On Monday, Nobel Prize-winning economist and New York Times columnist Paul Krugman wrote an opinion piece about his skepticism of cryptocurrency's long-term viability. His doubts center around two arguments: cryptocurrencies are not tethered to anything in the real world and therefore have no actual value, and they are and always will be too expensive.
On the subject of tethering, Krugman explains:
"Fiat currencies have underlying value because men with guns say they do. And this means that their value isn't a bubble that can collapse if people lose faith."
Bitcoin, on the other hand, is not tied to anything. "If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless."
Krugman's other concern is that making and using cryptocurrency is inherently too costly. He argues that making it expensive to create a new bitcoin, or to transfer an existing one, is "essential to the project of creating confidence in a decentralized system."
This, he says, runs contrary to the pattern of monetary history. He describes a trend in which business transactions have become increasingly easier and less costly: We moved from coins made of precious metals, to bank notes backed by fractional reserves, to central banks and fiat, and now to credit cards and other digital payment methods. Krugman argues:
"Cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years."
It's worth noting that many would disagree with the premise that high costs are inherent to cryptocurrency, as developers are working on new consensus algorithms they hope will make the digital assets less resource intensive. (However, it's also true that there is no certainty that these consensus algorithms will solve the problem.)
It's also worth pointing out that Krugman seems to be discussing a particular kind of cryptocurrency – one that is completely decentralized and open, and which does not serve any purpose other than being a means of payment or investment. However, Krugman does not specify these caveats to his argument, and (intentionally or not) lumps not only all cryptocurrencies, but all blockchain projects, under this "probably totally useless" umbrella.
"There might be a potential equilibrium in which Bitcoin (although probably not other cryptocurrencies) remain in use mainly for black market transactions and tax evasion, but that equilibrium, if it exists, would be hard to get to from here: once the dream of a blockchained future dies, the disappointment will probably collapse the whole thing."
Krugman ends his argument with a call for crypto enthusiasts to tell him: "What problem does cryptocurrency solve?" Again, he seems to overlook the ways in which companies like Stellar allow for permissioned blockchains that enable cheaper and faster transactions between banks and governments. He overlooks blockchains that have applications and entire businesses built on top of them using EDCCs (or smart contracts) and how those applications and businesses utilize cryptocurrency for on-chain transactions and voting. Cryptocurrency also plays a key role in incentivizing the block validators necessary to facilitate a decentralized platform.
Enter Oliver Hart, another Nobel Prize-winning economist. Hart recently signed on as a senior advisor at Prysm Group, a blockchain governance and design firm, where he will advise the company on incentive frameworks for blockchain protocols and EDCCs. This is fitting, as Hart won his Nobel Prize for his work on contract theory and how to deal with the impossibility of specifying every eventuality in a contract – something that is particularly challenging for EDCCs.
Hart's work will be, in part, to help create better contracts. He said in an interview with Forbes, "Almost all legal disputes have to do with contract incompleteness … [I]f people could write better contracts … those costs will be reduced." To Hart's point, if so-called smart contracts can become smarter and better able to address contract incompleteness on blockchains, this could make the relatively high transaction costs worth it.
What Hart says about smart contracts and blockchain stands in contrast to Krugman's position, though Hart is by no means a crypto enthusiast. Still, his work at Prysm illuminates the ways in which blockchain technology can solve certain problems, and that blockchain and cryptocurrency are not synonymous.
"Blockchain can be very helpful in automating certain things," said Hart in an interview with Forbes. "Incentives are at the heart of all this."
Of course, the incentives that blockchains rely upon are usually cryptocurrency rewards for successful/honest miners or block validators. So even if Krugman is correct that cryptocurrency is inherently expensive, this might not necessarily be a problem: Considering the usefulness of EDCCs, the possibility for decentralized autonomous organizations, and the way that blockchains allow for new models of ownership and power both online and off, the costliness of the blockchain platform might be worth it.