Who controls crypto currencies?
When you've only understood currency your entire life from the centralized paradigm the idea of a distributed system like cryptocurrencies is hard to wrap your mind around.
Explaining Centralized and Decentralized to Distributed Usually Blows The Mind.
If you look at this image you start to get a sense of the difference between these different ways of thinking about how currency is controlled.
The centralized network on the left has a clear central point (you could think of the central point as a central bank). The central point is the dominant player. All control flows from a central point (for better or worse).
The decentralized network in the middle has many different points of control, but you could think of these as banks all operating on the same closed network. You can clearly see 7 different control points. Also, this network has a hierarchal control mechanism. This just means that rules from a dominant system flow down to subordinate systems (think central banks cascading rules down to retail and commercial banks).
The distributed network on the right is where the magic happens. This is where power (and responsibility) is distributed. Notice there is no clear central authority? For the network on the right to continue to exist it requires cooperation not domination.
So the question comes up - Who controls crypto currencies?
For a well designed cryptocurrency, the short answer is "the people who support the cryptocurrency" control it (not a central planning agency).
Because there isn't a central planning agency that doesn't mean there is no plan. It definitely doesn't mean that there aren't groups of people planning.
So if the people control crypto coins then what are the different roles involved? What are the control points and structures that keep cryptocurrencies from being controlled just like any fiat currency?
The 5 different control points of a cryptocurrency.
1) The Core Team That Develops The Currency Has Control:
In an open source model for cryptocurrency development there is usually a core team of founders that get the project moving. Zcash, Litecoin, and Bitcoin have all been created using this model.
In the spirit of keeping the control of the project distributed, usually there are elements of the coins creation that solidify this idea. For instance, the Zcash key ceremony is a great example of this. Also, Satoshi leaving the bitcoin project but distributing control prior to his departure is another example.
2) The Public Contributors Have Some Control:
Anyone who helps the core team to improve the currency has a limited amount of control also.
Being an opens source model, public contributors can take the code base and add to it. If the changes they add make sense after a peer review then the changes are merged into the main code base.
In this way it is possible for anyone with the "technical chops" to have a portion of control in the coin they care about.
3) The Payment Network Itself Has Some Control:
The network that the coin and all of its transactions live on also controls the cryptocurrency. This is done at a software level. The distributed network of computer systems (including smart phones and other computing devices) make up the network.
The level of control exercised here is tied to the operations of the crypto coin. Things like transaction validation (who paid who), the ledger of all transactions, and peer information live in the network portion of the cryptocurrency.
4) The Miners Have Some Control:
This security mechanism is another way in which a cryptocurrency is controlled.
Not all coins have miners. Usually only crypto coins using POW (proof of work) have miners, but all of them have some mechanism (usually crowd sourced) for securing the network. The miners all have agreement (consensus) based on encryption that ensures the transactions recorded into the distributed ledger are legitimate.
In exchange for helping to secure the network miners get paid in the networks crypto currency.
5) The Cryptocurrency Exchanges Have Some Control (kind of...):
The exchanges that facilitate the ability to move stored value from one crypto coin into another also allow you to exchange fiat for crypto coins too. These exchanges are the only outside organizations that have a semblance of "control" over a given coin.
The thing to remember here is that they don't actually control the price of a coin. They simply facilitate the exchange between two parties. Think of them as a match maker.
They simply put a seller of one thing together with a seller of another thing.
For example you want sell your USD to someone with BTC and inversely they want to sell their BTC for USD. (Understanding which is the currency and which is the commodity being purchased can sometimes be confusing so I'll save that for another blog.)
In summary:
The key to understanding control of a crypto currency (via consensus and contribution) vs control of a fiat currency (via central banking) is simple.
A central bank has the ability to extract value from the people who use their fiat currency. They have a government with guns to enforce the use of the currency.
All the participants of a crypto currency can only create value for each other or the entire thing falls apart because there is no incentive to support the currency.
A failure to perpetuate the core ideas that make a crypto coin possible makes everyone involved poorer so there are many positive incentives intentionally built into crypto currencies that prevent everyone from becoming poorer.
After all... Who, in their right mind, would support any system that makes everyone poorer while enriching a chosen few? (Cough - Central Banking!)
I hope this was useful for you!
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Great article and nicely articulated ideas.
Also, who is enforcing the new projects, especially ICOs, it is not difficult to create a splendid website and hire some marketing agents to boast in the market and run off with millions, IF and when that happens, who monitors/controls such anti-social beings? any thoughts?
Thanks for your thoughts on this Reddy. I 100% agree that anyone presenting an ICO should be held responsible to deliver. But, investing is investing and civil criminal activity is simply criminal activity. I'm not a fan of policing so on this one I have to offer that the investor be ware.
People IPO companies that go under all the time. Do those who invested into a bad IPO get reimbursed for their losses?
