Bitcoin is in the headlines again. It wasn’t a dip in value or another DeFi startup hack that reignited the crypto-evangelists to defend the blockchain from its Luddite detractors, but rather El Salvador’s adoption of Bitcoin as a national currency and the rollout of the “Chivo” app.
In a country where 70 percent of citizens are unbanked, Salvadoreans were more skeptical than welcoming of the Bitcoin law pioneered by their young President Nayib Bukele.
Bukele employed a clever publicity tactic that exploited Bitcoin’s popularity to promote his legislation and the government’s Chivo wallet. Bitcoin made for an effective mascot, but this stunt doesn’t do service to cryptocurrency or the potential of blockchain.
This tale of governments entering the crypto business harkens back to three years ago when Venezuela’s Nicolas Maduro launched the national Petro cryptocurrency. Petro was developed by Gabriel Jimenez who, despite being critical of the Maduro regime, partnered with the government to develop a cryptocurrency that could address Venezuela’s hyperinflation and lack of government transparency.
When it became clear that he was developing tools for Maduro’s authoritarian toolbox, Jimenez defected. Today, the regime uses Petro to circumvent the United States’ financial sanctions and to avoid the hyperinflating Bolivar. Blockchain was designed with transparency and decentralization in mind yet Maduro defied those foundational principles for corrupt ends, thus proving that even the libertarian’s wet dream can also become a nightmare.
Nevertheless, Venezuela had the third-largest volume of blockchain transactions in 2020 making its citizens some of the strongest crypto adopters in the world. Adoption can mitigate the impact of hyperinflation as it has for otherwise victims of failing economies.
Decentralization is imperfect due to a lack of regulation compared to the centralized and highly regulated legacy financial system. Blockchain innovations are in inextricable tension with regulations; The SEC is playing constant catch-up with developers of decentralized finance, or DeFi, applications.
DeFi applications, such as peer-to-peer lending platforms, are valued at an estimated $115 billion, capturing just 5% of the cryptocurrency market. Yet, in the last three years, DeFi permanently lost almost $300 million due to hacks and exploits. While a definite red flag for financial regulators, it also introduces the need for decentralized insurance policies.
The mainstream discourse has donned Bitcoin blinders, but it is time to set our sights — or crosshairs — on the innovations happening on other blockchains like Ethereum. Bitcoin will slowly fade into the background as other platforms integrate DeFi and non-fungible token capabilities. Bitcoin is to Ethereum as AOL is to Gmail: both work, but one is clearly superior and the other is teetering on the edge between irrelevance and obsolescence.
The narrative surrounding cryptocurrency emphasizes Bitcoins risk, hence volatility heightened after El Salvador’s controversial law went into effect. However, it ignores Venezuela and Lebanon as living examples of what goes wrong within traditional financial systems and central banks. Citizens of those countries falling victim to hyperinflation and the unattainable price of basic goods make the ground all the riper for DeFi.
Even wealthy Western countries are not immune from the inherent issues of traditionally structured finance. Americans lost $9.8 trillion in home value between 2007 and 2009, over thirty times more value than the entire DeFi space lost over the last three years. Blockchain is a threat because it highlights our inefficiencies, but blowing its risks out of proportion doesn’t address or even acknowledge the flaws it’s trying to address.
Fiat currencies aren’t disappearing— even the most dedicated adopters still measure their crypto balances in USD or their local currency. Blockchain technology has the potential to either disrupt our financial system or help it become more efficient and transparent.
The lack of intellectual honesty surrounding cryptocurrencies has fostered a polarized debate where Bitcoin represents either an idol or a punching bag. Blockchain’s future is uncertain, so it is imperative to consider the benefits of integrating it with the status quo.
Read my column: It’s time for crypto culture to take itself seriously.