Is “Crypto” Too Dependent on Bitcoin?
If you were to play a word association game with anyone in the general public, and said “cryptocurrency”, the first thing they would say would almost definitely be “Bitcoin”. Bitcoin and cryptocurrency are effectively interchangeable to a large portion of the world, and this might be a bad thing.
By having it so all cryptocurrencies are painted with the same broad strokes that Bitcoin is, all nuance disappears and it becomes easier to dismiss the industry as a whole. This is extremely unfortunate, as many of the most interesting use cases of cryptocurrency and blockchain technology are completely unrelated to Bitcoin.
The Economic Risk
And if someone were to want to deposit money into their Binance account, they would most likely end up doing it using BTC or ETH (although Binance does allow deposits with other coins like LTC, NEO and BNB). Because of this, you have a strange correlation between Bitcoin and the entire sector. Would-be-investors must purchase Bitcoin or Ethereum in order to put their money in altcoins, and this pushes up the price of these more “blue chip” coins.
Right now, everything is valued in accordance with Bitcoin. Part of the reason for the massive run-up of crypto prices occurred in late 2017 is Bitcoin was continuing to increase in price, and a rising tide carries all ships. The question becomes whether this turns Bitcoin into a transactional currency of sorts, and if it will end up being artificially propped up for this reason, if at least until another coin becomes seen as the transactional coin of choice.
With many Bitcoin enthusiasts calling for Bitcoin to hit astronomical values before the end of the year, the assumption is that the rest of the crypto sector would participate in that increase as well. But no one is asking the question: is this a good thing? The Internet was very similar in the beginning, but eventually it evolved and spawned numerous unrelated entities that all employed the technology. Now we are waiting for the same thing to happen with crypto.
The Security Risk
The industry is currently configured in a way such that the flow in and out of the Bitcoin ecosystem is easily monitored and controlled. The high level of centralization through major players like Coinbase has made it easy to track the flow of coins. Yes, this has allowed for an extensive analysis and segmentation of the various groups, as shown above, but it also impedes on the censorship resistant aspect of the cryptocurrency.
If you have most cryptocurrency purchases flowing through Bitcoin and Ethereum, and Bitcoin addresses can already be tracked with relative ease by other companies in the space, then does one of the main promises of Bitcoin disappear?
The Political Risk
Finally, and maybe most importantly, does the dependency on Bitcoin create something very similar to a centralized node? And does this hurt the future of Bitcoin by not being able to provide the same anonymity that was originally anticipated?
It has always been assumed that decentralization was a good thing, and that sort of power shift is much of what Bitcoin originally promised to its users. But along with decentralization are a bunch of other characteristics that need to be continually supported for Bitcoin to maintain its value.
For example, Bitcoin needs to stay “trustless”, and as soon as users question the security of the network, all is lost. And censorship resistance by way of anonymity was always a libertarian dream that Bitcoin seemed to guarantee, but it is possible that the overly centralized exchanges have compromised that.
Centralized exchanges are currently necessary to convert money from fiat to crypto. You can use decentralized exchanges to trade between different cryptocurrencies, but you will need a centralized exchange in order to get your money into the market. This can be very frustrating if you are trying to avoid volunteering identification information, or just feel that it is a violation of what Bitcoin is all about.
There are tons of advantages to decentralized exchanges, such as the security and reliability, which are two notable issues with centralized exchanges right now. One of the most commonly given beginner tips regarding crypto is to keep your assets off the exchange, lest it be compromised. Currently these exchanges are much more expensive to use, but prices are coming down as kinks are worked out and a higher level of scale is reached. This bodes well for the network and the entire industry, because of the added confidence both insiders and outsiders will have in the technology.
To be considered “decentralized”, a project must be both censorship resistant and immune to any authoritarian modifications. Technically, the current use of Bitcoin fulfills these conditions, but in spirit, we are starting to see the centralized rent-seeking of massive exchanges make things appear a lot more ambiguous. So then the question is, does this threaten the whole crypto industry?
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