Digital currencies, particularly Bitcoin (BTC), often face criticism for being compared to pyramid schemes that rely on new participants joining to make a quick profit. While speculative buying does happen, it is unfair to ignore the significant progress made by developers in areas such as remittances, logistics, financial inclusion, and intellectual property.
A more valid criticism of blockchains is their dependence on miners or other powerful players who control the networks, despite claims of decentralization. Whether it’s factories filled with servers for proof-of-work (PoW), pools of PoW miners, large pools of tokens for proof-of-stake (PoS), or the fact that a significant portion of Ethereum network transactions run through the centralized Infura API, these centralized points of failure cannot be overlooked.
While popular PoW and PoS blockchains have mechanisms in place to punish bad actors, it remains uncertain how they will function when the value of digital assets on these blockchains surpasses the value of the native coin that supports them.
Consider a scenario where a stablecoin becomes so large that its total value exceeds that of the native coin of the blockchain it operates on. This would create an inverse pyramid, giving holders of the native coin control over the stablecoin’s transactions. Given the concentration of crypto assets among “whales” who have a vested interest in their blockchain’s native token, this could become a significant issue.
In Ethereum, where PoS is used, miners’ stakes are in Ether (ETH). If Tether (USDT) or USD Coin (USDC) were to become larger than Ether in market value, they could potentially execute a double-spend in those digital currencies, lose their Ether stake, and still profit from the double-spend. Although this is still hypothetical, it is not unimaginable.
This raises questions about how we should rethink the architecture of distributed ledger technology (DLT) and the role of mining or staking assets. Tether now has a market capitalization of over $80 billion, Circle just under $30 billion, and the Ethereum blockchain it operates on has a market capitalization of over $220 billion. This highlights the potential magnitude of the issue.
While this problem may seem theoretical and distant, the rapid growth of cryptocurrencies as an asset class should make us consider the consequences if stablecoins become mainstream. The last 14 years have shown us unexpected surprises and unintended consequences in the young DLT industry.
Developers should contemplate reevaluating the underlying architecture of digital assets. Dependency on centralized miners or servers, coding mistakes in smart contracts, and the risk of double-spending when projects surpass the value of their blockchains suggest that decentralized finance needs to explore alternatives to blockchain. Post-blockchain distributed ledgers, such as directed acyclic graphs (DAG), which allow access to anyone and don’t rely on block producers, could offer insight into the industry’s evolution in the next decade.
The new architecture that emerges will be a valuable achievement. Only then will the industry fulfill its promise and shed its association with pyramid schemes.