In less than five years, we will be able to text value to almost anyone, anywhere in the world. It will be instant, inexpensive, and easy. Can this be stopped? No. Can this be done without digital currencies? No.
PayPal, Apple Pay, WeChat, Monzo, and other apps are already offering ways to text value; but only within their proprietary walled gardens, and only within specific countries and jurisdictions. In other words, they haven’t gone far enough. All this is about to change.
Very few people outside the filter bubble are aware of this, but digital currencies will devour traditional finance in less than five years. As part of this monetary revolution, the majority of cash payments will relocate to the .
How will that look like?
There are 2 technologies in development right now, and one of them will reach mass in the next few years: i) Regulated stablecoins, and ii) Lightning. Stablecoins are digital currencies designed for minimal volatility against the dollar or other fiat currencies. They have a roughly 60% probability of mass within five years. Lightning is a super-fast micropayment protocol that runs on top of , and it has a roughly 30% probability of going mainstream. Finally, there is a small 10% likelihood that neither of the above catches on. Keep reading to find out why.
The Dollar. Reloaded.
Think of metal coins and notes as fiat money (government issued money) version 1.0. Introduced 60 years ago, credit cards became fiat money 2.0. In only a few years from now, regulated stablecoins could come to be fiat money 3.0.
Stablecoins allow for instant, global, and inexpensive money transfers that can be as easy to use as sending a text. This is what and Gemini are working on with their USDC and GUSD coins. They are placing the dollar on the , and they are doing that in a way that follows government regulations. Alongside their US dollar stablecoin, TrustToken has introduced British Pound, Australian, and Canadian dollar stablecoins too. This is just getting started.
Despite their advancements, however, let’s not forget that regulated stablecoins are privately-run and government-sanctioned. In other words, they are neither decentralized nor permissionless. And since they are fiat-backed, they are equally susceptible to inflation and money-printing as the fiat currency that backs them up. To bitcoiners, this is heresy. But to governments and regulators those are invaluable and mandatory features. As such, I expect there is a 60% chance that regulated stablecoins will beat in the cash game. (Note: Tether and other similar stablecoins cannot be fiat money because their are not regulated as financial instruments.)
Can bitcoin ever be cash?
Hundreds of millions of micro cash transactions take place every single day (coffee, train tickets, chewing gum, and so on). If those payments were to emigrate to , they would need to be secured by its proof-of-work algorithm. By design, spends the same amount of compute resources on a million-dollar transfer as it does on a 5 dollar Frappuccino. Every single transaction would then need to be stored on the , indefinitely. To some, this is a wasteful and inelegant approach. Besides, the relatively high fees and confirmation times of the network could never compete with, say, Visa.
Enter Lightning.
Built on top of , Lightning allows for micropayments to happen on a separate layer (off-chain). The premise of Level 2 solutions like Lightning is that, coffee-type payments need to be fast but not necessarily bulletproof. As such, the Lightning architecture does not employ . This allows for smaller security overheads, which in turn enables near-instant and near-free transactions. Besides buying your morning cup of joe, you could tip authors you like (you can ) or donate to a global cause you care about. You can instantly pay anyone, anywhere in the world, and you can do so without going through a central authority.
All this sounds promising. However, I have trouble believing governments will somehow sit idle as Lightning displaces their money. How can taxation and law enforcement happen without government-issued and -controlled fiat? By betting on Lightning mass you are betting against fiat currencies. In other words, you are betting against governments (and their ).
Besides, there are several entrenched interests hellbent on preventing from ever becoming cash. Take Bill Gates, Warren Buffet, and Jamie Dimon, for example. To understand why they , all you need to do is, well, follow the money.
Bill Gates and Warren Buffet are longtime buddies. Buffet has invested billions in the Gates Foundation and he manages 10–20% of Gates’ wealth through Berkshire. Buffet also has a $4 billion stake in Jamie Dimon’s J.P. Morgan who only recently launched their institutional stablecoin (JPM coin). Microsoft (which has Gates on its board of directors, and whose CEO was handpicked by him) promptly they are partnering with J.P. Morgan to integrate their (Quorum) into Microsoft’s cloud offering (Azure).
