Stablecoin Monster CBDC Red Herring – Bitcoin Magazine

by James · August 9, 2022

This is an opinion piece by Mark Goodwin, director of print editorial at Bitcoin Magazine.

I know it hurts some of your laser eyes to even see the word Ethereum in print, and while I respect that to a degree, the lessons learned by the expanding alternative cryptocurrency space are too important to ignore. Water’s Warm Maximalism is perhaps one way of looking at it, but regardless, ignoring others, even if they potentially fail to centralize forces, can only leave us ill-equipped to face the similar struggle that lies ahead; only the truly naive should see this collaboration between the government and private financial entities as anything but a dire warning of what is to come for Bitcoin.

Bitcoin is not immune to centralizing forces. Bitcoin is not immune to dollarization. There are many paths in which Ethereum continues through this fork as a financial entity without any of the supposed benefits of being the “world’s supercomputer.” The same fate could be realized in Bitcoin, and while it remains a formidable financial asset, it leaves behind many of the obvious privacy features of physical notes. The government understands this to some extent, and the push for central bank digital currencies, or CBDCs, has just been recognized in government offices around the world. For some reason, this perfectly reasonable fear of loss of privacy and property rights innate to centralized money was only placed on money that was directly owned and most importantly, issued by the state; the suddenly too big to ignore stablecoin industry remained undisturbed, maturing into over $100 billion issued, mostly in the form of ethereum ERC-20 tokens. Circle’s USDC alone has $54 billion in issued stablecoins, and is now sitting at the big kids’ table as they prepare for their biggest consensus test yet; proof of effort.

Despite how Ethereum is often painted when compared to a 90% issued, teenage Bitcoin, a proof-of-work model currently maintains consensus. From more or less the start, the foundation decided to code a block-height-triggered, exponential difficulty adjustment to ensure that any changes the consortium wanted to make to the base layer could be made without regard to the incentives of ethics. miners. This action perverts the incentives away from block creation by the marketplace towards block validation by the system’s stakeholders. The reason the Ethereum Foundation was able to get away with this perversion every time is because they had the lion’s share of the underlying asset, and thus their financial activity on one side of the fork meant everything. Whether or not you believe that Ethereum should be started in good faith is more than irrelevant now; the US dollar system just drank its milkshake.

Visual credits: Baza with Midjourney

The difficulty bomb was created for this very reason, the coming transfer from proof-of-work to proof-of-stake, but naivety left the keys to the detonator up for grabs. The weight of the upcoming fork, between PoWEth, Eth2.0, ETC, etc., is suddenly in the hands of private companies, who are cozying up to regulators and government departments every hour. What utopian variant of the supercomputer will USDCeth allow to exist? Already, we see Secretary of State Antony Blinken, following the protocol naming TornadoCash, an ethics-based privacy mixer, with coordination from Circle blacklisting every address per request from the US Treasury Department. This is a guide, and one that should far from be celebrated by free speech maximalists.

But it is also a lesson in perverting incentives, and assumptions about the consensus holding of corrupting forces. Ethereum could have been started 100% in good faith or 100% in bad faith, and the potential for a bottomless wallet to grab market share while amassing such economic weight as to pervert consensus was always going to exist. But we see something quite serious in it silencing the developers’ GitHub accounts who contributed code to the now sanctioned TornadoCash. This is of course far from a deposition, but should we be so carefree about who considers what is protected speech? We can all understand that a bitcoin transaction is nothing more than an expression of speech between two willing parties, but that doesn’t mean our regulators will. Interestingly, Blinken accused the party of working directly with North Korea to launder funds; funds denominated not only in US dollars, but using a privately issued token. Decentralized stablecoins are a logical fallacy, no doubt in how they ultimately rely on centralized consensus, but certainly in their constant whim of dozen Federal Reserve governors and extended board; all the benefits of CBDC without the headaches. In fact, a stablecoin likely reserves to a private entity more rights for customer exclusion and asset seizure than a directly controlled government entity would.

You might argue that Bitcoin suffers from a lack of features, but what it gains in simplicity is a far smaller measure of centralization of power to exploit. Could a bottomless box like the Federal Reserve dollarize bitcoin or any of its layers in a similar way? Fortunately, Bitcoin consensus is pro-fork in nature, as opposed to being pro-fork in nature; approach to the majority of today’s smart contract platforms. Could an entity backed by the dollar pervert mining incentives enough to capture a large enough hash share to censor transactions? Could an entity backed by the dollar create perverse incentives enough to discourage proper custodial use of bitcoin? Could a dollar-backed entity create malicious nodes to leak open-topographic network data to remove opportunities for increased anonymity? Could a device backed by dollars scare developers enough to no longer publicly work on privacy tools? You bet they can.

While this may read as a victory for people who understand securities laws or those who see Ethereum as a bad faith project, what this really is is yet another victory for the US dollar over civil liberties, property rights and free speech. The current Eth2.0 staking contract was funded directly from a TornadoCash outlet. Are billions of dollars locked into that contract now at risk of being seized, blacklisted or frozen by regulators and their stablecoin enforcers?

For those thinking “that can’t happen here”, think how safe the Foundation must have felt in their realm; even a 70% pre-mined headstart was not enough to keep the greenbacks at bay. Bitcoin simply does not suffer from the same consensus failures as Ethereum; it suffers and struggles uniquely on its own.