Cryptocurrency As The Long Game

Cryptocurrency As The Long Game / Neil Haran

When we hear about cryptocurrencies like Bitcoin, it’s usually through sensationalist articles that either declare it to be the economic savior of mankind or warn about the apocalyptic risks of not shifting away from fiat currency.

The truth is that most people don't fully understand the big picture aspects of cryptocurrencies—and, yes, this includes the creators themselves. It’s not that cryptocurrencies are really that complicated in and of themselves, it’s just that the market is and has always been a complex organism with countless unknown variables.

We are early in the life cycle of these currencies, and there’s no way to know which will actually succeed in the long run. What does success even mean, though? What will a “successful” cryptocurrency look like three, five or 10 years in the future? This is what we must define now, or we will face the collapse of this new promising form of currency.

Culture of cooperation
From the works of the late Nobel Prize winner John Nash, we’ve come to realize that cooperation is the key for all of us to “win” in the world of cryptocurrency. However, getting all of us to cooperate is the challenge.

“The Best for the Group comes when everyone in the group does what's best for himself AND the group.”

John Nash
The first step is to identify the players in this game. The next step is to figure out how to incentivize each of them to help the currency grow.

There’s a lot that we can learn from nature in this regard. Take fire ants for example: if one of them were to fall in a river, it would probably drown. However, when a group of them end up in water, they cooperate to form a living raft, preventing the group from drowning.

This is a good example of how cooperation can lead the entire group toward a better outcome. But how do you teach this behavior? Are human beings capable of not acting solely out of short-term self-interest?

Let’s compare the ants with another group: wildebeest.

Wildebeests: individualism hurts
With wildebeests, you can have a herd of a few thousand, which provides some superficial protection from predators. You would think that a single lioness wouldn’t stand a chance against such a huge army of wildebeests, but the truth is that she can fairly easily pick one of them off without confrontation from the others. As soon as wildebeests are threatened, they scatter in many directions, and the lioness is free to rip one of them to shreds.

The “everyone for themselves” attitude is so ingrained in wildebeest biology that looking out for each other is just not part of their behavior. In game theory, these kinds of players are called “dummy players.” They provide no real value to the ecosystem. They don’t improve outcomes; they’re just kind of...there.

Cryptocurrency network
What does a cryptocurrency network comprise of? What makes up the ecosystem, not just the currency itself? The ecosystem is primarily made up of users that use the currency and the merchants that accept the currency. It is also made up of the financial services and physical infrastructure that make the currency easy to use. The strength and innate value of this network is closely tied to how cooperatively and effectively the network functions and grows.

If the dominant culture within the ecosystem is based upon greed and competition, the quality of the network will reflect this. Merchants will generally opt to charge higher fees as their incentives are aligned with short-term greed rather than long term stability. The financial services like ATMs will generally come with high fees as well. The end result is little to no value for the end user over fiat currency (for day to day use) and in return, the loyalty you get from the user will be superficial in nature. The incentives the people within this network have been driven toward getting the price as high as possible, rather than having a stable ecosystem. The bird's eye view of the network will likely resemble a herd of wildebeests.

Trust is currency
In a cooperative network, the emphasis is placed first on building a stable ecosystem. Since the core of the ecosystem is the currency, a stable currency acts as a trusted medium of exchange. With a stable growth currency, the fear of a fluctuating price is removed.

Without fluctuating prices, the financial services like ATMs now come with little to no fees. Merchants and users are more readily willing to accept such a currency from each other and over time the ecosystem naturally grows. Trust is the most important currency in the world.

When you foster a culture of trust and cooperation, the players tend to lean towards providing value to each other. They see the bigger picture and contribute towards the greater good of the network. Merchants see the long-term value in keeping prices low instead of gouging for short-term gains. They see the value of increased customer loyalty and harmony within the network.

This makes a cooperative network inherently more valuable. Not only does a cooperative, “fire ant” approach result in more social harmony, but it shows itself in lower prices and fees.