What is the number one threat to this elaborate dance of billions? Yup, . Its uncontrolled rise into mass is what keeps those men up at night. Decentralized development is known to move fast and against the odds. Think BitTorrent versus copyright holders, or Linux versus Microsoft Windows, or Wikipedia versus Microsoft Encarta, and so on.
Taking all this into account, there is a small but decent chance — around 30% — that Lightning will reach mass in a few short years.
A note on Lightning wallets: At this point in time, most Lightning wallets are difficult for the average user. To deal with that, some wallets are offering “custodial” solutions which can open and close payment channels on behalf of their users. The caveat is that the users end up trusting a potentially centralized 3rd party — the provider. For now, this looks like a necessary and acceptable tradeoff because micro transactions are low-stake and because the ease-of-use of custodial wallets can pave the way to Lightning .
A note on “ Cash” (BCH): Parts of the community expect that future technological advancements can allow to scale to mass without relying on Level 2 solutions like Lightning. So they went ahead and forked their own version, called “ Cash” (BCH). This chain faces 4 challenges, listed in ascending order of importance i) Securing trivial cash transactions with a proof-of-work algorithm is not an elegant solution, if it can be done at all (discussion on this argument is ongoing and I’m willing to be wrong.) ii) Governments will obviously not support or accept anything that tries to replace their fiat, which means that “ Cash” will have trouble attracting institutional . So, for “ Cash” to succeed, has to unfold in a bottoms-up, grassroots fashion. In other words, “ Cash” has to go , like BitTorrent did a decade ago. Which brings us to, iii) How can “ Cash” go when there is no clear incentive to prefer it over, say, Dash, or even Apple Pay and PayPal? What’s the one thing that “ Cash” does 10 times better than what’s already out there? And iv) As its name suggests, “ Cash” wants to replace cash. You would, therefore, think that its main competitor is government fiat and regulated stablecoins. For some reason, however, all its marketing efforts seem to be focused on , a that is growing into something entirely different ( of value). This brand confusion is more detrimental for “ Cash” than it is for .
bitcoin is Piggy Bank 2.0
is not looking to replace fiat. What is truly gunning for right now is the $6 Trillion dollar gold market. In other words, wants to be a universal of value.
is certifiably scarce and there will only ever be 21 million of it (much less, in practice, but that’s another story). It is also portable, secure, and permissionless. No wonder you need a log chart to track its price. But people are not using as cash. Instead, they are holding on to it, in the same way their ancestors held on to gold.
But here is another distinction: While permissionless, the protocol is not entirely anonymous. In fact, , and authorities will, use to trawl through transactions in the and figure out who owns what. In other words, is not a threat to law enforcement, or taxation. In a world where replaces gold as a of value, citizens can continue to use fiat currencies (dollars, pounds, and yen) for everyday commerce and business. In other words, countries can continue to print their own money and their own monetary policy. In other words, is not a threat to governments. This is why large, regulated institutions are already tipping their toes in : , , , with more on the way.
Certain governments will, nevertheless, choose to fight . Why? Because it enables capital flight. Citizens can cross borders with billions stored in their unconfiscatable brain wallets. There are several countries, like , who don’t want that to happen.
Overall, I give a roughly 60% chance of success, not as a medium of exchange (fiat) but as the world’s primary of value (gold 2.0).
Summary
In five years from now, sending value to any part of the world will be as easy as sending a text. This is a 100% certainty. Everyone is working towards that.
Regulated stablecoins have a 60% chance of succeeding as a new form fiat currency while has a 60% chance of displacing gold. can coexist with regulated stablecoins because the two have complementary use cases. On the other hand, Lightning is incompatible with stablecoins and is in a collision course with governments, which is why it only has a 30% chance of replacing fiat in the next five years.
Watch this space.
Published at Sun, 12 May 2019 13:11:08 +0000
