Let me preface this by saying: I hope I’m wrong, but I fear that I’m not.
I’m relatively new to Crypto, though not to computers, currency, the collectibles market, or economics. I’ve understood basic blockchain theory for years, and simply opted to not participate. True wealth, after all, is independent of which coin one uses.
However, the potential of using purely electronic currency as a vehicle for online microtransactions — being able to pay a reporter directly for their story by cutting out the middleman, or an artist for sharing their work — has been evident since the first days of Bitcoin. As a writer who relies in part on tips, I’d have been foolish to ignore this aspect, and in fact I’ve found it intriguing — especially since services like PayPal charge hefty transaction fees for the privilege of holding our money, whereas Crypto fees are microscopic.
Then, finally, someone offered me a tip in Crypto, specifically DogeCoin. Never one to turn down free money, and as I say already intrigued, I downloaded my first wallet and introduced myself to the friendly Shiba Inu. The motto “Do Only Good Everyday” appealed, as did the innate humor of the memes and the community.
I needed an online broker to convert my Doge to cash (about 35 cents worth), and I happened to have an account. Zero balance, but that was soon fixed. Then, for fun, I uploaded some cash to my RobinHood account and started daytrading. After that, I became fascinated and dove down the rabbit hole.
The Extreme Basics (Grossly Oversimplified): By now, we all probably know this, at least to an extent, but it’s necessary to explore it to demonstrate the point.
Standard currency works through centralization: One single authority controls any given type of money, has the sole authority to print it. Once upon a time it had purely intrinsic value; a coin was worth the value of the metal in it, more or less. Today, that value is based on mutual faith combined with the authority the central government has to bust in and destroy anyone caught counterfeiting it, thereby diluting its value.
Crypto works the same way, more or less, except that it does away with the government. Control over currency value is exerted by pure market forces acting on the community, which, either voluntarily or for-profit, hosts the entire history of all transactions in a compact yet highly complex mathematical formula on their computers. That sounds like a lot of data and it is, but it’s so efficient that the average desktop can easily hold it all without any particular difficulty.
Transaction information is stored in discrete blocks. The chain aspect is that each block begins with a unique mathematical hash, a set of numbers that identifies describes the preceding block — a built-in index that is its own lookup table. The rest of the block is composed of a collection of transaction details. Once enough transactions take place, the block is completed and the next hash created to begin the next block. Individual systems, called “miners”, compete to be the first to do this, and the winner receives a reward in currency (plus a share of the transaction fees).
Over time, as technology advances, mining machines become more efficient, and the profit advantage goes to whoever has the best gear. As of this writing, it is no longer practicable for an individual with a simple desktop to mine for themselves at all, or to do so profitably even using a large pool. Top-end hashing machines, each custom-built to handle their own particular currency, now dominate the market, each a million times more capable than a private individual’s gaming system. Two limiting factors remain: the speed at which information can flow across the internet, and the cost of electricity.
There are several variations on the basic Bitcoin model, including stablecoins (which never vary in price, and cannot readily be mined) and the likes of Compound, which generates value by virtue of loans and earned interest. The basic qualities, however, are common to all Crypto. Moreover, the utility potential of blockchain going forward is far greater than the merely monetary; it is crowdsourced security, prospering through the collective goodwill of its holders.
But let us postulate the existence of a bad actor, the equivalent of a counterfeiter. Obviously, given the security provided by a distributed network, nobody can literally counterfeit a fake coin, so the process would be different. Instead, let us imagine a massive server farm containing multiple discrete internet connections. It not only holds a vast mining complex, it also serves thousands, even millions, of individual wallets. (Note that a single person can own a practically infinite number of accounts.)
Now, imagine that, at a given moment, all of those wallets in sequence act to automatically transfer to each other a fractional amount of coin. Enough transactions are generated to form a complete block locally, one with no external interaction required, and one without any need for data transfer except going outward, to demonstrate its own existence. The farm, which by comparison to other miners elsewhere, mines the Crypto generated by this artificial block instantly, recoups the transaction fees, and distributes the new coin to all of those individual wallets plus new ones being constantly generated during every iterative hardware expansion.
Obviously, this counterfeiting model is oversimplified, and experts will fall all over themselves in their rush to explain why it couldn’t possibly happen. Their explanation will be technical in nature, abstract, and will be based in the relatively simple mathematics of GUIDs and unique hashing. However, against this we have the Law of Large Numbers acting on the incontrovertible fact of the existence of mining hardware with practically infinite processing capacity when compared to internet hub architecture. Ian Malcolm would say that failure of any complex system when exposed to living ingenuity is inevitable, and experience bears that out over time.
