Written by Daniel Goldman, Jason Struhl, & David Beiner

Internal discussions here at Abacus regarding the current state of the cryptocurrency space have grown noticeably more pessimistic these past few weeks. It feels to us like this is an appropriate moment to take stock of what we see as the most distressing trends; we hope to explore some (if not all) of these things in more depth in future posts.

1. Centralized Currencies

“Decentralized” is quite the buzzword in the cryptocurrency space. It is a complex, amorphous term that relates to fundamental questions regarding governance and power, and can mean many different things to different people in different contexts.

With that caveat, here’s what we are willing to say: at least four of the current top cryptocurrencies by market cap can’t claim to be decentralized, a sobering fact given the inherent notions much of the popularity of cryptocurrencies are predicated upon.

Ripple operates all five of it’s consensus nodes. Neo operates all seven of its validator nodes. All IOTA transactions must pass through a central “coordinator node.” The Cardano team makes clear in their white paper (if not on their homepage) that their platform is currently fully centralized (with plan to decentralize in Q2 of this year).

Explaining the risks of granting a small private entity this level of trust — that the whole network can black out, that funds can be frozen, that a few individuals’ decisions can crash a monetary system etc. — feels beside the point. The real real point is, most — even if only intuitively — understood these risks before the age of cryptocurrency, and with the rare exception, like the now defunct Disney Cash, would have laughed the very idea off as insane. If these same people are now more comfortable accepting this monetary power-structure, it may be worth carefully thinking about why.

2. Confusion Over Permissioned Blockchains

When we first heard about private or permissioned blockchains, it sounded like an oxymoron. After all, the engineering architecture of blockchain was conceived (initially for Bitcoin) to run on nodes that explicitly did not require a trustful relationship with each other.

Increasingly, it’s become clear that permissioned blockchain networks have some potentially interesting use cases, particularly in reducing the necessity of trust in collaboration between distinct large entities. However, in the instance where a single controls the full system, is there really a point, or are you just adding unnecessary overhead to perfectly suitable, traditional database options?

We highly recommend multi-chain’s blog posts on the topic as a great primer for sorting through the nonsense and elucidating where the real use cases lay. And indeed, those use cases are there, and some may prove to be quite beneficial. But all too many advocates will have you believe that blockchains are some silver bullet that will magically solve any problem they’re fired at, in turn only increasing the fervence of the “blockchain” buzzword and thus potentially propping up market prices based on pure misunderstandings.

3. The Exchange System

It’s probably fair to say that there’s long been a widely held consensus that the cryptocurrency exchange infrastructure is fundamentally a mess, but wow, is this getting absurd. Exchange hacks feel like mundane news items at this point, even last month’s Coincheck hack, which in terms of funds, ranks as the largest hack in cryptocurrency history. The wealth concentration at major exchanges in conjunction with the dearth of regulatory oversight shouldn’t make the apparent market manipulation particularly surprising. The lack of smart order routing across exchanges leaves the entities siloed from each other, leading to large discrepancies in price. But this shakey system is what we currently have to determine a Cryptocurrency’s market cap, a metric which is inherently flimsy to begin with.

Until the realization of the Cypherpunk dream of a fully functional, trusted marketplace of pure crypto, people care about valuation in good ole’ fiat currency, and when the system for valuation is this broken, the insanity will only continue.

4. ICOs

The once egalitarian notion of ICOs providing an open, crowdfunded solution to a convoluted and hyper-fragmented system for fundraising has been turned on its head, as new ICOs are generally closed to all but the highest net worth individuals, a scenario very well understood in the mundane world of traditional IPOs. At the close of many ICO pre sales, it’s not uncommon to see only a few wallet addresses having taken most of the supply, making it even easier for crass market manipulation. Not coincidentally, ICOs serve as some of the lowest hanging fruits for regulators to address, given the incredibly high potential for fraud.

One area of increasing focus seems to be on the widespread misuse of labeling security tokens as utilities, an easy target for entities like the SEC who can clearly demonstrate a violation of existing securities law. The aforementioned extreme appetite for anything attached to the word “blockchain” has tarnished the notion of ICOs, as investors increasingly see them as lucrative cash grabs for an entity that might see token creation as nothing more than a way to raise capital without having to part with any equity. Finally, an ICO makes it very easy to create misleading market cap/circulation metrics; there are better models out there worth considering.

5. Tether

No list of current problems in Crypto-land would be complete without Tether, the crypto traders’ stand-in for US dollars (and now Euros as well!) who’s value still rests on faith in reserves that have yet to be successfully audited. We’ve written about it before, and will inevitably have to again.

In the aftermath of last month’s news of Tether breaking ties with their auditor, and of the company being subpoenaed by the CFTC in December, it seems that it’s not only the relentless critics that have woken up to the obvious disaster on the horizon. And yet, arguably barring the recent dip in crypto market prices, everything continues to operate as though all is well. Tethers keep circulating with remarkably high trade velocity; the coin’s 24-hour volume on a given day is usually the 2nd or 3rd highest of any Cryptocurrency.

Nobody can say how exactly this situation will come to a head, but it’s hard to imagine it being pretty, and hard to imagine it being too far off.

6. The Biggie: FUD Accusations

The current discourse in crypto communities and chat groups has largely taken on the grotesque undertones of our current political spectrum. Seemingly any dissenting opinion gets bucketed into a radicalized category of either shills (trying to push up prices) or people being accused of spreading FUD, depending on the audience. What we see in a silong of sentiment — a black and white contrast of two radical opinions, not only negatively influencing markets but making it very difficult for more even-keeled perspectives to rise above the noise. We see this in the form of admonishment towards criticisms/critiques, systemic downvoting or banning from groups or forums, or outright deletion of posts from moderators. Considering the anti-authoritarian roots of cryptocurrency, this trends seem worryingly ironic.

It’s important to do your own research and and try to seek out a different perspective, if for nothing more than the challenge your own notions and consider all possibilities. With so many people having staked their savings on a particular coin, it’s not surprising that blind loyalty to a coin or notion is so prevalent, but it is extremely dangerous. Blockchain tech is still is in its early, science-experiment phase; thoughtful analysis and critique of its current limitations and shortcomings of proposed solutions are better embraced and debated than downplayed and ignored.

While these trends are worrying, they don’t necessarily portend a bleak crypto futurescape. Rather, they’re indicative of both the current societal level of discourse, and of what is still a brand new market being created, replete with all of the growing pains that come from such rapid adoption of anything with even a remote whiff of blockchain technology and its paradigm shifting potential. Vigilance, pragmatism, and a healthy dose of skepticism remain the ally of the long term, level-headed outlook. As this market becomes globally regulated and better understood, many of these current issues fall into the annals of oft-forgotten relics of a tumultuous and exciting time. Until then, proceed with caution.