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In Defense of Alternative Cryptocurrencies

Alternative cryptocurrencies, like Litecoin, Primecoin and PPCoin, have gotten a significant amount of bad press recently. Lead Bitcoin developer Gavin Andresen wrote an article criticizing altcoins as being a way of getting around Bitcoin’s 21 million currency supply limit and “getting back to an ‘inflate on demand’ world” and, more recently, Daniel Krawisz from The Mises Circle wrote a lengthy post entitled “The Problem with Altcoins”, raising many other concerns. Krawisz’s arguments received a substantial amount of support from the Bitcoin community, showing that there are many Bitcoin users who disapprove of alternative cryptocurrencies in principle. Quite a lot of the time, the arguments made against specific alternative cryptocurrencies are justified; however, a strong case can be made that the position provided by Krawisz – that altcoins are bad in principle, and not just in implementation, goes too far.

The first argument that many people raise against alternative currencies – although, fortunately, one that is ignored by both Andresen and Krawisz, is that most of them offer essentially no value over Bitcoin itself. IXCoin is nothing more than Bitcoin with a steeper currency supply curve, flattening out around 2020. Feathercoin is a clone of Litecoin with the only major change being that the final currency supply is 336 million instead of 84 million, although Feathercoin developers do emphasize the currency’s well-maintained and active community as a counterpoint. Anoncoin is a version of Bitcoin that works over the anonymizing network I2P – certainly a valuable feature for I2P users, but a superfluous one now that I2P clients exist for Bitcoin itself. And it’s hard to tell what’s “American” about AmericanCoin, “Chinese” about ChinaCoin or particularly “global” about Worldcoin. These are all good arguments against those individual cryptocurrencies; however, when used as an argument against alternative cryptocurrencies in general, the fallacy becomes obvious. The fact that most altcoins offer little value and are forever doomed to the obscurity of sub-$1 million market caps is actually rather unsurprising; in fact, it is exactly what you would expect the alternative currency ecosystem to produce. It has been known for years that 90% of small businesses fail, and the principle has been generalized as Sturgeon’s Law: ninety percent of everything is junk. Did anyone ever expect that alternative cryptocurrencies would be any different?

However, the two do make a number of other arguments against alternative currencies. Krawisz makes a lengthy post detailing a number of arguments both against specific currencies and altcoins in general, whereas Gavin Andresen’s article on the subject is much shorter, and focuses specifically on one particular problem: inflation. Andresen writes:

One of the big appeals to me for Bitcoin is the fact that it is inflation-proof– the supply of Bitcoin is fixed and completely predictable. Everybody knows that 21 million Bitcoins will be produced, and everybody knows approximately how quickly they will be produced.
Creating gazillions of alt-coins seems to me to just be a way of getting back to an “inflate on demand” world. Not enough genuine Bitcoin money for you? No problem! Create a new alt-coin to produce more!

Meanwhile, the core of the Krawisz’s argument is this:

A medium of exchange that is more widely accepted on the market is more useful than one which is not. This is known as the network effect. Thus, an initial imbalance between two nearly equal media of exchange will benefit whichever is more widely accepted until a single one overwhelms the rest. There is no limit to this effect: ultimately one would always expect a single currency to overcome all its competitors.

The first thing that one needs to notice at this point is this: these two arguments are mutually exclusive. If Krawisz is correct, and there will inevitable be one cryptocoin dominating the market, then the only way an altcoin can succeed is by replacing Bitcoin entirely. Thus, there will not be any pseudo-inflation through multiple currencies. If, on the other hand, the total currency supply expands due to multiple coins being on the market simultaneously, then that will prove wrong Krawisz’s assertion that the cryptocurrency market necessarily tends toward monopoly. If one opposes altcoins, one must therefore choose to oppose them from Andresen’s line of reasoning or that of Krawisz; one cannot take both.

