What is the value of cryptocurrency vs. blockchain?

Many have posed the question - why crypto and not blockchain?

On the surface, this is a very valid question, especially given the noise and speculation around cryptocurrencies while there are projects that utilize blockchain technology for non-speculative use cases in areas like supply chain, digital identity and information sharing.

The truth lies in the nuance and understanding around why the properties of cryptocurrency - immutability, verifiability, and programmability can produce a new way of organizing our social fabric. This is only possible precisely because we have digital value that is enshrined by strong cryptography and guaranteed by math. Not implicit trust.

The short and blunt answer is that blockchains can have value without cryptocurrencies (as is the case with digital identity, supply chain or health records) because a blockchain is just a computer science data structure known as a Linked list that is efficient at storing data that needs to be guaranteed to be sequential. It has had value since it was invented in 1955. It wasn't until the introduction of Bitcoin that cryptocurrencies, combined with game theory, distributed computing and this Linked List data structure, that the vast majority of the world learned about a "block chain".

The sad reality is that most cryptocurrencies do not have material intrinsic value. For the majority of crypto-assets today, their value has been largely driven by speculation and has grossly overshot the value capture of these assets at present.

Crypto-assets generally tend to fall into 4 buckets:

1. a commodity (Bitcoin, maybe Ethereum)
2. data (digital id, health records, state of an object or thing);
3. a currency (fully collateralized stablecoins or CBDCs); or
4. a security (most tokens)

In Canada (and even globally), we are lacking a regulatory framework that adequately addresses which rules should apply to crypto-assets and instead we have relied on bespoke legal opinions, shoe-horning old regulations awkwardly into new paradigms, retroactive enforcement, or general community opinion. In absence of a proper taxonomy, not only has this not protected consumers, but this has introduced ambiguity that enables bad actors to exploit and discourages good actors from moving forward with potentially very innovative business ideas that could benefit Canadians and even the world.

In all fairness to the regulators, this is a particular challenge because crypto-assets can be used in different contexts, morphing their topology because of their programmability.

As an example, a crypto-asset that initially appears like a commodity or a security can also be used as a medium of exchange for payments like a currency.

This presents a challenge to our regulatory frameworks in Canada. Especially with the pace of innovation and the global borderless nature of crypto.

At present, our provincial securities regulators under the CSA have been the primary regulators for crypto-assets and crypto-asset platforms, but even they would admit that they don't have the tools to adequately address the challenges that the malleability of crypto-assets present.

I think there is an opportunity for Canada to properly define a digital asset taxonomy and accompanying regulatory framework that adequately addresses gaps in our existing policies by focusing on the context around the usageof a crypto-asset and not merely the fact that itis a crypto-asset.

This concept, paired with regulatory sandboxes that actually encourage innovation and experimentation in a safe and supervised way, would set Canada apart from the rest of the world and provide much needed regulatory clarity that could attract talent and capital, instead of the flight we've been seeing.

So, what is the value of cryptocurrency?

Cryptocurrencies at their core are merely digital stores of value. While in many cases, they may not be perceived as good ones due to the volatility, nonetheless they are programmable, digital stores of value, that enable transactions that can't be faked because of the cryptography baked in.

When used in the right way, these properties can enable robust, open and efficient systems that encourage cooperation among peers because these crypto-assets have a perceived value and you can define system rules that create shared incentive alignment. Even between malicious or competitive counterparties.

These "rules" are pre-determined incentives and disincentives that are enforced by immutable software and rely on Game Theory to be effective (in industry called "token economics"). Thus, you can design systems that economically discourage bad actors from cheating others without necessarily relying on manual enforcement or the rule of law.

This is only possible because of the programmability and the strong cryptography tied to these digital stores of value. This is the value of cryptocurrency.

When incentives and disincentives in these open systems are designed in a way that a crypto-asset actuallyaccrues value because of it's usage, there is the potential for network effects to create robust, open and efficient systems that reduce the reliance on trusted intermediariesprecisely because they are incentivized to act in the best interest of everyone else, or risk losing a valuable income stream.

This is no different than many incentives we employ in "the real world" already.

Economic punishment for not filing taxes on time or being accurate, speeding tickets, central bank interest rates, etc.

The difference here is that the rules of the game are known ahead of time, and punishments are applied automatically by software instead of people, and are strictly enforced. Unfortunately, there are still few crypto-assets and protocols that have demonstrated this, but there is a lot of rapid innovation happening and immense potential.

In my opinion, responsible development of these systems requires regulatory guidance but also the freedom to experiment and fail. This is typically antithetical. In absence of clear frameworks that are easy to access, innovation is happening in the open source world where permission is not necessarily required, and punishments are rarely handed out. As a result, we've seen rapid innovation, but also a lot of economic loss from unsuspecting speculators.

I think there is an opportunity to create a middle ground, whereby innovators can innovate and speculators can speculate, knowingly, with informed consent and some basic guardrails to prevent systemic risks.

Much like when other innovative technologies like oil extraction, the car, the computer, the cell phone, and the Internet emerged, the ones that adopted became "haves" and the ones that didn't have been "have nots" trying desperately to catch up. Herein lies Canada's ability to seize this opportunity.

To me, it's clear that the Internet of Value is emerging and it would be in Canada's best interest for the future of our generations to be the leader.

Resources

• Paradigm - Ethereum's New Staking Model
• Ultrasound Money