In a Medium post published earlier this month, Castle Island Ventures Partner Nic Carter explained the utility of Bitcoin (BTC) as a revolutionary alternative to the traditional, government-approved banking system. Additionally, Carter wrote about how the thousands of Bitcoin competitors that have popped up over the years have missed the point of this new technology.
On a recent episode of Laura Shin’s Unchained podcast, Carter discussed this secondary point on altcoins in greater depth. While Carter noted that the relative success of Ethereum (ETH) cannot be ignored, he also indicated that there are very few chains other than Bitcoin and Ethereum that have any real usage whatsoever.
The Problem with Altcoins
When Shin asked Carter if there were any coins besides BTC that he viewed as legitimate or promising, he responded with an explanation of the key issue that the altcoin market has faced ever since the first alternative cryptocurrencies were created back in 2011.
“The problem I identify in the article is that there has been insufficient attention given to the legitimacy-conferring factors for the long tail of altcoins,” said Carter. “And so, the emphasis has always been on technical innovation — some of which were really marginal technical innovations — and really insufficient attention to the things that I believe matter, which is like: How do you ensure that the developers can’t abuse their privilege within the system? Are there checks and balances? Is the monetary policy credible, for instance? And oftentimes, what we actually see in these systems is those credibility-endowing facts are traded off to achieve glamour metrics or technical thresholds.”
Carter used the EOS altcoin as an example of this issue. While supporters of EOS tend to point to the high number of transactions the network can process per second as a key selling point, the fact that trade offs are made in terms of the relative centralization of the validator set is oftentimes overlooked. Some of the issues associated with this centralization of the validator set were covered in a recent CoinDesk article.
“[A high degree of centralization] poses a greater threat to the long-term legitimacy of the network, which is not outweighed by the marginal technical enhancement there,” added Carter.
The level of centralization around publicly-identifiable validation nodes seen in some altcoin networks, such as EOS and Ripple (XRP), puts into question whether these altcoins should even be referred to as true cryptocurrencies.
Is Ethereum the Exception to the Rule?
The one possible exception to Carter’s view on altcoins that came up during his discussion with Shin was Ethereum. Just last week, Ethereum’s native ETH token enjoyed one of its best ever 24-hour price moves against BTC. However, it should also be noted that ETH was down 85% against BTC since March 2016, which was the peak of the “flippening” hype, as of late July.
“At this point, you can’t deny that Ethereum has a really vibrant community and kind of organic groundswell of usage and development,” said Carter. “Beyond that, I would say it’s very sparse.”
That said, Carter also holds the view that the only cryptocurrencies worth creating are those that aim to be money. Due to the fact that ETH has long been described as a sort of digital gas for computing costs rather than money, Shin gave Carter a chance to explain this apparent inconsistency in his views.
“Ethereum probably should contend and aim to be money, and I think we noticed a little recalibration where initially it was computational gas, like the lubricant in the system, and then more recently certain high profile [Ethereum users] have been saying, ‘Well, actually, Ethereum itself is money,'” said Carter.
To Carter’s point, Ethereum creator Vitalik Buterin recently stated that ETH can be money if that’s what the community wants at Ethereal Tel Aviv 2019. Joseph Lubin, who co-founded Ethereum and founded the blockchain technology company ConsenSys, also made the case for ETH as money during the same discussion at the Ethereal event.
ETH’s pivot away from gas and towards money has mainly been promoted on the backs of the various decentralized finance (DeFi) applications that have launched on Ethereum in more recent times.
According to Carter, value accrues in a cryptocurrency network when users decide to hold the underlying token of the network for long periods of time rather than when someone utilizes the token for any sort of short term value transfer (read more on this in an older post).
Shin pointed out that there is also a need for ETH to have value in order for Ethereum’s upcoming move to proof-of-stake to work from a security perspective. Of course, this applies to proof-of-work systems as well. After all, the miners need to be incentivized to secure the legitimacy of the transactions on the network.
While the market views BTC as the more valuable and trustworthy form of crypto money today, it still has its own issues. A Bitcoin mining veteran recently described the level of centralization in the industry as “quite alarming.” Blockchain technology company Blockstream recently revealed their own massive Bitcoin mining facilities to the public, which is their attempt to help with the problematic situation around mining centralization.
These potential issues around mining centralization have not stopped various individuals from increasing their Bitcoin price targets to anywhere from $42,000 by the end of this year to $100,000 by the end of 2021.
While Bitcoin has had a great year thus far, a bigger winner has been Chainlink (LINK), which was up more than 800% against the US dollar year-to-date at one point.