My personal position is that Andresen’s argument is technically correct, although the potential for it to cause price inflation is somewhat overstated. If alternative currencies have a future at all, it will be a future where cryptocurrency in general becomes more prominent, not less. In such a world, the larger problem is not price inflation (ie. Bitcoin’s value going down); rather, it is price deflation – Bitcoin’s value going up. Why is this a problem? First of all, nearly everyone agrees that having wealth be more equally distributed across many individuals is a good thing; opponents of wealth redistribution, by and large, only target the methods (eg. inflation and taxation) by which redistribution is attempted in practice. If altcoins cause Bitcoin’s value to go up by a factor of fifty rather than a hundred, and thus give rise to, say, fifty people split between five currencies with $1 billion each rather than ten people with $5 billion each, then by all standard measures of welfare economics that will be a positive outcome.

Second, it is the very potential for Bitcoin’s value to go so high up that makes the currency so unstable. When Bitcoin had its bubble to $266 in April, the reason why the market bounced back and forth so wildly before settling down around $100 is that the stakes were so high; everyone knew that, if successful, Bitcoin’s value can reach as high as $10,000 to $1 million, and the wild swings in prices represented people’s varying estimations of the probability that Bitcoin will indeed see such a success. However, if it is understood that if Bitcoin succeeds there will also be many other altcoins, then Bitcoin’s value might only end up between $2,000 and $200,000 in the case of extreme success – creating a lower “ceiling” on what the price can be and thus narrowing the range within which estimates of Bitcoin’s value can take place. The net result of this will, in fact, be reduced volatility – a positive outcome for people who are looking into Bitcoin as a store of value to protect themselves from having their bank deposits confiscated or their pension plan nationalized, and not as a “maybe get rich quick” investment. There is certainly nothing immoral about the latter, but the far larger value that Bitcoin can provide ultimately rests in the former. Once the cryptocurrency market is mature, we can expect cryptocurrencies to go down just as often as new ones come up, so the currency supply should remain roughly stable in any case.

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BTC: 1FxkfJQLJTXpW6QmxGT6oF43ZH959ns8Cq

LTC: LaBhvWiAP7msku6w8QSQ5G7omVWMF3uxJC

By

Vitalik Buterin is a co-founder of Bitcoin Magazine who has been involved in the Bitcoin community since 2011, and has contributed to Bitcoin both as a writer and the developer of a fork of bitcoinjs-lib, pybitcointools and multisig.info, as well as one of the developers behind Egora. Now, Vitalik's primary job is as the main developer of Ethereum, a project which intends to create a next-generation smart contract and decentralized application platform that allows people to create any kind of decentralized application on top of a blockchain that can be imagined.

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  • Joseph A. Nagy, Jr

    “In such a world, the larger problem is not price inflation (ie. Bitcoin’s value going down); rather, it is price inflation – Bitcoin’s value going up.”

    Did you mean deflation one of those times you invoked the word inflation? I hope so because otherwise the sentence makes no sense.

    • Vitalik Buterin

      Eek, thanks!

  • Alby

    Deflation = Too many goods/services chasing too few bitcoins

    There isn’t enough bitcoins to meet demand, so long as people limit the smallest
    bitcoin unit they will trade to 0.01/bitcoins. Which at today’s valuations is equal to $1.28 (0.01/BTC). Time for a shift to 0.001 or 0.0001 as the smallest BTC traded.

    • ThatBostonMan

      There are plenty of Bitcoins, but not everyone wants to use Bitcoins. Bitcoins aren’t everyones favorite currency and Bitcoin is limited by max block size and other issues which make it necessary to have alt coins.

      • Alby

        …alt coins like the Penny, Nickel, Dime, and Quarter. Much more widely accepted without much hassle.

        • Paul

          Yes, but you need an alternative to Bitcoins too. Do some research on how many own most of them.

          • Alby

            Anybody who holds a Crypto Currency is a sucker. The only use of a crypto current is for a short term transfer of wealth from Party A to Party B. Case in Point, the decline of Bitcoin from $1200 to $600 in a matter of days. Crypto currencies aren’t protectors of wealth, but transfer tools of wealth.

    • Pascu

      When the Bitcoin’s price will go up maybe people will trade in 0,001 or 0,0001 of a Bitcoin. Until then don’t expect them to trade less than $1.28. There are enough Bitcoins to meet demand.

  • BOB

    Yep the rich get richer. Bitcoin has already lost its image of de centralized currency.

    • ThatBostonMan

      And that is why there are altcoins. You can have Bob.coin if you want.

    • Pascu

      Get Litecoin, Peercoin, Primecoin and wait.

