6 Reasons for Optimism This Crypto Winter

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Why this downturn is different from 2018

Exploring the transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

Jan. 28, 2022

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There’s no debate: We’re in a bear market. But I’m feeling far more relaxed about the collapse in crypto prices than during the 2018 sell-off. This moment seems less drama-filled, less guilt-ridden and less of an existential issue for the crypto industry. My reasons for that sanguine conclusion are laid out in this week’s column.

For the podcast this week, “Money Reimagined” participated in a special project coordinated by CoinDesk’s Layer 2 team: Privacy Week. This package of articles, op-eds, TV interviews and other content addressing human privacy, and the role cryptocurrency and blockchain technology can play in both protecting and threatening it, tackles the biggest issue of the internet age. To dive into it, my co-host Sheila Warren and I interviewed legendary cryptographer David Chaum, widely regarded as the father of digital currencies, and Tor Bair, founder of the Secret Foundation, both of whom contributed to the Privacy Week package of articles, which you can find here and here.

Have a listen after reading the newsletter.

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6 Reasons To Be Positive About Crypto

Rachel Sun/CoinDesk

When token markets plunged in 2018 following the initial coin offering (ICO) bubble, I wrote a column entitled “Crypto Winter Is Here and We Only Have Ourselves to Blame.” It lamented the get-rich-quick schemes and “lambos” that took precedence over the development of real solutions to real problems at that time.

Four years later, with crypto markets reeling from another sharp sell-off, I feel no compulsion to write such a self-flagellating piece on the industry’s behalf.

Sure, last year’s boom generated overblown prices for many tokens, both fungible and non-fungible, alongside a whole new set of bad-taste, wealth-flashing memes. (The phrase “have fun staying poor” surely took the prize as the worst.)

But in many ways the building and problem solving that followed the 2018 meltdown has served us well. It meant the speculation behind the most recent boom was built on a more established foundation than in 2017.

Crypto is still far from going mainstream, both in terms of its technical capability and social acceptance. But there is a lot less “vaporware” now. It feels more “real,” established, here to stay – that it truly is building something transformative for the world. That’s why this “winter” feels less brutal.

So, with that in mind, here are my six main reasons to say “this time is different” (which, I know, is always a dangerous thing to say).

Layer 2 scaling systems: No longer just an idea

Whether it’s the Lightning Network for low-cost bitcoin payments, the ZK-rollups that power decentralized finance (DeFi) applications or multiparty computation projects enabling secure online custody, cryptographic advances have over the past three years gone from concept to deployment.These innovations will lead to the network processing scalability that’s needed for blockchain technology to go mainstream.

Most of these are layer 2 or companion tools that address a core problem with multi-node blockchains: the need for a massive amount of duplicative computation to process transactions on chain. They represent decentralized alternatives to “permissioned” blockchains where only a small set of approved actors would have the authority to validate transactions (thus improving efficiency). Instead, Layer 2 mechanisms use clever cryptography to enable off-chain computation that can’t be gamed and which, after linking outcomes back to a “permissionless” blockchain, don’t undermine its decentralized consensus. If Ethereum developers can successfully migrate that blockchain to the full suite of 2.0 features, even bigger scaling gains will soon be made by the crypto ecosystem.

Read the rest of this column here.

Off the Charts

Price Vs. Difficulty

One group in crypto that’s especially suffering right now: bitcoin miners. The chart below shows why.

Here is the problem for miners: Not only are falling prices eating into their profitability in dollar terms, the difficulty factor for winning bitcoin rewards via the protocol’s proof-of-work consensus algorithm keeps rising. That means the amount of computation needed to earn the same amount of bitcoin is increasing, which translates into higher costs for hardware and electricity.

The reason for that is twofold. First, miners have continued to expand hash power as part of an ongoing redeployment following the Chinese authorities shutting down facilities in that country in the late spring. The time-consuming process of creating and installing new mining facilities inevitably increases total hash power, which causes the Bitcoin algorithm to adjust its difficulty factor higher. Second, there is a lag effect in the difficulty adjustment, which happens every 2,016 blocks, or more or less every 14 days. Even if some miners start throwing in the towel and shutting down rigs due to waning profitability, those that stick with it have to wait two weeks for any relief on the workload side of things.

The Conversation

America COMPETES?

This week, Coin Center Executive Director Jerry Brito uncovered a bombshell provision in a new bill introduced in the U.S. House of Representatives.

I encourage you to read Brito’s whole thread on the topic. It details how the bill rolls back certain protections that were meant to prevent authorities from abusing their already sweeping powers under the Bank Secrecy Act. It would give the Treasury secretary unique discretionary power to take down cryptocurrency exchanges on national security grounds.

The discovery unleashed a firestorm of critique from the crypto and libertarian communities. Nick Anthony of the Cato Institute’s Center for Monetary and Financial Alternatives chose especially strong words to describe what he saw as a disregard for due process.

Criticism of Rep. Jim Himes (D-Conn.), the sponsor of the provision, was especially harsh.

Security specialist Eliza Sorensen pointed out the harm this could do to another group of business operators who suffer discriminatory treatment of their financial transactions and who depend on bitcoin as a safe mechanism of payment.

At least one crypto enthusiast seemed to find some sympathy for Himes’ position, however, suggesting that crypto companies that engage in national security-threatening activities deserve to see action against them.

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Relevant Reads

Privacy Week

As mentioned up top, this week was Privacy Week at CoinDesk. Here are some of the highlights of a great package.

Regular CoinDesk contributing writer Jeff Wilser took an optimistic view in a piece that imagined what our internet economy would look like in 2035 if we manage to fix the privacy problem. CoinDesk columnist J.P. Koning argued that the promise of DeFI depends on the introduction of appropriate privacy so businesses feel comfortable using it for commerce without exposing vital market data and trade secrets to competitors. CoinDesk Chief Insights columnist David Z. Morris points out that the most insidious element of how we’ve lost control over our data in the Web 2 era lies in the “Algorithmic Loop” with which big internet platforms like Facebook and Google use that data to control our behavior. Contributor Dan Jeffries grapples with the quandary of how to deal with the incredible degree of apathy on this issue and calls for strategies that push the privacy part of new privacy-preserving cryptographic applications into the background.