Why aren’t Cryptocurrencies used in everyday life Jax Net

By @Юрий Шишацкий (Iurii Shyshatskyi)

In our previous Blockchain Briefs, we had determined that the security properties of Bitcoin-like blockchains degrade over time. This post will focus on the long term implications of this degradation. Speculations on this topic have a long history, many authors have claimed that cryptocurrencies have a bright future due to the versatility and the many applications this new technology has. Others point to the drawbacks of blockchain technology and predict inevitable flaws currently existing in cryptocurrencies. We will try to figure out what outcome is more likely to happen.

Firstly, we need to learn why the degradation of the network doesn’t affect the price of the coin at first glance. Right now security is not a problem for Bitcoin and a few other cryptocurrency leaders. Bitcoin will have sufficient security even after the next few halving events.

Secondly, whenever people bring their money to the network, the demand for coins and price grows, along with the security budget for mining.

Thirdly, many people consider cryptocurrency as a tool for saving and earning money on speculations. Movement of coins to cold accounts reduces the number of coins in circulation. Therefore, one halving in four years doesn’t seem destructive.

The true problem will occur when Bitcoin reaches its maximal extension so that further network and capitalization growth won’t seem feasible. The second problem will be the decrease in the security factor below some sufficient bound, currently, we are unable to pinpoint where this bound is. Also, it is hard to estimate where the network’s largest extent is. Nevertheless, we can be sure: one-day security will have a prominent role. Is it possible for bitcoin-like cryptocurrency to properly function in this circumstance?

Let’s assume this day has come and make some calculations. Let’s also assume that investors have attempted to calculate the coin’s intrinsic security value. After N halving events (2n-1)/ 2n of coins will be issued. They will be supported by 1/2n fraction of coins. Roughly this is 1/2n of coins per minted coin. Assuming that the next halving will be four years later, we can conclude that the security budget for the next year will be 1/2^{n+3). Four years later the security budget will be only 1/(2^(n+4)).

One may think that the intrinsic value of the coin has dropped two times, but these newly issued coins have less intrinsic value than coins issued four years before. Theoretically, they have two times less intrinsic value (this assumption is wrong but let’s keep things simple). Therefore, there should be at least four times less intrinsic value.

Four times a decrease in four years is around 41% per year. It is unlikely that rational investors will keep such assets if there is a better alternative, even a fresh altcoin with the same protocol could become a competitor. Therefore, at some point, one can expect a panic and fall of the coin price to the bottom. Unfortunately, there won’t be a sufficient amount of unminted coins to secure the system and give it a chance to recover.

Many people earned wealth on the growth of the cryptocurrency market. However, when a blockchain network shrinks to zero, a comparable amount of wealth gets lost.

Nevertheless, there is one good thing about it. We can learn what amount of inflation is needed to sufficiently secure the network. Basically, we can expect that the collapse occurs when the security factor drops below some minimal acceptable value. Although, the blockchain community can make some hard fork which fixes the coin emission rate. For example, the Bitcoin community can decide to make a halving once every eight years, to keep miner’s reward fixed or even increase it. It will be a lucrative alternative to losing the network altogether along with their investment. It is likely that by this time the network majority will learn how short-sighted the halving policy is. In this case, there will be additional emission of coins and infinite supply. Many observers claim that Bitcoin has a finite supply. However, this comment appears to be completely misleading. When we deal with the cryptocurrency it’s important to keep in mind that digital assets may disobey common rules. Often we treat crypto coins as casual coins. Metal coins are likely to preserve their standardize weight and face value.

However, in the case of digital coins, we can observe that the value can evaporate from them. It works like hidden inflation. People often assert Austrian and Keynesian economics to study the problem. However, these theories were developed for real currencies and do not translate to digital coins as clearly.

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