  • Luke Parkerson

    Your last paragraph ignores the nature of open source software development. Comparing the bitcoin devs to a bank or the fed is laughable.

    Meanwhile, here’s another way to look at Krawisz’s network effect argument: Count up alllll of the hours spent by bitcoin believers convincing merchants to accept bitcoins in their business. If we’ve got 10,000 merchants today, and they all took an average of 5 hours each to be convinced to accept bitcoin in their business, that means we collectively spent 50,000 man-hours so far as a salesforce team, just to get bitcoin it’s sub-2-billion market cap it has today.

    Now imagine that we need to go back to all of those merchants, and convince them that Litecoin is better now, so they should go and change their setup or replace it outright so that they can start accepting litecoins… Will that ONLY take 50,000 more hours?

    I say no, it’d take twice that many man-hours to get litecoin to where bitcoin is today, simply because after another 50,000 new man-hours are spent pushing them away from bitcoin, we’ve just made all of those merchants realize that it’s hard, fickle work to accept a cryptocurrency at all! A good percentage of them will just wash their hands of all cryptocurrencies for years to come.

    Krawisz is correct, and anyone who doesn’t think so is simply underestimating the power of the network effect.

    • disqus_TLcMqwnySr

      This was already addressed with switching costs; as a technical issue, it would be possible to implement a nearly seamless method of accepting multiple alternatives. The only thing that could prevent such progress would be for Bitcoin to be functionally incompatible with alternatives, and that’s simply not realistic with an open (source, protocol) environment.

      Krawisz’s point remains a marginal concern due to the abstract nature of the technologies involved.

      As an aside, there may be niches where a particular cryptyo system is better suited than another. Alternatives would therefore be a necessity.

    • Vitalik Buterin

      > Your last paragraph ignores the nature of open source software development. Comparing the bitcoin devs to a bank or the fed is laughable.

      The Bitcoin software is open source software. The Bitcoin rules are not, because they are not software; they are a set of arbitrary parameters which are, de facto, under the control of a clique of Bitcoin developers and mining pools. Of course, Bitcoin devs do not have the power to _change_ Bitcoin to our detriment because the community would raise a fuss, but that’s an _inertia effect_. Actually changing the rules is a momentum effect, which is much harder.

      > Now imagine that we need to go back to all of those merchants, and convince them that Litecoin is better now,

      No, we convince Bitpay that it’s worth it to add a Litecoin payment option with autoconversion and all the merchants start accepting LTC automatically. Done. So it’s exactly the opposite of what your last three paragraphs try to argue.

    • ThatBostonMan

      It wont take nearly as much for Litecoin to get where Bitcoin is today. What makes you think people will not develop agnostic wallets and software? Mastercoin is already going in that direction, so are Bitshares. So is Ripple. It’s going to reach a point where software is currency agnostic because it doesn’t require much for merchants to accept the best software to process payments and the best software will be the software which accepts any coin on demand that the user wants to deal with.

      It’s just like the situation with logins. We can login with Facebook, Linkedin, AOL, or whatever we want using an OpenID like system. Or we can be stuck using a new password for each website which in my opinion is what was wrong with how things were done in the past. Bitcoin big shots want to protect their own potential for wealth at the expense of the technological innovation in some cases.

      In other cases, let’s be serious but who wants Satoshi Nakamoto to have trillions of dollars worth of Bitcoins? When people have to decide if they want to make Satoshi Nakamoto a trillionaire or use Litecoin where the proportions are a lot more fair most people coming into this technology will trade whichever currency best represents their political or moral values.

      Bitcoin’s old guard are radical politically and most people even of the libertarian variety aren’t going to necessarily agree with the old guard. The new guard will form around new currencies and will try to do things better.

  • http://blogs.forbes.com/jonmatonis/ Jon Matonis

    The other way to look at it is that independent network hashing power is largely a zero-sum game, meaning that securing and strengthening one cryptocurrency network can be diffused through having to secure multiple cryptocurrencies.

    • ThatBostonMan

      How do you prevent the problem of Satoshi Nakamoto becoming too powerful and too rich?

      No man should have trillions of dollars but that is what will happen if Bitcoin were the only thing people could use. People need to have the option to switch to a blockchain with a new elite for the same reason people need the option to choose a new government.

