The Sad Truth About Crypto Currencies

There is a lot of debate regarding crypto currency – some think it is the future of money, others strongly disagree, and the debate does not seem to come to an end. I personally have a fundamental problem with them. I was tempted a couple of times to try to solve the problem myself, but I doubt that I will have the time and focus to do it. Maybe someone can pick it up from here.

While I love most of the advantages of the digital currencies, I think that the current model is conceptually flawed, anti-revolutionary, and self-destructive.

The Gold Rush

About two hundred years ago, a period of fervent migration started. The reason was pretty simple – gold deposits were found in various regions of the world and people were moving there hoping to find gold (and a better life).

Since ages, gold has been valuable. Even many civilizations that didn’t use it as currency were ready to kill for it. On the other hand, the practical value of gold was quite low. Technically, gold only started to become important for manufacturing in the last century.

In the process of rushing after gold, a lot of good and bad things happened:

  • people spent enormous resources, even lives in order to extract metal
  • many areas together with their native inhabitants were devastated
  • industries evolved in order to make the mining process more efficient
  • towns were founded to host miners and started to evolve

The list can go on, but it’s quite clear that, as a civilization, we were fortunate that the mining process had many side effects, because the mining itself offered very negligible return. Back then, gold was important mostly for financial reasons.

The Crypto Rush

Sorry for the long introduction, but I only wanted to remind everyone about the gold rush, because what happens with crypto currencies today is actually worse.

Photo source:
Photo source:

Crypto currencies are obtained through a process called mining, a process which mimics the gold mining pretty well. During the mining process, computers execute an algorithm to reach certain stages that are rewarded with crypto currency. Crypto currency is no gold, it’s just a sequence of bits. The mining algorithm is specifically designed to take advantage of raw computing power – the more powerful the computer, the more currency you are rewarded with. There are shortcuts, of course. For example, some processors are more efficient than others in executing the algorithm, and it’s even possible to create specialized hardware to speed it up.

The mining process is collective/distributed and designed to self-adjust the reward – once technology progresses and the algorithm is executed faster – it takes more and more computing power to get currency. Once again, we have a good analogy with gold mining: at first, it was possible to find gold nuggets in the river, but shortly after it became much harder to get several grams.

Unfortunately, this analogy makes the process heavily broken:

  • The execution of the algorithm does not produce value, just some bits – the currency. Even in the 19th century, gold had a higher practical value.
  • Resources are spent to execute the algorithm. Computers are manufactured, electricity is consumed, some people need to take care of them.
  • The potential for self-destruction is huge. Gold miners left sites that didn’t offer enough gold, but in this case everyone knows what to expect from retrieving the currency. Getting more computing power is very tempting as long as the currency can be exchanged for regular currency at a price that is higher than the mining cost.

So, as a civilization, we already spend scarce resources to create no value, just some sequences of bits that can be converted to US$ or maybe goods/services. I am sorry to say this, but gold mining offered better and more lasting value.

Can This Be Fixed?

I strongly believe so. Humanity needs computing power and there are lots of power-hungry algorithms that produce amazing value – from predicting weather to discovering cures for diseases, and even finding signs of extraterrestrial life. Instead of building mining sites that consume MWh of electricity to produce no value for our civilization, perhaps currency could be generated for contributing to solving problems that are really important to us. Of course, this is technically harder than hashing, but it can be done.

Currently, the future does not look bright – we might spend more and more resources to generate some bits that gain value just because we invested a lot of resources to obtain them. We should learn better from the past.

PS: I am fully aware that it takes a lot of resources even to print money. But this is because we have to do it – this is how our economy works and theoretically governments keep resource spending under control.
I also know that people spend a lot of computing power on useless stuff, but eventually this is self-regulated.

Mining can also have good side effects, for example we built machines able to hash faster, but I doubt that crypto mining will give us a boost to discover better ways to produce energy.


You can post comments in this post.

  • You make a lot of good points. I think Bit Coins are a great idea, a great concept, but unsustainable in the long run for many of the reasons you mentioned.

    Benson Stein 9 years ago Reply

  • Bogdan, excellent article for starting a debate. There are a couple of things to add: cryptocurrencies are still young, and the underlying technology benign and transformational. People like you *are* in fact trying to give real-life purpose to the blockchain, with fairly decent results so far.

    For example, Primecoins are designed to find increasingly large prime numbers (which is VERY relevant to cryptography to say the least), and Namecoins serve as a decentralized DNS system. And earlier this year, Honduras announced plans to develop a blockchain-based land registry to stop property fraud. So in a way, there is a bit of social value to this technology, but whether this is the most effective way to achieve these goals remains to be seen.

    Sebastian Ungureanu 9 years ago Reply

  • Wow, this is in every resepct what I needed to know.

    Celina 8 years ago Reply

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