Posted on March 18, 2020
Bitcoin is Financial Detox
The term “crypto world” is still a highly ambiguous term. It includes developments that are, on the face of it, exactly opposite from each other and would actually have to be differentiated. One clear illustration of this would be the topic of DeFi. In recent months, crypto headlines have been dominated by Decentralized Finance. This new area of numerous financial applications on the Ethereum blockchain has grown rapidly and has been called the next big thing in crypto.
Ethereum proponents are visibly proud of all the DeFi achievements to date and are obtrusively rubbing them in Bitcoiners’ face. The former especially complain about Bitcoin’s rudimentary programmability, which does not allow for any financial innovation at the baselayer the same way we are seeing it with Ethereum, enabling the current money protocols in DeFi. Ultimately, the criticism by Ethereans revolves around the fact that Bitcoin has enabled decentralization in issuing and storing money, but not in matters of finance use cases. In the case of Bitcoin, finance still remains centralized and a world of finance evolving around Bitcoin would again be centralized, since it cannot be built by programming it into the Blockchain itself through sophisticated smart contracts. This makes Bitcoin users dependent on centralized entities such as exchanges all over again.
De-Financialization, not DeFi
What is considered a killer argument by some Ethereum bulls is, interestingly enough, interpreted by hardcore Bitcoiners as a sign that the critics have not understood what Bitcoin really is about. Thus, Decentralized Finance is not only a misconstruction due to recurring smart contract vulnerabilities, but also contradicts Bitcoin’s inner philosophy and objectives. The mother of all cryptoassets has set out to drive the de-financialization of this world; it is explicitly not about decentralizing the world of finance through shaky and buggy code. If Bitcoin has its way, the world needs healthy money, not another wave of new financialization.
Bitcoiners consider the ever-increasing financialization of our society to be the biggest problem of our time. According to the arguments by Bitcoiners, the distorting process of financialization has happened because our financial system is not tied to a scarce asset. The actual root of the problem Bitcoiners see in the closing of the gold window in 1971. Richard Nixon’s decision not to meet international demands for gold in exchange for dollars imposed a fiat money standard on the entire world.
The agony of fiat money
Bitcoiners are convinced that the world is affected by today’s fiat money standard in various ways, the sum of which is surely negative. Although prosperity has grown continuously over the past decades, the current fiat money standard has nevertheless put a golden yoke on us. Apart from the fact that the cost of living has risen (all things considered), much of our current prosperity should be correctly assessed as pseudo-prosperity. Because what nominally looks like prosperity and might be real prosperity for a certain period of life can only too quickly evaporate.
Thus, the financialization of today’s markets has led to an ever more delicate inflation of various assets in the economy. Today, a potential fall is enormous and it is difficult to estimate what would effectively turn out to be real and not pseudo-prosperity if the financial circumstances were to turn sour. Our financial world today operates on the principle of constant leverage, upon leverage, upon leverage. Credit is granted on the basis of loans that already serve as the basis for other credit operations. Different parties have valid claims to the same asset on their balance sheets. This is very the inflation of our economy is happening: several parties believe to actually own an asset, even though it exists only once. Such leverage can lead to a deflationary cascade in which pseudo-wealth (financial promises) vanishes in an instant. Financialization always means the indebtedness and fragility of the economy.
Old wine in new skins
In the eyes of Bitcoiners, the promotion and development of the DeFi world would once again create an unsustainable credit bubble, but based on the blockchain. Such financialization in a new dress could not be what “crypto” should really strive for. After all, any kind of financialization is inherently unstable. Sooner or later it would always turn out that the emperor is naked – no matter whether he presents himself in a new dress or not.
Bitcoin, on the other hand, sets out to break this financialization. But as reality shows, even Bitcoin itself is not immune to financialization. There are already countless Bitcoin derivatives and the cryptoasset is being integrated into the existing financial market structure by hedge funds and other financial players. An abstracted financial alchemy based on Bitcoin will be unavoidable. Paradoxically, given its structure as an absolutely scarce digital good, the derivatives and hedging market is therefore likely to assume even greater dimensions in relative terms when compared to the traditional world.
However, one essential difference, remains: Bitcoin (on-chain) cannot be manipulated or inflated on its base layer. The Bitcoin network knows neither a Fed nor a Plunge Protection Team that stands ready to intervene when push comes to shove. As a cryptographically secured asset, Bitcoin is also individually controllable. Anyone who wants to can control their Bitcoin independently of any financial alchemy. This gives each individual person unprecedented sovereignty in modern financial matters. As remarkable as that is, it should be exactly this way. For Bitcoin is probably the most abstract form of base money known to mankind to this day, the cryptoasset nevertheless has the best prerequisites to make the abstract financial alchemy of our days a little more bearable.
This article was made possible with the kind support of Bitalo, the first crypto exchange in Germany completely regulated by the BaFIN (https://bitalo.de).