True Decentralization in Cryptocurrency

It is interesting to hear Bitcoin maximalists support the idea that there will only be one cryptocurrency in the long term. Bitcoin maximalists believe that the Bitcoin protocol can be modified do everything so there is no need to have altcoins and in the longer term, these coins will become worthless because all of the features will be implemented on the Bitcoin blockchain. This perspective ignores that only having one cryptocurrency would essentially be a centralized system and put the future cryptocurrency financial system at risk if an exploit or bug was ever found in the Bitcoin protocol. As I discussed in my article Centralization vs Decentralization one aspect of a decentralized system is that risk is localized and will not spread to the whole system. The people that want only Bitcoin are favoring centralization of risk and control.

We can look into past financial systems as an indicator to how well a decentralized financial system not only decreases systemic risk but also decreases moral hazard. Moral hazard is the lack of incentive to guard against risk where one is protected from its consequences. When you have a centralized system with protections against loss the actors in that system will increase their appetite for risk due to increasing competition.

The Great Depression and Great Recession of the new millennium are two examples of what occurs over the long term when risk is centralized. It may take a while to build, but the effects are devastating and affect many more people. According to Murray Rothbard in his book The History of Money and Banking in the United States, before centralized baking, the United States actually had a period of free market banking that was relatively unregulated from the 1830s to 1860s. Since a cryptocurrency can be created by anyone at any given time this may provide the best comparison to what happens over time.

In the 1800s, the demand to create additional currencies was primarily for local convenience whereas today multiple cryptocurrencies are created for different utility. When individual states “allowed” banks to create their own currencies, this increased the variety of currencies in circulation and did not decrease them. In fact, this trend continued to accelerate after the 1837 banking panic that affected states that still controlled the issuance of currency. By 1860 a significant number of states adopted free market banking as it was evident after the 1837 banking panic that decentralization of the banking system decreased systemic risk. If the natural trend in a free market banking system was to create multiple currencies, then why would it be any different for cryptocurrencies which can be created with a click of a button?

So why did this system disappear? The Civil war enabled the federal government to ban the free banking market under the guise of national security and return the banking system to a single monopoly controlled by the government. Both sides did this as it ensured they would have enough currency to fund the war.

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