $1 trillion. In 1990, it hit $3 trillion. Today, it stands at $23 trillion.
But no one has arguably benefited from this growing consolidation of power and wealth as much as the tech hegemons. As internet bandwidth and usage grew, giants of the industry, like Ali Baba, Facebook, and Netflix, have emerged today, topping not just the rankings as the most valuable companies, but also dominating the internet throughput and user time spent online. As they continue to hoard power, wealth, and value created online, public sentiment towards them has been shifting from praise as enablers of user empowerment to condemnation as greedy, data-hungry spreaders of fake news. Andre Staltz’s The Web Began Dying in 2014, Here’s How epitomizes this change in sentiment.
As I’ve mentioned in my previous piece, early internet adopters and protocol developers wanted a network that promised individual sovereignty, a virtual libertarian utopia of sorts. But the original vision of a decentralized and open web never materialized. While individuals today are more connected and empowered than they have ever been because of the internet, a handful of tech behemoths have managed to disproportionately capture data and value created online. Individuals may be more connected but they are certainly less sovereign than ever before.
The value gap that exists on the internet is paired with a skills and income gap on the ground that has accompanied the growing dominance of global financial centers at the expense of the state’s once unrivaled reach and authority. Fueling these centers and the companies that populate them are highly skilled workers residing in cities like San Francisco, London, Shenzhen, New Delhi, New York, and Singapore, who have more complex sets of skills and significantly higher incomes than their rural counterparts.
The inequities spawned by finance and technology have provoked all manner of political and social pushback. The disenfranchised have been rebelling in various ways since the dawn of the 21st century. And cryptocurrencies are one very significant dimension of this rebellion. When the mysterious Satoshi Nakamoto published the Bitcoin Whitepaper in 2008, he/they did so with the very specific purpose of challenging the power elites and the outdated and dangerously flawed post-cold war economic and political system over which they have presided. The weapon of choice? A new currency protocol—cryptocurrencies--through which users can conduct transactions and exchange information in a peer-to-peer fashion without requiring a centralized authority to verify the integrity of the transaction.
Note that Bitcoin, the first of the major cryptocurrencies, emerged in 2008 during the financial crisis which laid bare neoliberalism’s predatory nature. Soon after, came Ethereum, another cryptocurrency, which builds on Bitcoin’s vision of user empowerment and disintermediation of middlemen, and has the ability to disrupt centralized networks thanks to the concept of smart contracts and Decentralized Applications (Dapps) that run on the Ethereum network.There are several other notable cryptocurrencies as well, each optimized for a different use-case, but Ethereum and Bitcoin are the most widely adopted to date.
To understand how such cryptocurrencies have the ability to function in a distributed and decentralized manner, we need to study the decentralized blockchains—think of them as ledgers--that power them. Because these decentralized and distributed blockchains, by their very make up, are cryptographically impervious to hacking, hijacking, or even manipulation, they can resist any effort to control the transactions that are conducted through them. They allow for networks to run independently of any single entity or central figure. And they perform as distributed ledgers, with each new block added to the chain containing the most up-to-date version of that ledger, much in the same way a company’s balance sheet is a snapshot of its financial position at a certain period in time.
For Bitcoin, Ethereum, and most other cryptocurrencies, these ledgers are distributed to the public. Anyone may download them and they operate as a node in the network. The more nodes in a network that contain the latest version of that ledger, the more secure the network. If you have 10,000 nodes running replica copies of the same ledger, tampering with any number of these nodes cannot affect the integrity of the ledger, since all other nodes contain the same information. If you hack 30% of the database of a traditional network, depending on how that data is stored, you have compromised 30% of the data in that network, whereas if you hijack 30% of nodes running the Ethereum Blockchain, there will be virtually no effect on the integrity of the data because the remaining 70% have replica copies of the same information. This concept is known as Byzantine Fault Tolerance (you may read more about it here). The more “tolerant” the network, the more robust and secure it is. Another key element that allows cryptocurrencies to operate independently is their ability to run “Smart Contracts,” where transactions between two or more parties are only executed if and when certain conditions are met, acting much like an escrow agent sitting between the buyer and seller of a certain asset, without the need for an agent.
Cryptocurrencies are therefore a paradigm shift because they do not disrupt specific industries per se, but they do disrupt the very idea of a middle layer that sits between parties exchanging value or information, and are hence disruptors of social and commercial contracts that are industry-agnostic and that have existed for centuries. The one low hanging fruit that may be vulnerable to disruption is finance, but the concepts of decentralization and trustlessness can be extended to all existing modes of exchange of value or data between two or more parties, from social networks to governments. Add in artificial intelligence and connected devices that communicate on the blockchain, and you have all the ingredients to revolutionize the global political economy, much like the steam engine revolutionized travel. Cryptocurrencies have it in them to fulfill the dream of the early internet developers: individual sovereignty, autonomy, and decentralization of power.
But the blockchain is just as much about the disintermediation of the middleman as it is about the destruction of existing social and commercial contracts. It’s not about whether Bitcoin is a good replacement to existing infrastructures as it is about adopting a new and improved transparent mechanism that defies the status quo. Bitcoin does not even need to play that role well, because it derives its strength and momentum from the pervasive distrust in existing systems, and not the robustness of the protocol itself.
In my next article I will show why the opportunity is too large for one coin to emerge as the winning one and explain why the long-tail will prevail. I will also highlight how Bitcoin is failing in delivering on its original vision as a settlement currency, and today is neither a currency (due to limited technical capacity to handle large volumes of transactions), nor a store of value (because of volatility in price). Nor is it a commodity, because, unlike the hard laws of chemistry that underpin Gold or other commodities, a cryptocurrency’s underlying code is human-created, which renders it susceptible to fundamental changes by way of “forks” or changes to the codebase. It is a speculative asset and should be treated as such until the above issues are addressed.
This article was written with the generous help of my aunt, Amal Ghandour.