Which Cryptocurrencies Will Survive

I am in the cryptocurrency/blockchain space now for about more than two years. Overtime, I have developed a hypothesis of my own about what it will take to make a cryptocurrency successful in the long run.

To understand this we have to realize that cryptocurrencies are directly opposite to the government. Much of the power that the government gets is from its ability to control the money, collect taxes, being able to spend that money in different sectors as government feels appropriate. If a cryptocurrency replaces currency of the government (fiat currency), that shifts all the power from the government to people who control that cryptocurrency (developers, miners, users). In the resulting powerless government, you have a society with no order and everything goes haywire.

To tackle economic problems such as unemployment and inflation, government has primarily two ways, fiscal policy (adjust taxation and government spending, usually done by the goverment department) and monetary policy (adjust money supply and interest rates, usually done by the central bank). There is clearly no way to implement monetary policy in cryptocurrency world because of its fundamental virtue (decentralization). In an imaginary world full of honest taxpayers, government can implement fiscal policy, but clearly that will never happen. Some countries have introduced negative tax rates to increase business and employment. That can’t happen if government does not control the currency.

I am convinced that cryptocurrencies are here to stay, but most likely they won’t replace fiat currencies or central banks, but will replace gold and store credits. If cryptocurrencies replace central banks, that society and economy will be controlled by people controlling those cryptocurrencies (rich people), and thus would be worse than what we have now.

With that bit of context, these are the things I think are needed for a cryptocurrency to replace fiat currencies

  • It can be used even if it can’t be traded with fiat currencies.

Most cryptocurrencies today will see a sharp decline in their value if they cannot be traded with fiat currencies, which means their value still comes from fiat currencies and are merely gambles. Governments allow cryptocurrencies until they don’t see a real threat from them, which is when their value comes from fiat or they can control and monitor transactions by rules and regulations (government can take away the value whenever they want). One way to do this is obviously having the trust of users. One more way is to codify it in such a way that it can be traded for a valuable digital resource (computation, storage, network).

  • Maintained by developers which are unknown

If the group that maintains source code of the cryptocurrency is public, the government can control them and influence their decisions either by bringing forward new regulations or forcefully. Controlling those developers translates to controlling the currency. Also, it would be nice if no single developer has a cult like following and many developers contribute relatively equally. It is really rare for that to happen, that too on its own. If a cryptocurrency source code and technology is maintained by group is publicly known and concentrated in country X, it a national security threat for a country Y where that particular cryptocurrency is getting popular.

  • Users can remain anonymous

That way it remains usable even if banned.

  • Solid protocol with bug-free implementation

This one is obvious. Users will lose money because of bugs in implementation or loopholes in the protocol and will likely not trust again.

  • Decentralized way to download the client

There are ways to do this, but I am not sure if it is possible or easy with the internet as it is today. Take inspirations from IPNS and DNS-Links. Different peers would have different versions of client. Match client copies of version that you want and download the most common one. Something that can be downloaded from bitcoin.org or ethereum.org still seems pretty centralized to me.

Cryptocurrencies that matches most with above, are generally popular for illegal activities, funding crimes, black money etc. So, this seems like a good rule of thumb.

I think someone who wants to make a strong cryptocurreny can learn a lot from torrents and its community. It is an amazing technology where developers are not so famous, there are multiple clients, multiple torrent link providers, multiple seeder and leechers etc. It is decentralized in many ways. It has survived despite government bans. Domain names got banned, but there are many torrent-listing sites with different domains and now there are sites that provide lists of active torrent-listing sites. Regardless of whether you like or dislike torrents because of its legality, it provides a great model for distributed software.

Most cryptocurrencies can be divided into four categories based on how many boxes it ticks from above listed properties (most boxes to least)

  • Rupee-alternative
  • Gold-alternative
  • Store credits
  • Gamble

Gamble currencies will disappear eventually. Store credits stay as long as the store stands. Gold is timeless (but which one?). Rupee-alternative is hopefully never happening.