It is brutally ironic that the Bitcoin industry is presently in upheaval. In the middle of the 2008 Great Financial Crisis, cryptocurrency was developed as a response to the shortcomings of the conventional financial system, with its over-leveraged shadow banks and a daisy chain of leverage and maturity mismatch.
The first Bitcoin whitepaper, published the same year, outlined a vision of money evolving into an autonomous peer-to-peer transfer system without the need for intermediaries. However, the current unrest is blatantly representative of the shortcomings that the industry’s early proponents fought against. As companies fail and coin prices fall, the deconstruction of this new daisy network of heavily leveraged shadow crypto banks is presently underway.
As we evaluate the harm and choose the best approach for the required policy reaction to manage the sector, we must keep in mind a few crucial factors. Despite what cryptocurrency claims, it is really incredibly centralized in two important aspects.
First off, many protocols that claim to be decentralized in reality have a very concentrated power structure in terms of who controls what. The collapse of the Terra stablecoin in May served as a reminder that the creator and a select number of venture capital supporters are frequently in charge. Typically, cryptocurrency is only ostensibly decentralized.
Second, it is essential to have centralised intermediaries like Sam Bankman-FTX Fried’s that serve as a link between the conventional financial system and the cryptocurrency world. They control the influx of new money, which gives speculative dynamics the oxygen they need to thrive. BIS research in this field has brought attention to the fact that cryptography only really works in certain situations.
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