Two kinds of cryptos and thoughts about future developments

This is a humble try to make up my mind about future developments of cryptocurrencies. Various of the coming ideas might be present in other topics as well. Still I noticed that some of my points below are not that much in the focus of today's discussions. So at the best this post could open up some eyes and start a discussion with respect to right ways to evaluate or interpret the various developments that we see in the field today. I rather try to keep everything on an abstract level and do not try to go into the details of individual crypto projects. Let's start..

Different kind of cryptos

Crypto tokens are often summarized under the notion "cryptocurrency". This is very misleading since many tokens (typically referred to as 2nd or 3rd generation blockchains) are not currency, but rather are shares of an entity with voting rights (for instance when it comes to fees). Moreover, they allow to redeem kind of dividends by being involved in proof of stake procedures. Clearly, the idea is to maintain an active community of programmers. But formally, holding such tokens is in flavor very close to holding classical shares. The value is motivated by the programming done in the background and the blockchain's broad applicability in finance and in the notary profession. With the growing relevance of its applications there come responsibilities. Regulators will define rules to which the system has to abide and these rules may be different in different regions. At some point the entity might be forced to declare a CEO or alike to defend its legal interests. Possibly, the entity stays clear from these conflicts and legal issues are fought out with the users of the system. Independently, from these considerations I would expect that tokens with voting power and kind of dividends are in the long run treated as shares of a corporation. Their value will depend strongly on their applicability and the backing of the regulators and also on the dividends paid.

On the other hand, there are tokens such as bitcoin which have as sole feature their limited supply. These do not come with a settlement system that is suitable for everyday life nor with fancy further applications. The maximal number of transactions is small and with KYC measures being implemented the regulators have good control on the transactions. So in a certain respect the limitedness of in particular bitcoin is also its strength. As long as governments allow to store gold as an investment there is no viable argument against bitcoin. Beyond the value of bitcoin itself there is no other applicability and also the holders are not paid for anything (as for instance for maintaining the system). So it is indeed very close to a currency.

Persistence

Will there be one digital (non-state issued) currency that prevails in the long run or will there be a change once in a while?

My guess is that modern blockchain developments will provide (they do already now) settlement structures for tokenized currencies. To a large extend these currencies will be state/bank issued. Since these blockchains will handle a broad variety of tokens, there will be no reason to favor the crypto token related to the operator of the blockchain. These tokens will essentially be tokenized shares of the entity running the blockchain and I would expect that they do not develop into currencies. The evaluation of their worth is not much different from analysing the worth of a company. In particular, evolutionary developments will change the respective landscape. There will be no difference to developments in the stockmarket. When comparing crypto developments with the internet, Ethereum and the likes will maintain the infrastructure on which buisnesses are founded and run. Will one of these be in the long run the new google? I don't know.

Now let's discuss the future of currency like crypto units. Here the question of persistence is related to the question whether a cryptocurrency as bitcoin might lose its usability and an evolutionary step might occur. In principle, this may happen but explicit reasons that are discussed in the community are often not very critical.

Bitcoin is based on a very limited blockchain so that it does imminently need additional settlement layers that are provided by other blockchains or custodial solutions. In practice, most people do not notice the limitations of the blockchain. It is from my point of view a big mistake to evaluate the strength of a cryptocurrency by the efficiency of the core layer. Only the user experience (fees, bid-ask spread, wide spread adoption, security) is relevant. Interestingly, a very potential underlying core blockchain bears the risk of getting in conflict with regulators making it less interesting for long-time investments (gold substitute) or it might take over lots of other tasks being not beneficial for its role as currency. At this point a crypto purist would object that the overall aim has to be to establish a decentralised settlement system that cannot be interfered by the state. But from my (and many others) point of view a state needs to be able to enforce laws and will not accept such a settlement system.

A second criticism that is often mentioned is the high energy consumption of the proof of work procedure of bitcoin. Again in the long run this is a minor problem. Either the blockchain forks at some point into a proof of stake legitimisation. Alternatively, with most transactions being made off-chain one could easily reduce the reward for the miners by one tenth in one to two years. A very simple hardfork could accomplish this, once there is reasonable consensus in the community. Here one needs to be aware of the fact that the negative effect of lower rewards is very limited since an attacker can only replace a certain number of blocks by other blocks. Still the attacker cannot get hold of the bitcoins effected by the attack and still such an attack will be very expensive.

The cryptographic puzzles that secure the possessions may become insecure. Well, this would certainly not happen overnight and a hardfork into a different system is possible at any time.

In general, the community could also lose interest in decentralized currencies once the state issues tokenized money. Or people might move back to gold as the safe haven which could also be tokenized. To be honest this seems to be the most likely thing that may happen.

But still I do not believe that this will happen since bitcoin bears the central promise to be not inflationary (as gold) with lots of advantages compared to gold. Someone who has a bank locker with a significant amount of gold inside might go there once in a while to check that it is still there. But the physical experience of really owning it is certainly not strong. To check the bitcoin account is much easier and knowing that noone can get hold of it easily is a strongpoint pro bitcoin.

Lightning

The fascinating idea of establishing bitcoin lightning and so enabling everyone to just use bitcoin in every-day life sounds cool. But on the negative side this would raise lots of concerns under the regulators. So a fading activity in the bitcoin lightning network will possibly rather strengthen the role of bitcoin than weaken it. Anyway there are (possibly non-decentralized) solutions around this problem.

Just to summarize. From my point of view there are two completely contrary developments that are often mixed up. On one hand one has the growing acceptance of bitcoin as a store of value and on the other hand there is a growing interest in the general blockchain infrastructure. In this sense Ether and Polkadot are not currencies at all and to be honest as a regulator I would not classify them as such.

I hope you had fun reading these lines. What do you think about this twofold approach? Possibly, similar ideas popped up in other discussions, too. I would be thankful for any reference..

Stay healthy!