      So we need many many different kinds of digital coins and they should be as easy to create as an email address or domain name. Matonis.coins should exist and you should be able to make those coins as valuable as possible and trade them for Bitcoins or whatever other coins.

    • atoms

      I have a GPU farm, mining Bitcoins now makes no senses because of all those ASICs. It’s either mining LTC or collecting dust.

      There are also people that would never mine BTC at this stage, but are mining altcoins because they are interested in certain factors: greed, enjoyment, novelty, etc

      Network hashing power is NOT a zero-sum game.

    • Paul

      Some people will want one coin, some will want more than one. Some will mine one coin, others will mine 2. Choice…this is what Bitcoin was all about. Not everyone should join in on Bitcoin. Stop thinking like that.

      Sounds like you want to replace the monopoly of the government with the monopoly of the Bitcoin.

  • ThatBostonMan

    What Gavin and other proponents of Bitcoin being the dominant deflationary currency is that they all ignore the fact that Satoshi Nakamoto, a completely unknown anonymous individual will end up with billions or perhaps even trillions of dollars and this is just fine to them?

    If they are about decentralization of power then no one man should have a trillion dollars. Bitcoin is a good idea but it’s not a very evently distributed currency and for that reason Litecoin is actually a better currency for the masses.

    Bitcoin is going to end up being a currency for the elites because there are holders of Bitcoin who have millions of Bitcoins or hundreds of thousands of Bitcoins out of 21 million. That is not very proportionate and if it’s just going to mirror the current system of elitism then what is the point?

    We need alt-coins to keep Bitcoin honest and to also keep a Bitcoin elite from trying to form and dominate the global economy. No one is saying people shouldn’t be allowed to get rich. There should be plenty of people who can become millionaires, maybe even a few billionaires, but no trillionaires. Satoshi has so many Bitcoins that he would be a trillionaire and Gavin probably has hundreds of thousands of Bitcoins himself so of course he’s going to want the Bitcoin power up to succeed in the most deflationary manner possible.

    Deflationary currency is fine and I like the idea, but it has to be done in a decentralized way where there are plenty of opportunities to start over or competition between block chains. It should not be a situation where Satoshi Nakamoto becomes the financial God of the planet and richer than Rockefeller.

    • Pascu

      I don’t really care about Satoshi Nakamoto getting rich. Satoshi Nakamoto might actually be a group of people. If they do get rich they’ll have to pay taxes the moment they’ll try to covert cryptocurrency into fiat currency. At least is will start an economy again.

      At the beginning of December 2013 927 people had the majority of Bitcoins and out of them 47 had 28% of all Bitcoins.

      If that doesn’t make you think I don’t know what will.

      • ThatBostonMan

        How many billionaires are there in the world?

  • Erez Ben-Aharon

    An extremely well thought out article (even if I don’t agree with everything in it). Very happy I found this magazine, kudos!

  • http://vitamind3info.blogspot.com/ Adrian

    I like Bitcoin, but like Alts too, although, yes, many are pump and dump scams.Maybe though, there should be a year long discussion on an improvement to Bitcoin.
    Here’s a few suggestions, Browser based mining perhaps where anyone can park their browser on a site and mine for coins.
    Or maybe even offline mining, where coins are generated randomly, with no advantage based on CPU power.
    Maybe mining could be done by loaning out to corporations, mining power, maybe even disk space, eg loan out 1% of your processor ( Like Seti@Home ) and 50Mb of your disk space, get ten (perhaps premined) coins.
    A percentage of coins go to startup companies to reward innovation and help Build a REAL, maybe a percentage of coins go randomly to state welfare, so all investors in the currency are contributing to growing a REAL economy and helping support those in need of financial assistance.
    Maybe we could call it HumanityCoin :-)

    Maybe we should actually ask what would the ideal cryptocurrency would look like ?

    • Paul

      Your ideas are will lead to instability.

  • Pascu

    Let’s think about this…in December 2013, 47 people own 28% of Bitcoins an less than 1000 own over 50%.

    I think there’s a need for alternative cryptocurrencies.

  • http://www.anotherseoninja.com/ Jessica Hartman

    I love the image in this banner. Can I use it for my social profile? Love your writing as well – I can give you credit for the image :)