Network effect: quality over quantity
Bitcoin advocates like to throw around the term “network effect” when speaking of the resiliency of the Bitcoin network, and while it is true that a larger network of people using a currency can be a huge asset, it is not the only factor at work.

The quality of the network is important. The quality of a network is directly tied to its innate value and its ability to grow in a more harmonious direction. A cryptocurrency token is essentially like a share in the overall ecosystem. The more valuable the ecosystem is, the more valuable your share price is (or your currency’s value).

As this ecosystem grows stronger, the true value of the currency will naturally rise. Conversely, if you have a weak, disconnected, fragmented network of speculators, a high price in the cryptocurrency would indicate a lack of true value and the presence of a highly inflated value.

Therefore, the real value of the currency is ultimately in the culture of people who make up the network. A network of ants and a network of wildebeests are entirely different ecosystems. They have different values, so they create different results.

The sad reality is that this type of supportive culture cannot be taught after the currency is already overrun by speculators. You have to instill this culture from the very onset as this culture sets the tone for how the ecosystem will grow. Is our behavior closer to wildebeests or ants? Do people lean toward acting in self-interest, rather than for the collective benefit of the group? Maybe this doesn’t have as much to do with the innate nature of humans as it does with the design of the system.

If a system incentivizes greed and competition over cooperation, then the ecosystem will more or less reflect this. So we just need to be aware of this when designing incentives. The ecosystem of a cryptocurrency needs to have incentives in place from the very beginning that will induce people to cooperate. In other words, what the individual wants and the good of the group need to be the same thing. A cooperative model like this can raise the true value of a currency over the long term and keep it stable.

The price incentive
A low price may not be as much of an incentive for the regular user, but price appreciation is a strong incentive to attract skilled people such as grassroots activists, reserve investors, marketers, strategists, product and user experience specialists and more. These valuable players are the brains of the currency and can help the currency grow. However, if the price of the currency is unstable and has already risen quite a bit, what exactly is the incentive for these skilled folks to help the currency grow?

For that matter, people like to feel like they’ve gotten in at the bottom of a currency that has the makings for a meteoric rise. Serious people with a “fire ant” mentality don’t want to gamble on something that has been front-loaded and seems to have already hit its peak.

Take Bitcoin for instance: investors getting in now can pay thousands of dollars or more for the privilege of competing with speculators, in an ecosystem shaped out of greed and competition and relying on a currency that is more than likely overvalued. What a deal, right?

Real users are the value
The ultimate value comes from a large user base of real users and what they bring to the currency’s ecosystem. The currency has to grow with these people, not past them.

If you have a stellar community with strong cooperative ethics as well as stability, you are giving people a strong value proposition. In turn, they will return the favor by providing your currency with their usage and eventually their loyalty. Maybe they won’t all be fire ants, but they will be real users that naturally help build trust within the currency, rather than the uncertainty that wildebeest speculators bring.

Incentives for altruism
When you set the stage for success, you will invite more supporters than adversaries. If the goal is to simply pump up the value of an asset and sell it to unsuspecting people, it may work for a short while, but eventually people will realize it. The bubble will eventually burst.

Competition and greed aren’t good traits for long-term strategy. The innate value of a currency relies on stability and the trust that comes from that. It is the only way the ecosystem can grow in a healthy way. However, this has to be done from the very beginning, because you can’t convince a large group of speculators to act cooperatively no matter how loud your voice is. You must attract quality players—and that quality is more important than their raw quantity.

There is value in the type of users that you help attract. Humans have the capacity to act cooperatively, but they need enough incentives to guide them. They need a culture that supports correct action. You cannot ask them to be altruists and then disincentivize altruism.

As your cooperative network grows larger and stronger, it will help unify all players toward the common goal of keeping the currency robust. All of this ends up paying off massively as the system achieves stability at a level the currency could never have achieved otherwise. At a global level, the ecosystem could one

What makes up the cryptocurrency ecosystem