Commodity or Currency? Why No One Can Figure Out How to Classify Cryptoassets

whobiz (28)in #cryptocurrency • 7 years ago (edited)

In With the Good, Out With the Bad

Cryptocurrency, distributed ledger technology, and "trustless" systems are still very experimental solutions. Most of their value remains speculative. Many of the solutions being proposed, are being built to address problems which are not unsolved. This point, I've heard frequently voiced by skeptics of the blockchain revolution... And frankly, I agree with them. Completely. As much as I would like to believe that most projects have arisen for the specific remedy of a clear problem... That simply is not the case. However, that's not to say that these solutions aren't capable of replacing those which exist currently. The important element to analyze is not whether the function of this technology fills a chasm-sized need. Rather, the focus should center upon their fitness to fill those needs, and the ability to replace those solutions built on a faulty premise. Further, to say that the existence of a previous solution negates the potential of this emerging field of tech would be short-sighted. Such a sentiment suggests ignoring entirely the novel components of game theory -- Hell, developers are even managing to engineer altruism... Improvement is part of the design. Don't believe me? Maybe Mr. Buterin is more effective in communicating these concepts than I am. Rational decision-making and a mathematical equilibrium of choice remain integral concepts in the philosophy and architecture behind cryptoeconomics.

Prior to the advent of the internet, scientists needed to communicate just as quickly and freely as the internet has now come to make possible. They may not have been communicating with great ease, speed, or with as few barriers... But, solutions did exist for the issue of communicating across geographical distance. Technology like the internet simply presented a much more effective and superior solution than those that were in place. But, adoption of new technology takes time... home use of the internet serves as a prime example.

A red herring exists as an unintentional byproduct within the blockchain industry. Those seeking technological solutions similar to bitcoin would be misled to classify these solutions as a purely "tech" just as it would be a grossly poor generalization to label the internet in such a way. These innovations are most certainly technological in form and will continue to shape that tech landscape, globally. However, at its most basic level, blockchain technology serves much more as a conduit or a necessary bridge between raw technological capability and a new realm of economics, previously plagued by bad-actors and an excessive requirement of "trust." Cryptoassets, more than a novel solution, actually present with them a radically improved blueprint for the mechanics behind logical (or illogical) decision-making between independent parties. Smart contracts allow application of this blueprint at the level of individual actors, as well as that of supermassive corporate and state-level entities.

While it is easy to see that the world is gradually becoming comfortable exchanging currencies traded on the FOREX for cryptoassets... That practice has brought with it a discussion: do cryptocurrencies function as an abstraction of wealth, in a way that is similar to a federal reserve note or credit cards?

Andreas Antonopoulos addressed currency adoption from this perspective during a Q&A nearly a year ago (May 2017).

Video: Andreas Antonopoulos Q&A May 2017 - How long until mainstream adoption?

Objectively, paper money or digital representations of that paper, intrinsically hold no value with or without a consensus. Yet, an agreement among and between citizens determines that the valuation of the note is appropriate. In this aspect, we see that cryptoassets hold one major difference by design from fiat. That difference falls squarely on the ability of a single individual to produce cryptocoins, in the same way a commodity is produced (oil, precious metals, all things on the NYMEX). But, don't worry if you're bullish on the USD... You can always exchange it for that gold we have tucked away in Fort Knox .... right?

As Antonopoulos elaborates in the May 2017 Q&A shown above -- currency adoption has occurred previously in history. Namely, with the adoption of paper money and credit cards. Now, our trust in notes has become so widespread that most people now perceive some mystical sort of value to.... well.... some pretty pieces of paper.

Mr. Andreas Antonopoulos is spot-on with the utterly ridiculous notion of intrinsic value within a reserve note. Unfortunately, his notion which relates adoption of cryptoassets to those of paper currency or credit cards is equally ridiculous... if not fundamentally incorrect. The adoption of a note which is "redeemable" for an equivalent value of silver or gold could be compared only to such a note redeemable for an equivalent value of a given cryptocoin or token. Clearly, this places value in line with the decision of the CFTC to deem cryptocurrency a commodity. If I still have not managed to sway you ... Marketwatch agrees that crytpoassets simply fail to behave as currency in nearly any way at all.

What Marketwatch grasps more effectively than Mr. Andreas Antonopoulos does, is that currency and credit are both abstractions of wealth in different manners and layers of abstraction. If we are to analyze it from a point of commodity-worth, then credit would be a second abstraction layer of value, wealth, or utility at its most basic form. Cryptoassets are not abstractions of utility, or worth, in any regard. Commodities take time and effort to produce, and thereby have a value based upon a balance. This is between a.) the effort to produce them, b.) the utility gained by purchasers in the midstream (potential for profit), and c.) the utility eventually gained through end-use by consumers. A similar chain of production and supply is easily identifiable within that of natural resources, mercantile goods, and commodities. What may be on the horizon is not simply a commodity, but a new type of resource for the digital age, functioning as a currency or bartering good in its infancy.

The article from Marketwatch does not fully support cryptocurrencies as a commodity. However, it expresses clearly that cryptoasset behavior, economically-speaking, is like a strange and not-seen-before, adaptation of a commodity. Whichever way your belief falls in this argument, one thing is undeniable. Regardless of adoption, or how distributed ledger technology fits into the future of the global economy -- for an asset to have value in the current market, it must justify its own worth upstream in production, or provide a capability post-production for an increase in utility through its use-case. Without those price-driving factors, these cryptoassets are merely failing alternatives among their superior substitutes.