A Response to ‘Dr. Doom’ & The US Senate Banking Committee’s Hearing On Cryptocurrency
Last week, the US Senate Banking Committee held a hearing exploring the cryptocurrency and blockchain ecosystem, which featured prominent American economist and self professed crypto skeptic Dr Nouriel Roubini.
Here we analyze the testimony of Dr. Roubini and give our take on the 10 main points of his argument.
1. ‘Crypto is the mother of all scams and bubbles. The bubble has burst this year’
- 81% of all ICOs were scams
- 11% of them have been failing or are dead
- Only 8% are still traded on exchanges
- Bitcoin has fallen by 70% this year. Other crypto has fallen by 80%, thousands of others by 95%. This entire asset class is literally imploding now.
Response: Dr Roubini is counting by number rather than by value. If you counted % of ICOs as scams by value, the figure is much much lower. This does not excuse the scams, but 81% by count of companies and 81% of a market are very VERY different concepts.
At the heart of an ICO lies a promise to deliver a product or feature set at some point in the future. People buy into a company on that basis and often promises that are made at ICO level are massively delayed or simply remain a whitepaper rather than a working product. At worst case scenario, they are scams and ‘money grabs’.
At Radix, we are approaching things differently. We are not doing an ICO. Just like you would sell licenses or subscriptions online for a software product/service; Radix will allow tokens to be bought publicly once we launch our public network , which is due at the end of Q1 2019. We believe that this is the most transparent and ethical way to proceed.
‘Bubbles’ are not necessarily a bad thing, they are common in normal financial markets and there is some similarity between the way that Bitcoin has behaved and the way that NASDAQ did during the dot com boom, as can be seen from the graph below. Blockchain and crypto is in it’s infancy, it is yet to establish it’s true value which will come with time and maturity.
2. ‘Blockchain is the most overhyped technology ever & is no better than a glorified database
Response: Cryptocurrencies might be overhyped, but Blockchain is not. Blockchain and DLT is much more than just a database, it is inherently auditable, unlike normal databases and ultimately more secure as it is not controlled by any single organization or nation state. It is a technological breakthrough similar to invention of the internet and it is glorified’ because it is an exciting technological breakthrough.
All new tech goes through what Gartner calls the “Hype Cycle”. Blockchain is no different, we’re entering the “Trough of Disillusionment” and it will take time and more proven use cases before we enter the “Slope of enlightenment”
3. These assets are not currencies, they are not a unit of account, they are not a means of payment, they are not a stable means of storing value.
- Bitcoin can only do 5 transactions per second, Visa can do 25,000 per second
- ‘Nobody uses Bitcoin for transactions besides criminals & terrorists’
Response: To understand this response lets start with defining what is money and what makes a currency.
Money is an abstract concept based on confidence in reputation of a nation state, entity or even an individual. Currency is a globally accepted form of money that is a …
1. Medium of exchange: can be used to intermediate the exchange of goods and services.
2. Unit of account: A standard numerical unit of measurement of market value of goods and services.
3. Store of value: Maintains its value over time and can be spent later or exchanged on a later date without penalty.
In other words, money must exhibit the following properties of being…
1. Fungible: one unit is interchangeable with another
2. Durable: unit must withstand being used repeatedly
3. Portable: Individuals can carry money with them
4. Uniform: All units must have the same buying power
5. Limited in supply: The supply of money in circulation ensures value remains relatively constant.
6. Acceptable: Everyone must be able to use money for transactions
7. Divisible: Can be divided into smaller units of value
Bitcoin and other crypto currencies already exhibit many if not most of these features. These criticisms are criticism of a new technology, yet to prove itself, not of things this technology will never be capable of. Radix has already done over 25,000 TPS, and it’s underlying currency is designed specifically to be a reliable store of value over time.
How does FIAT money derive value?
By financing debt and promising to pay the debt at a certain time in future. My promise is only as good as my reputation. FIAT money derives value from confidence in a nation state. There is a supply of $85T in terms of coins and assets while the global world debt is around $200T.
So what happens if money no longer holds its value? For example in countries such as Zimbabwe — currency is only as valuable or useful as the stewardship allows it to be from the point of view of it’s users.
Time and time again, the feds have bailed out banks by printing FIAT currency from thin air, effectively stealing from everyone.
Crypto removes the key central point of failure of a FIAT currency — human mismanagement. Thus bitcoin is not only a currency BUT a better store of value than we have ever seen yet.
4. Crypto Mining is also an environmental disaster — wasting a massive amount of energy
There is truth to the fact that Bitcoin is bad for the planet. The entire Bitcoin network now consumes more energy than several entire countries and is mostly fueled by coal power plants in China. This is simply not sustainable at the current rate and is really bad for the environment. Also when you consider that Bitcoin miners are currently a niche group in terms of the population of the world, this relatively small group are expending a huge amount of energy. Therefore, if more people mine Bitcoin and this group grows significantly, so too will the damage it is doing to the environment.