So, presuming that it can happen, let us examine the market to see if it is currently happening. If it were, we would expect that new wallets containing microquantities of Crypto would be proliferating; and indeed they are. Mining pools would act on new additions to the system — freshly created Core Wallets, designed to hold the entire blockchain — so quickly as to approximate the effect of a DDoS attack; and indeed they do. Most tellingly, the number of blocks created at any given point would be accelerating at a dynamically increasing rate.
Crypto mags have been releasing pro-investment articles of late, each explaining the massive recent increase in the number of existing wallets and lauding the expansion of activity. And yet, Crypto’s popularity reached its peak some years ago, when the momentum of popular opinion created a massive spike in values across the board. There is no reasonable explanation for this explosion in use.
In order to test my hypothesis, I’ve downloaded Core wallets and the accompanying complete blockchains from each. Bitcoin, Etherium, Litecoin, and Doge all show the same pattern: The number of blocks generated per day is increasing at a near-exponential rate. Bitcoin’s acceleration came first and was relatively small; the long block processing time provides an intrinsic limiting factor that militates against the success of such a scheme. Etherium, however, processes far more rapidly. Its increase began in 2020 and grew slowly, possibly in consequence of limitations in the global processing chip supply chain. Litecoin and Doge volumes both began peaking in late 2023, moving from a few thousand blocks per month to tens of thousands and, soon, another order of magnitude. Rough math indicates a hundred thousand blocks will be processed in April alone if nothing happens to stop it.
Each form of blockchain currency contains built-in limiting factors which will restrain the destructive capacity of these hypothetical modern counterfeiters, the most effective of which being the vast cost of the electricity required to make it happen. Bitcoin, Litecoin, and Etherium self-limit their own supply, which exposes the profitability of counter-actors to the law of diminishing returns. And DogeCoin has a minimal price point, so tiny that mining it has never been a highly profitable act. It would appear that any massive profits to be extracted using this method have already been achieved, and without any deleterious impact on the price point.
However, uniquely among popular Crypto, Doge is unlimited in quantity, and the mining reward is constant. The market, due to its popularity among the less financially aggressive, has a price that naturally fluctuates minute by minute. It has extreme volatility, and holds its value largely by consent of participants, who view future possibility as sufficient motivation to continue to hold assets in coin rather than cash form. If the supply continues to grow exponentially, however, and is ever released en masse, the market will flood, inflation will take over, and the currency will become almost valueless.
This indicates one of two things: First, that anyone mining Doge in this aggressive fashion is not doing so in order to destroy its value but rather in anticipation of a future price spike, one which would be profited from gradually and in equity rather than by liquidation. Second, that the goal is in fact malevolent, that the actors are waiting for precisely this spike to cripple it through mass asset liquidation. Note that either predicates such an event, which popular rumor would suggest could be the adoption of DogeCoin by Elon Musk’s Twitte… uh, X… uh, TwiX.
Let us continue the thought experiment: If a relative newcomer to the universe of Crypto could hypostulate this, is it not likely that others have as well? If one single actor, whether benevolent, nefarious, or simply venal, has chosen to act in this way, would it not be reasonable to presume that others have already followed suit? And, given that to do so would be both profitable and, at least apparently, not against any law or even strong custom, can we judge them for so doing? Finally: Given the existence of leased cloud-based mining pools, might not natural market forces eventually, inevitably, and with no ill will, mimic such activity?
I will close this fascinating exploration by suggesting the counteraction. If indeed this postulate is correct, the market will itself provide the antidote. Competition between data farms for artificial block creation will inevitably reach a point where each will interfere with all the others, data transmission speeds will again exist as limiting factors, and market domination will again become impracticable.
But that’s only if the currencies survive (many of the smaller ones tend not to) and if the collective goodwill of the Crypto community exceeds their own venal self-interest combined with the force of any deliberate malevolence.
In the end, what will happen? Your guess is as good as mine.
You can send cash to PayPal in order to help support my writing, set up a subscription donation at Patreon, or buy me a coffee. My DogeCoin tip wallet is at MyDoge.com/gnerphk. Sign up for RobinHood and we can each get free stock shares; my link is https://join.robinhood.com/johns-ca450756.
More important than money: Thanks for reading.
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