The advent of exchanges in the cryptocurrency arena helped in many ways to strengthen their use case, despite backtracking on the promises of decentralization and disinter-mediation.
By providing a streamlined process for enthusiasts and interested parties to participate in the growing momentum of the cryptocurrency market, these exchanges brought blockchain-based currencies into the public domain.
Nonetheless, not all developments have been positive, especially when considering high-profile heists and attacks that have left some participants holding the bag, losing extraordinary sums in the process.
While the presence of exchanges provides a very useful function, namely supporting the price discovery process and adding a degree of liquidity to a still very much illiquid marketplace, their oftentimes cavalier attitude has caught the attention of regulators.
Though the ability to convert crypto to fiat played an essential role in growing the footprint of the cryptocurrency landscape, rampant speculation is attracting increasingly nervous attention from governments.
If desired, authorities could threaten the very existence of cryptocurrency exchanges if they prohibit banks and financial institutions from directly dealing with associated businesses. However, how would cryptocurrencies react if this development should transpire? Would they face an extinction moment or take on a different role?
An Unhealthy Obsession
The current state of cryptocurrency leaves much to be desired considering the asymmetry it promotes within its ecosystems, eschewing careful investment and fundraising for innovative ideas for speculation. For many cryptocurrencies or coins post-ICO, being listed on an exchange is a big advantage, and is often accompanied by rising trading volumes and valuations.
Take, for example, the listing of Bitcoin Cash on GDAX and the explosion of volume attributed to the move. Yet, for those coins that fail to make a splash in the broader marketplace, this oversight can mean that better ideas and innovations are oftentimes ignored for the more speculative opportunities that traders wish to chase.
Even when they are listed, the companies behind the best ideas can quickly abandon their vision and lose potency, as a higher premium is put on price relative to actual utility. For some of the newer coins especially, this can be a detractor and distraction from their true value. With certain groups accused of exploiting the more fragile infrastructure related to cryptocurrency to engage in practices like pump-and-dump schemes, wash trades, and front-running, the limitations of the current unregulated framework are clearly visible.
The Way of the Dodo
Considering all the recklessness associated with the current cryptocurrency exchange paradigms, several countries have considered outright banning exchanges within their territories. Although South Korea has since walked back its efforts to shutter many of the exchanges operating within the nation’s borders, China has still not clarified its position, leading some of the most prominent mining operations and exchanges to abandon the country in favor of greener pastures.
The question therefore becomes, what will happen to cryptocurrencies if the exchanges that support their mainstream appeal disappear? In some cases, there will undoubtedly be those cryptocurrencies that face an extinction moment.
One of the main reasons that some cryptocurrencies may go the way of the dodo should exchanges be eliminated from the equation is simply a lack of use cases. Take for example bitcoin. If bitcoin was no longer tradeable relative to fiat currencies, its use case would be severely limited as a currency alternative considering the minimal number of merchants accepting it as a payment form.
Miners may also be reluctant to mine if they can’t finance their operations and pay expenses in fiat currency converted from their crypto earnings. Furthermore, the sluggishness associated with processing times and costs could be significant challenges facing its deployment as a viable alternative.
For many of the smaller coins that have ridden the wave of explosive growth in interest in blockchain dynamics without demonstrating applications for their ideas, this is doubly true, especially if they have not garnered more widespread recognition.
In addition to the obvious recognition issue, the other factor to consider is holes in the value chain that cause leakage, reducing the sustainability of a blockchain ecosystem, especially if value can be extracted or removed from it. However, for closed token economies, they may be able to flourish without the fiat component if they can exchange other forms of (self-realized) value between participants.
Building Value Outside the Fiat Paradigm
Fiat currency makes it easy to denominate value and capitalization for cryptocurrencies, but the true value of any solution lies in its application and adoption by users. The most sustainable cryptocurrencies that would emerge from any efforts to shut down exchanges and remove fiat fungibility from trading would be those that encourage participation and exhibit the fastest velocity of coins through the ecosystem.
Give and take relationships do not necessarily have to be directly monetizable via fiat currency. A prescient example would be barter, which requires an exchange in value that isn’t necessarily monetary in nature.
Some of the best blockchain innovations exhibit that same bartering attribute, providing numeration in the form of tokens for services rendered which can be then used within the ecosystem to purchase other services.
A great example of the possibilities inherent in tokenized environments is Golem, a platform designed for participants to contribute processing power from their personal computers to the network to form a globally distributed supercomputer. For contributing processing power, users are remunerated with GNT (Golem Network Tokens) which can then be spent within the ecosystem for accessing and renting the supercomputers’ powerful functionality.
Another strong example is retail network HotNow, which has built its own tokenized ecosystem designed to help move shoppers from the online space to offline brick and mortar stores by providing incentives and discounts. For consumers who complete tasks associated with their favorite retailers like social media posts, promotional activities, or even participating in games, they are compensated for their activities with HoToKeN which can then be used to unlock and redeem discounts at their favorite stores.
For store owners, they harness a unique form of advertising, can build longstanding relationships with their stakeholders, and glean valuable data and insights for participating. This builds a sustainable, circular value chain that rewards both parties in the retail equation.
Abandoning Fiat in Favor of Blockchain’s True Value
These new tokenized ecosystems that act as utilities reflect bitcoin’s earliest ambitions, which was a decentralized architecture free of the current gatekeepers. Nevertheless, the introduction of fiat currency into the equation looms large over these efforts, transforming the reason for participation to speculation instead of advancing good causes and use cases.
If exchanges were banned, that could all change in an instant, bringing cryptocurrency back towards its original vision for solving real world problems by deploying blockchain technology in innovative ways.
Even though existing solutions could still help individuals ascribe value and physically trade their cryptocurrency holdings outside of exchange environments, banning fiat cryptocurrency exchanges would likely be a promising turning point for the entire paradigm.
Apart from causing an extinction moment for those cryptocurrencies without practical use cases, the real beneficiaries of any such move will be those blockchains that truly harness the value of disintermediation and decentralization.