Radix is different because we are an efficient system that does not use Proof Of Work to verify transactions, as such no power is ever wasted. We can also run on low powered devices such as a Raspberry Pi and don’t need huge power and super computers or conglomerates of miners, making us the most sustainable solution in the space.
5.a There is a technical revolution in financial services, but it has nothing to do with Blockchain or crypto, it is called Fintech and is based on AI, Big Data & Internet Of Things. There is no Blockchain in Fintech.
Response : There is plenty of research, PoCs blockchain for FinTech including in the securities and equity space, insurtech and KYC areas. To take one example, Standard Chartered Bank have piloted the industry’s first blockchain based smart guarantees in trade finance. Just recently Singapore’s Central Bank called Blockchain ‘Fundamental for Fintech innovation’ which completely negates Dr Roubini’s claim that innovation in Fintech has nothing to do with Blockchain.
Thoughts from our Founder Dan Hughes: “To truly have a reliable Internet of Things you need distributed ledger technology. For example, my refrigerator that orders things from Amazon, needs to be checked Amazon’s end to see that it isn’t faulty or hijacked. As a consumer, I don’t want to wake up and have 1,000 cows’ worth of milk outside my front door. The way to do that is through a digital ledger. There are a number of emerging technologies — AI (Artificial Intelligence), VR (Virtual Reality), AR (Augmented Reality) and IoT (Internet of Things). The direction that we’re going in, means these 4 things will want to communicate with each other, for example AI and IoT, your smart fridge wants to order something because it has detected that your milk level is low because of the preferences you’ve set. AI and IoT want to communicate with each other, VR and AI want to talk to each other or IoT wants to talk to your VR unit. All these 4 technologies, if they want to speak to each other, need a trustless way of communicating — a trusted distributed ledger. So the DLT sits right in the middle, it is the protocol at the heart of all of them. The DLT is basically the internet for IoT. It enables them to communicate and transact, and crucially it enables them to do so in a trustless way. So it’s not ‘just fintech’ DLT is integral to the success of all these emerging technologies.”
5.b The crypto ideological utopia is an egalitarian dream of full decentralization of all human transactions. No governments, no central banks, no ‘trusted institutions’. It’s total and utter nonsense.
Response: The ‘trusted institutions’ such as governments which Dr Roubini refers to have in recent years proved not to be trustworthy at all. The US government has been liable for huge data breaches in the last 10 years. Then we have the likes of Equifax, whose data breach last year affected an estimated 146 million people globally, the majority in the United States. The social media behemoth Facebook, also leaked huge amounts of private data earlier this year. In Facebook’s case, this allowed millions of user’s data to be sold to a third party during the Cambridge Analytica scandal. The fact that people are able to control their own identity information via Blockchain & DLT means that there is not one single point of failure to be hacked, and that in itself means that personal data is fundamentally more secure.
6. Crypto land is now subject to the opposite dangerous trend: massive centralization. Mining is centralized and run by oligopolies in authoritarian countries like China and Russia. Trading is centralized and non-secure and are being hacked on a daily basis. Development is centralized as a technological elite are police, prosecution and judge. They arbitrarily change code and fork coins into new ones when things go wrong. The wealth is massively concentrated, worse than North Korea.
Response: We agree that centralization is a concern within the space. Ethereum, Bitcoin and other Blockchain/DLT platforms have a huge scalability problem and those platforms which are aiming to solve these scalability problems, either by using small cabals of “validators” or via the use of DAGs (Directed Acyclical Graphs), are sacrificing decentralization in the process.
The Proof Of Stake consensus protocol, which has also been touted as a solution to the inherent scalability problems of Blockchain, is also flawed and leads to centralization.
What makes Radix different is that we can solve the scalability problems of blockchain whilst maintaining decentralization. You can read all about our path to decentralization here. We believe that decentralization lies at the heart of the vision for Blockchain and is integral to our platform.
7. There is massive price manipulation in Crypto Land. Widespread Pump and Dump schemes, Spoofing, Wash trading, Insider trading. Coins created to manipulate upward prices. Massive criminality.