It's like that movie minority report. To prevent crime you have to be confident there is a crime. What could some regulatory agency "really" do to prevent bad people from presenting an ICO?
I believe we are better served by teaching people how to invest properly (which includes researching the opportunity) than we are at creating more soul crushing regulatory jobs.
Makes sense, agreed. At least on the public IPOs, there is paper trail of where the LOSSES went...under this ICO fever, there is risk that money could be diverted to 'wrong causes' without being traced! that is a concern from a general safety point of view and I agree, investment is an investment with inherent risk!
Hm... yeah... what you're saying here makes a lot of sense. You do make a very good point here. But, I don't think cryptos will necessarily be able to address this concern directly.
Here is my thinking (hopefully it makes sense):
With any asset class the financial benefits could be directed toward "wrong causes".
Some examples:
A criminal could buy a house (using an alias) and use it to create or sell drugs, then renovate it and flip it in order to keep moving and do it all over again. (They use the horrors of bureaucracy and clerical errors to avoid being incriminated.)
Criminals on Wall Street have been fleecing the nation but have often not been held accountable. And, all of this with sound paper trails in place. (They use the law itself to avoid being incriminated.)
IRS has paper trails all over the place. But that hasn't prevented criminals from forging identities to file fake tax returns in order to get the returns of other people. (They use the fact that centralized organizations like the IRS have limited resources to validate every person's identity prior to issuing a return. This knowledge helps them to avoid being incriminated.)
I think in any of these cases the asset class or industry can attempt to police but in the end there is a limit to the effectiveness of the policing (with diminishing returns as you add more of it).
Thanks again for your insights! Good stuff to get me chewing on before my I grab some lunch!
=)
Hope you picked on something tasty...
Your insights make sense and I love the decentralized cryptoworld. Just to give you a perspective, I have not invested a single $$ in stock market, however, to get into Cryptoworld, I have taken a personal loan - that's how much I back crypto world. I came to know Steemit about a month back - so you can call mine a late entry...hopefully not too late as I learned yesterday from Stephen that we are only 1/100th of ONE percent - so we are going to grow...
My point was about creating some kind of accountability, like an performance based release escrow, like some genuine ICOs have done. My point was not driving it to a guarantee corner rather a more transparent one!
Thank you for letting me bounce my thoughts and for serving them well!
I'm very new to steemit too.
You and I definitely share the love of the distributed nature of the cryptoworld.
I glad you did the investment with a personal loan (constructive debt is really good IMO) rather than using margin.
I think you're right on the money with the performance based escrow. That is a very good model for managing this kind of problem! It could be ideal actually!
I'll be looking out for more from you!
Nice explanation and a timely one at that! Resteemed as more people need to learn about this and how to explain it to their friends and family who are still hooked on the fiat (ponzi) system.
Thanks so much for the resteem!
I can't thank you enough for that. I'm glad you found it helpful too.
I couldn't agree more about the "fiat ponzi". It is the root cause of so many problems.
TU makes sense :)
Hi Janina! Nice to see you over here too! I actually made this post based on our discussion at YT! Good to see you!
This is some useful easy to understand info @jfgrissom
Keep steem on!
My vote, resteem & follow for u :)
Thanks for the comment and the encouragement Zar!
Good analysis
Thanks for your thoughts on this Hugo!
This is great!
Thanks for your comment on this!
Very well explained. Especially 5 points of controls for cryptos.
Hi Siddartha,
Much appreciated! I'm glad someone else appreciated that too. I see so many people talking about how some exchange "cheated" them when really the exchanges are doing exchange things. It's the big players that steam roll everyone (intentionally or unintentionally).
Thanks for sharing your thoughts on that point!
Good read Thanks for sharing; i like the analogy of them fiat currenies.
All pigs are equal, but some are more equal than others.
Thanks for sharing too Adnrsform!
Thank you for a very informative article that answered many of my questions concerning crypto coins. Keep up the good work and I look forward to more posts.
Thanks for the comment Accttax! I'll do my best!
So this is not something anyone is going to like to hear, but cryptocurrencies satisfy the banking industry and government's top currency objective of eliminating physical currency as a means of social control.
Cryptocurrencies can be hijacked by the banks easily by mining at a loss and at low fees in order to force out other miners. When they have control of mining they can then force the entire system through their exchanges by refusing to process transactions that are not through their exchanges.
At that point they have control over the cryptocurrency forever.
Now why would they want to do this?
Because they want to be able to freeze the accounts of protestors, which they cannot do with physical cash, in order to basically kill them.
You protest, they freeze your accounts. Just like they did to wikileaks and so many other organizations fighting corruption.
Without access to your funds you can't pay your bills and end up homeless.
People say that cryptocurrency cannot be effected by this, but the reality is that governments can, as of now, completely control internet access and regulate all exchanges, no matter the currency.
This was a great reading! Thanks!