Where next for crypto and the evolution of blockchains?

The first decade of our century witnessed the emergence of the third hegemonic materiality of money in history: data. Previously, we imagined and exchanged fiat value on metal and paper. We built economies around these monies, drawing on technologies that turned these materials into devices harboring monetary value. Money materials are not neutral instruments. They contribute to the ways in which monies are made and exchanged, as well as the ways in which economies and markets are designed and maintained around them. With the emergence of Bitcoin (BTC) in 2009, and then around ten thousand more data monies in the following decade, we have figured out a way to make money and imagine its value in the intangible materiality of the exclusive right to send data. 

Usually misunderstood as a passive and solitary data entry in a memory device, in reality data money is an active and relational right to send data from one place to another. These places are defined by the specific blockchain network where these rights are exchanged. If a network removes your node from its universe, you may still have data about your cryptocurrency in your memory device, but these same data cease to work as money. To work, data money needs actors, devices, and networks that are operational. A data money is not digitally represented, as the dollars in your checking account are, but is computationally made with the infrastructural possibility of a blockchain. That is why it is impossible to comprehend the making and workings of data monies without also understanding their accounting systems — that is, blockchains. 

Before Bitcoin, monies were digitally represented and exchanged. These relations had to be governed by banks. Banks are controlled by the state, which also serves as a guarantor of the account balances that the banks keep. Unless a legal dispute arises or tax documentation is needed, the documentation of these transfers between accounts owned by human persons (for example, you) or legally defined persons (for instance, a company) are kept private. 

The emergence of blockchains proposed a new accounting system and a novel way to transfer money without needing a bank or a state by defining new actors that can claim responsibility for accounting. Replacing banks and states as guarantors and double-entry bookkeeping as accounting, miners began to document all transactions on a digital ledger that we call a blockchain. But how? The answer may look complicated, yet it rests on a very simple logic. 

There is no free lunch in any accounting system. Accountants are paid to keep the books in order. In crypto economies, miners are paid to keep the blockchain accounting working. Blockchain accountants — or miners, as they are called in crypto economies — invest their time, energy, and infrastructure to ensure that transactions are approved and registered in the space of blockchains. Once registered and accounted for, a transaction is safe and can be checked for validity in every computer that forms part of that operational blockchain system. Everyone can download a copy of this ledger, and every ledger has every transaction that has been approved by miners. In exchange for their successful work, miners receive a unique gift, a payment from the blockchain network. This payment is then used as currency in this new crypto economy — hence, cryptocurrency. 

In the beginning, mining was easy. There were not many people transacting. No one could imagine that Bitcoin was going to reach tens of thousands of dollars in value. People would buy pizza with 10,000 BTC — which, at the time of writing this book, are worth half a billion dollars. As Bitcoins have turned into money and have begun to serve as asset or exchange vehicles — and in the case of El Salvador, as a unit of national account — more accountants are needed to register its transactions, thus decreasing the Bitcoins you can make with your mining operations. Such slowing down is achieved by making it more difficult to carry out computational operations, an automatic response conditioned by the coders who wrote the blockchain algorithms. Increasing difficulty has been addressed by increasing the number and capacity of the processors that the miners use; thus, mining has become a very energy-intensive computational industry. 

That is why the Bitcoin network burns a lot of energy to operate an accounting and transactional architecture that is now criticized as slow and energy-inefficient. First-generation blockchains built their own services, algorithms, and programs on the specific computational infrastructure of the Bitcoin blockchain. They were slow, massive energy-burner networks that did not provide users with any capability to treat computer programs as money. The Bitcoin network still had some capacity to allow simple programming to be imagined as money; yet the more complex it grew, the slower the network became. 

The emergence of second-generation blockchains, with the then superfast and cost-efficient Ethereum network, addressed Bitcoin’s problems in a variety of ways. First-generation blockchains facilitated the sending of data as money, whereas second-generation blockchains did so only if certain conditions were met, thus embedding computer programmatic conditions in the materiality of data money making. This allowed for imagining contracts made of data as value and transferring a short computer program as a contract, thus changing the nature of accounting from checking for value to checking for a working contract or a program. Essentially, this is still monetizing the right to send data — but in the form of a program and within a very fast network that consumes less energy. 

But over time, the Ethereum network also began to face the same challenges that Bitcoin had faced half a decade ago. The Ethereum blockchain was faster and more energy-efficient; still, as more people began to use it and as Ethereum’s value increased vis-à-vis the dollar, the Ether cost of transactions (called gas) began to increase in value, too. The extreme volatility of the cryptocurrency markets made it more desirable to execute buy and sell decisions quickly; thus, actors needed transactions to be faster, which could be carried out only by increasing the gas fee one pays for moving data monies. In addition to the increasing costs and decelerating accounting services, Ethereum’s and Bitcoin’s blockchains were not interchains, which allow other chains to work together. One could build a new blockchain on Ethereum or Bitcoin; however, it was not feasible to build a chain that would connect different blockchains. 

The new generation of blockchains — such as Cardano, Polkadot, and Avalanche — sometimes called platforms, provide actors with opportunities to build an entire market or interchain network, as they put mutually exclusive blockchains with varying computing protocols into contact so they can transact with each other. Now it is possible to bridge structurally dissimilar blockchains and carry out transactions on them. It will be immensely difficult for the Bitcoin and Ethereum blockchains to protect their competitive edge if they do not pursue a radical change.