What would make a cryptocurrency successful, better yet, what would characterize an ideal cryptocurrency? I think it is fair to say that predicting a long term success of a virtual currency just like any other asset or security if virtually impossible but I can think of a few characteristics that will help a new cryptocurrency gain popularity and attract companies and individuals to use it and to participate in running its network. it is important to mention that all the features suggested below either already exist in some implementations of can be easily created using existing technologies. Here are some features that could help to create a successful cryptocurrency:
1. Not a security — it must be created without an ICO or IEO. That will ensure there are no questions of it being a security. As such there should be no limitations on who can purchase and use it. New blockchain should be launched without any initial offering, from the genesis block it should be distributed to people or organizations that earn it by participating in its consensus mechanism or provide additional services built directly into the blockchain.
2. No sponsoring organization — any cryptocurrency issued, controlled or governed by an organization for-profit or not, is subject to laws of the jurisdiction where such currency is issued and vulnerable to other jurisdictions where the laws under which the currency was issued do not even apply. Anywhere cryptocurrency is used local government can claim jurisdiction and can try to influence the activities of this currency. There are political pressures, as we can see clearly with Libra that goes beyond reasonable or logical. Any organization or individual are always vulnerable, subject to pressure and therefore present ongoing risk to the viability of the currency. The fact that Satoshi Nakamoto is still unknown is one of the best features of Bitcoin. There is no one to blame or put pressure on to influence currency development or distribution.
3. Security first — just like lack of security in the early internet solutions, the early blockchain solutions, bitcoin included were not built around security. The ideal cryptocurrency will have security build into its native design. Security built directly into the blockchain means white lists of IPs and even MAC addresses build into the tokens, delays in transactions based on new geo-location, new IPs and change in MAC addresses and passwords, etc. The most important security feature on blockchain or computer networks, in general, is not a new fancy password or 2-factor authentication, it is judicial low tech delay in transactions, an old fashioned speed bump. Hackers can swap your sim card, can even change your password but if the transfer of coins is delayed by 24 hours and you still didn’t stop the transaction, it is on you.
4. Not backed by another asset — no dependency on a custodian, no reliance on stability or volatility of the underlying asset. Any currency backed by another asset is nothing but a digital certificate representing that asset. Tokenization of assets in itself is valid and a promising phenomenon but a successful cryptocurrency has to develop its own value. Any cryptocurrency backed by a traditional asset is vulnerable to bureaucrats and politicians that control or attempt to control the asset. The custody of such asset will always be a source of additional risk and limitation to its movement. Currencies backed by other cryptocurrencies will always be subject to inflation and political manipulation of that asset. The volatility of the underlying currency always creates a risk even if this asset is over collateralized. Over collateralization creates another problem, it makes this currency not capital efficient.
5. Not backed by an algorithm — Price stability, which in itself is a misnomer, I wrote another blog post on this subject, you can find it here. Stability managed by an algorithm ultimately relies on the confidence of the people that use it. It always essentially comes down to a structure where people can buy the currency when its price is down with a promise or a notion of a future event to sell it at a profit. When the price goes down, some mechanism will start buying “cheap” currency with the intent to sell it later with a profit. But confidence can be lost much quicker than price can go down. Confidence, in general, has an inverse correlation to volatility — high volatility equals low confidence.
6. Stability — stability is important, natural stability of an ideal cryptocurrency will come from its utility. Price stability is fool’s gold. The idea of price stable cryptocurrency seems like a good one on the surface but falls apart under any scrutiny. Cryptocurrency backed by other assets like gold and dollars have its validity and utility but it’s merely a digital representation of the asset, and as such it can’t be considered a standalone cryptocurrency it is just a surrogate for the underlying asset. It’s value heavily relies on the availability and transparency of the custody of the underlying asset. A cryptocurrency will be stable if people, organizations, and countries decide to use it. When we call an asset “stable” it doesn’t mean that its price doesn’t move, it means that the volatility of the asset is historically, on average lower than the volatility of other assets. The dollar is considered to be a relatively stable currency because of the amount of economic activities performed in dollar terms, yet the price of a dollar moves on the foreign exchange market 24 hours a day. The ideal cryptocurrency will find its stability over time, as the number of transactions performed in that currency grows.
7. Stability can also come from predictable and recognized value. Stable yield (with predictable source of the return) could insert stability into a cryptocurrency. Returns from a blockchain consensus process and the growth of the number of the blockchain transactions over time will determine the value of the coin. These “stable” returns could be a very interesting option.