Response: Our Founder & CTO, Dan Hughes says: “This is not wrong in some regards. The markets are manipulatable because 1) It’s not mainstream, so the market is thin. If the market is thin, it can be manipulated more easily. Generally to manipulate a market you need about 2% of the market cap; this is true for stock markets too. If the New York Stock Exchange had a daily volume of 1 trillion dollars, and if I had $20 billion, I could manipulate the market. The difference is in crypto that the value is so much lower because the market is so much thinner. 2) Market manipulation is easier because of the economic models of the coins; they are all fixed supply. So if your supply is fixed the only thing that can move is the price. So it is not really an apples to apples comparison to compare crypto to other currency markets. The tech is young and has yet to mature, the markets are thin and no one really has any solutions for good stable currencies, it’s gone stagnant. Dr Roubini is not wrong here, but he is just not looking forward to the future or looking at the whole picture.”
8. ICOs associated with security tokens are non-compliant securities — break all security laws. They are mostly scams.
Response: Lack of non-compliance is not the issue of the token issuer (yet) but the problem of the state that is playing jurisdictional catch up with the rate at which crypto is advancing. Until then the best we can do is self-regulate.
Our Founder Dan Hughes says: “Some of them are and some of them aren’t — look at Ethereum. Ethereum wasn’t a scam and is now the world’s largest community driven project. You could say that there are some scams. But it’s similar to the stock market, you have all the big name stocks that aren’t scams. Then you have the penny stocks, many of which are pumped and dumped all the time, like in The Wolf Of Wall Street. Dr Roubini is just looking at a slice of the market and is comparing the best of one to the very worst of the other.”
9. Utility tokens and widespread tokenization would mean a return to the stone age of barter. Even the Flintstones knew better than crypto as they use clam shells as their own one currency.
The idea that there is only one global currency, and every currency in the world is not essentially interchangeable across efficient exchange markets is very strange.
Airmiles, to loyalty points, to audible credits. The idea of a currency for a specific company or use is neither new, and billion dollar companies already operate using this very idea.
10. Corporate Blockchains and so called enterprise DLTs are glorified databases and have nothing to do with blockchain. They are private rather than public. They are permissioned rather than permissionless. They are based on trusted authorities verifying transactions rather than trustless. They are not distributed on millions of computers but rather on a few selected controlled ledgers or databases. They don’t use cryptographic games to authentic but rather a trusted permissioned system. They claim to be blockchain but have nothing to do with blockchain. Corporations experimenting with them have decided that they are no better than traditional databases and since they are more costly and less efficient they will not use them. Only 1% of CEOs say that there will be any adoption of DLT. 80% of CEOs have no interest in this technology. No government / corporation will put all public info on there so it’s not going to happen. Blockchain is a lot of hype and almost no reality.
Response: Our Founder Dan Hughes says: “They are different. One thing that a database doesn’t have is an auditable history; who changed what and when. The audit is usually separate from the database, so it is corruptible. You can change the database and hide your tracks. In a Blockchain or DLT the ledger is the audit trail AND the database, so you can’t change the audit trail without changing the database too and making it known that it has been tampered with.”
The people who profited most from the internet were not the major corporations that existed just before it was created. The giants of tomorrow will be built from scratch on this technology. We look not to the large corporates but the startups and their innovation to guide the way in what is possible with the new technology.
Decentralization and trustless systems are not necessarily something that are easily understood by the legal teams of major corporations or institutions. There will need to be a transition period of understanding before true DLT systems are seen as lower risks by enterprises and before their IT and risk people understand them.
In conclusion, many of Dr Roubini’s points are huge generalizations about Blockchain which in no way illustrate the whole story, he only highlights the flaws and worst case scenarios. He speaks in overwhelming negative terms and interweaves this with some aspects of truth, such as the points about centralization and scamming which occurs at ICO level. Dr Roubini says that what is going on in Blockchain & crypto at the moment “will not change” — but no one can predict the future. A statement like this perhaps shows that some of the arguments he makes are more emotional and irrational rather than grounded in complete facts. The technology is in its infancy and whilst there are clear flaws, which he certainly highlights, the benefits of the tech, long term, are overwhelmingly positive.
As for surmounting these challenges and system flaws, at Radix we have created a fast, scalable DLT that actually works. Our platform is rooted in a vision for complete decentralization, and this is something we can not and will not ever compromise on. Our platform can scale without ever sacrificing the founding principles of Blockchain.
Bitcoin mining is undoubtedly bad for the planet, the more people that mine the worse the effect. The Radix platform does not use a Proof of Work protocol, so no power is ever wasted. It also does not require a huge amount of computer power to verify transactions, even a Raspberry Pi can act as a Radix Node Runner, making us one of the most sustainable solutions in the space. If Blockchain and cryptocurrency is to be truly scalable and reach mass adoption, it must also be environmentally friendly, which our platform is.
As for the so called scam culture associated with ICOs, we have turned down over $100M in offered investment capital. We believe in raising what is needed, building and delivering first.The system we have built is not just a white paper, but already has a fully working Alpha net that can be built on today.
Radix is ‘Blockchain without the blocks. It’s fast and it works.’