Tim Swanson is director of research at Post Oak Labs, a US-based technology consulting firm, and former research director for the R3 consortium.

The following article is an exclusive contribution to the CoinDesk series 2017 in Review.

Imagine a parallel universe in which the US economy could only grow at $ 50 every 10 minutes, generating just $ 2.6 million a year . Due to a hard-coded economic planning computer program, every four years, the income generated collectively by its inhabitants has been halved. As in the ninth year, its production has decreased and was $ 12.50 every 10 minutes or $ 657,000 a year.

That is, regardless of the productivity and productivity of the labor force, productive production in the United States remained fixed and static, the only change (downward in this case ) intervening once a year. four years.

How many people would volunteer to live and work in this world "backwards"?

This situation effectively reflects the internal static economy of bitcoin and many other cryptocurrencies.

For example, with evidence networks like bitcoin, the marginal productivity of labor is zero. No matter how many additional work units are added to the revenue generation process (mining), as the network will always produce the same amount of economic output.

Today, after almost nine years of operation, the bitcoin network – better known as Bitcoinland – generates about 12.5 bitcoins every 10 minutes. Regardless of external economic conditions, demand, the Bitcoinland economy will generate about 657,000 bitcoins a year in its third era.

While comparisons with aggregate measures like GDP and money may be an imperfect analogy, the fact that economic expansion measured in production can – with the exception of a change in fork and rule – never change to bitcoin because of its inelasticity is probably detrimental to its unit of account.

Deliberately planned similarity is often touted as a "non-bug trait," and many crypto-currency enthusiasts like to dream when regulators and financial institutions of our own world disappear, devoured by gray nanites funded by bitcoins. ]

But before bitcoiners can reach their nirvana state in reverse, they must solve the underlying omnipresent economic calculation challenge facing their security system and their workforce.

The phenomenon is simple to describe: virtually no Bitcoinland participant makes economic calculations (such as pricing) for goods or services in cryptocurrencies such as bitcoin. There are several reasons for this, including chronic volatility.

Or increasingly high transaction fees ($ 10 or more) that cause haemorrhage among traders (even their own commander Cobra recognizes this problem).

But for this article, let's leave aside the typical discussion about payments and merchants and put more emphasis on work.

Active population

If Bitcoinland is considered to be its own sovereign (virtual) nation state, the only salary that a native participant receives in return for any service whatsoever is what miners are paid to resolve and "vote" on a benign problem. every 10 minutes.

From the point of view of the network: promoters, maintainers, administrators, enthusiasts, Twitter sock puppets, same craftsmen, war veterans, self-proclaimed opinion leaders, firefighters, hatters, etc. and can only receive bitcoins after their miners strike.

Just like multinational corporations (EMNs) with large operations abroad, miners of cryptocurrency networks do not measure the income they receive in terms of bitcoins (or money). other discrete cryptocurrences), but measure their income in terms of the fiat of foreign financial markets, in particular the conversion of bitcoins into the local fiduciary currency where their mining is physically located.

However, unlike multinational corporations that eventually repatriate part or all of their capital to their headquarters, apart from the recycling of coins in ICOs, most cryptocurrency-oriented companies remain dependent on income Foreign Domestic Service (FDI). foreign capital injections from venture capital firms to increase or even measure business valuations.

The miners do this because the unit of account for the fiduciary currency is usually stable and liquid, so that they can pay the salaries of their employees, pay rent, electricity costs, property taxes, etc. the economies of Venezuela and Zimbabwe that have suffered years of political chaos, but in general, most developed countries and even developing countries have relatively stable national currencies compared to Bitcoinland.

And because bitcoin is still not used as a unit of account, its labor force (minors) relies on third-party reference data to perform all economic calculations. That is, for Bob the miner to calculate correctly he has to increase or decrease the consumption (and investment) of capital, or to measure if his mining is profitable, Bob projects future revenues based on a unit of account that is stable, in this case, the currency of foreign capital markets.

During the Cold War, there was a joke in the academic world: the Soviet Union would conquer the world with the exception of New Zealand (other versions used Switzerland as stop point). New Zealand would be left to its own devices because the Politburo needed a viable market for the Soviets to know the market prices for goods and services.

While Bitcoinland can attract significant foreign capital, miners continually need highly cash OTC cash and spot trading denominated in foreign currency because it is with these currencies that they pay their bills

. ]

In this case, despite their own flaws and problems, the United States, the euro area, Japan, South Korea, China and several other countries effectively replace New Zealand, so that national currencies and prices reflect the economic conditions that bitcoin miners can use as a reference rate in their projections of capital consumption.

Final remarks

In 2018, just like the last nine years, miners will continue to depend on foreign financial markets for price stability and liquidity. If existing traditional financial markets become chaotic and unstable, miners would be unable to plan rationally and allocate for future investments.

For example, the invisible costs of hash production for a hypothetically stable $ 20,000 bitcoin would represent about $ 13 billion of capital consumed by miners in their search for rent.

And this is only one piece of work proof. If there were periods of dramatic volatility, or even a protracted bear market, this could lead to bankruptcies like those of CoinTerra, HashFast or KnC, although this is beyond the speculations of this article.

Ironically, despite all the bluster, because cryptocurrency ecosystems lack a circular stream of revenues, they will still be dependent on the same financial system that they denigrate for everyday support and stability .

And while many "stablecoin" projects have been announced and launched over the last year, almost all of them do not only depend on commercial bank accounts, but also on the economic stability of a specific economic region that They aim to serve. Guess which set of entities provides this type of relative stability?

Ideological enthusiasts will probably use the best of the best and respond with insults: how dirty and dirty statisticians will censor your virtuous darknet market transactions, and that maintaining networks of proof of work is no matter what. what cost for the environment! But again, it's for a sarcastic article on a different day.

Empirically based on evidence-based blockchains, the labor force and liquidity providers all depend on mature and functional foreign capital markets to convert their coins into real money. Perhaps this will change as more hedging products, again thanks to foreign financial markets, are put online.

While traditional financial markets will continue to exist and grow without recourse to cryptocurrencies to rationally assess national economic activity, in 2018, as in previous years, Bitcoinland still depends entirely on the stability foreign economies providing liquidity and prices. data to the endogenous work of bitcoin.

Too much macroeconomics for you? CoinDesk accepts submissions for its 2017 series in review. Send an email to news@coindesk.com to share your comments on the coming year.

Image of the world upside down via the "Stranger Things" Facebook page.

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