8. An ideal cryptocurrency will have to have the following stable characteristics:
8.1. Stable, predictable supply — where a number of coins issued every day, month and year is stable and predictable;
8.2. Stable transaction fees — ability to pay a higher fee to jump the transaction queue, probably sounds like a good idea to a programmer but to anybody who is relying on the “stable” processing of their transactions, it is an extra layer of uncertainty. Knowing what fees you have to pay and time it takes to process a transaction is probably more important than price stability of a given currency;
8.3. Predictable block formation — another feature clearly designed by a computer programmer is ability by the node operators to select what transactions are added to a block. Having a formulaic method that determines what transactions are added to each block makes a blockchain consensus process predictable and better. It also makes attacking that blockchain harder.
8.4. Stable consensus rewards — is also part of the ideal cryptocurrency. It’s important to know when your transaction will be confirmed; Stable consensus rewards — knowing the amount of money one can generate by participating in the consensus mechanism over time is important to attract market participants. A larger pool of decentralized participants will reduce the ability of bad actors to manipulate the currency and improve the overall stability of the blockchain network.
9. High throughput — thinking about a cryptocurrency that is available all over the world and not thinking about the ability to process thousands of transaction per second is like thinking about flying to a remote and exotic destination without thinking where your plane is going to land. There is a number of solutions emerging in the cryptocurrency world that offer high throughput, from sharding to side chains, the solutions exist that offer the ability to process tens of thousands of transactions per second.
10. POS, not POW — over the last few years a number of POS cryptocurrencies have emerged that have proven to offer a better option, this consensus mechanism offers higher throughput, it is not vulnerable to 51% attack, and of course, it consumes less energy. It is also easier to design a POS process that will discourage centralization of staking operation. A Proof of Stake process can be designed with an unlimited number of validators, where a specific group of validators for each round can be selected randomly, where pure hash rate and concentration of staking power doesn’t guarantee higher returns, where a delegation of the coins voting rights, is transparent and simple. POS algorithms also offer higher throughput.
11. Open-source software — open source software means that it can be reviewed and examined by many, that in-turn guarantees the quality of the software, it makes it more secure, better audited. It is best suited for decentralized contributions by many independent developers. Open-source software also helps with the predictability of the currency and processes it supports.
12. Programmatic governance — predictability is a precursor of stability and acceptance of an asset in general and currency in particular. Programmatic governance and predictable behavior of the currency is required for it to be accepted as a unit of account and means of exchange. Democracy is the best form of government known to men but it not ideal. People are lazy, indecisive, and can be easily influenced by special interests. Having a specific set of rules programmed into the blockchain will make its behavior transparent and predictable. Some mechanism to manage improvements and additional development could be helpful but full-blown democratic governance similar to EOS or Decred could be detrimental to acceptance and adaption of the currency.
13. Reduced data storage requirement — just like we need to think about throughput, we need to think about data storage requirements when designing a successful cryptocurrency. Minimizing the amount of data nodes have to manage is important. As blockchain grows, so grows the amount of data a node has to store. That makes it harder for new nodes to join and more expensive for existing nodes to maintain the chain. A novel approach could be developed where “Archiving” Nodes can maintain the complete blockchain while standard nodes can hold a limited amount of data. That data could consist of the latest blocks and/or hashed indices of previous blocks. The Archiving nodes will be paid a separate fee for maintaining the complete blockchain. These fees could be calculated as a percentage of the consensus fees and the number of people deciding to run Archiving nodes will be based on the level of compensation they deem satisfactory. Alternatively, nodes that maintain a full blockchain could be paid a higher staking fee.
14. Smart contract capabilities — smart contract capabilities are common. Ability to issue additional tokens on one blockchain or ability to program additional logic into the token will increase the blockchain utility and the number of transactions overall. That will increase the number of fees generated by transactions, and increase the fees paid to the nodes participating in the blockchain consensus process.
15. Mobile first — next generation cryptocurrency has to be deigned to function well in the mobile world. There are many people in the developed countries that don’t have computers but all have mobile phones. Next cryptocurrency has to function well in such world. Blockchain and consensus mechanism has to work well in mobile only environment. People should be able to do everything with this new cryptocurrency using only their phones, that includes paying for good and services, investing and confirming transactions. Mobile block generation, mining is possible if the blockchain is designed to support it.
It’s clear to me and many other believers that cryptocurrencies represent a very important development in the world today. Virtually every government in the world history had the ability to issue sovereign fiat currency and almost all governments abused this power. And current governments are no exception. The difference between US and Venezuelan governments is a degree to which this monopoly is being abused. Cryptocurrencies break these monopolies. Anybody who questions validity and importance of cryptocurrencies should look no further than Venezuela, Iran or Argentina. Any country with hyperinflation or political unrest sees bitcoin trading with a significant premium.
We need cryptocurrencies to keep the governments honest, forcing governments to compete for the capital of their citizens is a great development. Competition is always good, it forces all participants to do better. Countries, where Bitcoin is restricted, are clearly afraid of this competition and thus signaling to their citizens that their capital is kept captive, that they are not in control of their own money.
Just like the Internet freed the information, cryptocurrencies will free capital!