New technologies that make it possible to reinvent our financial system have exploded over the past decade.
Bitcoin BTCUSD, ethereum and other cryptocurrencies are proof that there’s a market for alternatives to the big, powerful players. And yet, it’s unclear how these cryptocurrencies will affect the economic landscape. Problems like bubbles, financial crashes and inflation aren’t going away any time soon. (Ahem, note recent events.)
But in the future, things could be different. These digital currencies and their supporting infrastructure hold great promise for deepening our understanding of the monetary circuit. With newfound clarity, we can build tools for minimizing financial risk; we can also learn to identify and act on early-warning signals, thus improving system stability. In addition, this new level of transparency could broaden participation in the economy and reduce the concentration of wealth.
A crypto alternative
How might this work? Leading cryptocurrencies, with bitcoin being perhaps the most famous, or infamous, example, have considerable logistical limitations. An alternative is needed.
For the past three years, our lab at the Massachusetts Institute of Technology (MIT) has worked on creating a new global currency, Digital Tradecoin, that combines the most recent technologies with the very old idea of a gold coin having intrinsic value. The currency will be backed by alliances of diverse players and anchored to a basket of real-world assets such as crops, energy and minerals, or perhaps by a portfolio of national currencies and bonds. These traits help stabilize its value and make it easier for the public to trust it. After all, a currency requires both efficient trade systems and trust.
This is where bitcoin falls short. For starters, it’s slow and clunky. Its infrastructure can handle about seven transactions per second, compared with the 2,000 on average handled by Visa. It’s an energy drain, too. The computer power required to create each digital token, a process known as “mining,” consumes at least as much electricity as the average American household burns through in two years.
Bitcoin is also not as free and libertarian as it’s often portrayed. The system was set up to spread authority among many miners; but because a small number of groups banded together into giant pools, a few players now dominate. Put simply, it’s not the peer-to-peer network it was designed to be.
Another problem is that bitcoin is not useful in day-to-day life. Bitcoin’s price against the U.S. dollar (and other government-issued legal tender) is exceedingly volatile, which makes it hard to spend. And because bitcoin isn’t backed by assets or a government guarantee, it’s essentially a speculative currency, which is a polite way of saying it’s not real money.
Read the full post at MarketWatch.
Alex `Sandy’ Pentland directs MIT’s Human Dynamics Laboratory and the MIT Media Lab Entrepreneurship Program, co-leads the World Economic Forum Big Data and Personal Data initiatives, and is a founding member of the Advisory Boards for Nissan, Motorola Mobility, Telefonica, and a variety of start-up firms.