Crypto Coins – Money without banks?

Aug 21, 2018 by

Dr. Beat Weber’s started his lecture with describing crypto currencies by defining crypto coins and their creating process with the example of Bitcoin. Bitcoin and similar crypto coins are digital currencies with a  limited supply. Miners keep track of all the transactions which are made within the anonymous users. The first miner that finds the correct order of transactions made can add this new block to the blockchain and receives in return a certain amount of Bitcoins. The number of Bitcoin released decreases with time which makes mining less and less attractive.

To determine whether Bitcoin can serve the same means as national currencies the lecturer first stressed the main functions of money: measuring prices, transferring property and storing value. Crypto coins now have no fixed prices of goods in it and are rarely accepted and unstable, thus Dr. Beat Weber concluded that crypto currencies are not money. However, a counter example could be brought up: the local currency WIR in Switzerland does neither perform all these functions, regardless of that it is used as regular money.

Then Dr. Beat Weber went on and compared the functioning of national currencies and crypto currencies. He argues that national currencies are operated through a trustworthy institution, the central bank. Further, the supply of the currency is adjustable and backed in the balance sheet of the central bank. Therefore a national currency’s value is relatively stable. As crypto currencies are lacking an trustworthy institution and are not backed, their value is very volatile. In that context, the blockchain trilemma illustrates a central point. It says that of the three goals of (1) decentralization, (2) cost efficiency/scalability and (3) correctness/security only two can be maintained at the same time. For example, a cheap and decentralized system lacks security and a cheap and secure system lacks decentralization.

Another interesting point, which Dr. Beat Weber raised, is the different trust level people have in technology and humans. He perceives that the public trusts blockchain algorithms more than humans. To his opinion, algorithm do not promised exchangeability in goods, guaranteed value, correcting mistakes, safety of access, costs of transfer or quality of algorithm. Meanwhile, algorithms promise supply limit and safe transport among users. This aspect is also arguable, though, given that Bitcoin is potentially vulnerable to certain types of attacks such as Sybil attacks,  51% attacks, DoS and others.

Dr. Beat Weber concludes that the Bitcoin attracts attention because of its speculative character and the possibility to earn high sums in short time. However, he sees no competition in the Bitcoin  for national currencies: neither as a substitute for them nor as a reliable payment system. Firstly, the high volatility of the Bitcoin due to the limited supply and the lack of an stabilizating institution make it unserviceable as a reliable means of payment. Secondly, Bitcoin might only be successful as a (reliable) payment system for niche activities such as money laundering, payments across national currencies or small online denomination payments. All in all, he does not predict a bright future for crypto currencies as he does not expect them to to  be a widely used, secure and stable mean of exchange.

In our personal view, Dr. Beat Weber gave a good introduction into the topic. He backed his arguments with good information so that few arguments could be brought up against his stance. However, it would have been interesting to go further into detail and, for example, explore different points of view from other academic research.

Written by: Valeriya Gorobets and Juliana Rivas

Based on the lecture by: Beat Weber (“Cryptocurrencies”)