In the beginning, there was nothing. And then there was the first bitcoin. In 2008, an anonymous person working under the pseudonym Satoshi Nakamoto published eight pages. Eight little pages that would turn the world upside down because they described a system allowing two people who did not know each other to carry out a secure electronic transaction without going through a trusted third party. Since then, his idea has been copied and adapted. A host of blockchains (Ethereum, BNB Chain, Solana…) have appeared. And a vibrant ecosystem valued at $3 trillion and used by 320 million people was created from scratch in fourteen years. Since then, this new world has faced a terrible crash. Cryptocurrency prices collapsed (-48% for bitcoin, -51% for ether, etc.) and $2 trillion in valuation evaporated. What happened ?
One of the fuels of the crypto bubble has of course been the low rates that central banks have put in place to prevent economies from cracking during the Covid pandemic. A strategy that has encouraged investment so much that it has benefited increasingly risky values, until it has flooded cryptocurrencies. The panic of their curves then attracted the general public dreaming of lightning fortunes.
The reasons that push so many people to crypto are however heterogeneous and deserve to be looked into. There are many people in this community who are genuinely enthusiastic about the innovative technology on which the system is based. But interest in the blockchain has also been fueled by the mistrust created – rightly so – by the 2008 crisis. And in 2022, this mistrust has not fallen one inch, quite the contrary. “I buy cryptocurrencies in anticipation of the day when the global financial institutions will collapse,” says a well-to-do Parisian executive in his thirties. A speech that several crypto users and professionals have given us. The sign that the craze for cryptos is also, in part, a symptom of the concern of populations confronted – in bulk – with the threat of global warming, Covid and the war in Ukraine.
“Have fun staying poor!”
Belonging to a community also explains the attraction of cryptos. Those who buy the infamous Bored Ape Yacht Club NFTs don’t do so for the Bored Ape Virtual Card. They join a circle of people select, plugged in. These virtual coteries mock those who do not understand the interest of cryptos: “Have fun staying poor!” They weld their bonds with memes of bears, profile photos with laser eyes and their secret jargon (“WAGMI!”, we’re all going to succeed), no doubt jubilant to see the layman toil over their exchanges on the “hash” , the “burn” or the “gas fees”. Unsurprisingly, regulators are having a little trouble keeping up. And that caused some problems.
Social media has been filled with non-transparent ads about high-return, high-risk products. Tons of scam projects have sprung up, like the crypto Squid Game, whose creators pretended to be Netflix partners before going with the cash. Even when there is no malicious intent, cryptos remain risky. The fact that blockchains like bitcoin are open-source is pleasing: everyone can innovate on it. But if anyone can create a competing bitcoin, it raises complex questions about the intrinsic value of this UFO. Some 6,000 more or less serious, more or less eccentric cryptocurrencies have emerged. The case of Dogecoin launched by two engineers to make fun of cryptos is instructive. Since Elon Musk joked about it, its price has exploded (9 billion euros in value today). One wonders in this story who will have the last laugh.
Popular crypto projects have also shown their flaws like that of Do Kwon. Its Luna token and its stablecoin TerraUSD supposed to always be worth a dollar of Luna thanks to a system of automated corrections and financial incentives had attracted many people. But these mechanisms “don’t work when humans panic,” he warned. economist Frances Coppola in the summer of 2021. In May 2022, the flash crash of Luna and TerraUSD (which dragged down Three Arrows Capital and Celsius) proved him right. Last November, the FTX affair broke out, revealing the less than stellar behind the scenes of one of the most popular crypto exchange platforms. Access to customer funds without security checks, keys stored without encryption… “Never have I seen such a total failure of corporate controls at all levels”, denounced the former liquidator of Enron, John Ray III . Incompetence or embezzlement, justice will decide. Sam Bankman-Fried, arrested, is now awaiting trial.
The blockchain revolution
Beyond these scandals, the biggest problem of the sector remains that it does not have clear ideas on what makes its added value. Is it a perfectly anonymous means of payment? No, researchers have invented sophisticated tracking techniques. Is it an innovative payment method, then? A safe haven? The bitcoin plunge has pretty much undermined that assumption. And even though the crypto sphere is making great strides, it doesn’t have the volume processing capabilities of a Visa. As for the idea that cryptos will one day replace currencies, it would make no sense for well-banked countries with a stable currency, such as France or the United States.
Blockchain, however, remains an invention that ingeniously answers a key question: who can we trust, especially in the virtual world? Bitcoin has proven over the years that its system works: two people who do not know each other from Eve or Adam can safely make digital transactions. And Ethereum seems to have found a much less energy-intensive way to do it. In countries with few banks, the blockchain option therefore deserves to be studied (as long as the populations have Internet access). “In dictatorships or in countries in crisis, the blockchain can also constitute a life jacket for the populations. We cannot seize your cash at the border or block your savings arbitrarily”, argues Alexandre Stachchenko, Director Blockchain & Cryptos at KPMG France. Part of the Lebanese population has also turned to cryptos in recent months. For the diasporas, cryptocurrencies can also have an attraction: the commissions taken on the transfers of funds are much lower.
The NFT which allow to attach a certificate of authenticity to a physical (paintings, etc.) or virtual (video game items, membership card, etc.) object also remain promising. Admittedly, this increasingly monetizes the digital space by making “rare” what is not. But digital is taking more space in our lives. For people to want to develop better things there, maybe new reward systems are needed. The other avenue to keep an eye on is the DAOs, programs that allow individuals who do not know each other to coordinate by acquiring voting rights and managing a common pot. Badly constructed, they can have flaws (the first DAO had its money stolen for not having properly coded its rules). But their potential is intriguing.
This is basically one of the great merits of the crypto sphere: anyone can get their hands dirty. Just as Uber forced taxis to upgrade, perhaps this competition will force traditional finance to upgrade. However, the crypto world would also benefit from taking a closer look at its ancestor. Web3 is sometimes reminiscent of idealistic hippies who create autonomous societies and end up reinventing the right to vote or the pooling of health expenses… Sometimes, they invent better systems. Sometimes they come painfully to the same compromises. And sometimes, they opt for totally flawed solutions. Traditional economics has valuable experience in fraud prevention, risk management, fighting dirty money, etc. If the crypto sphere does not learn from what it watches as the past, it is doomed to repeat it.