3 Reasons Why Zippcoin Is Not a Cryptocurrency – and Why for Many, That’s Better

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twittervectorVirtual currency has burst on the scene over the last two years. The reason, of course, is bitcoin.

And the reason in turn that bitcoin burst on the scene is its block chain – aka “cryptocurrency” – technology.

The block chain is fascinating, brilliant and it deserves all the attention it gets. The block chain may revolutionize currency. It will certainly revolutionize something.

So why be a virtual currency and not adopt this revolutionary technology?


Block Chain Basics

To understand why zippcoin is not block chain-based, it is first necessary to understand a little about block chain technology.

It is easy to find plenty of detailed discussion about the block chain on the web, but for the purposes of this discussion it has the following 3 key characteristics:

1. It is based on a peer-to-peer architecture
2. Distribution of new coin is by “mining”
3. It has a permanently fixed supply of currency


Block Chain Architecture Advantages

Let’s take a quick look at the advantages of each of these three key characteristics:

1. Peer-to-peer architecture

A peer-to-peer architecture means that there is no central brain to the system, no centralized authority. Instead, the system is comprised of many equal nodes, or peers, each of which is equally responsible for maintaining the system, deciding which transactions are legitimate and which system updates are desired. If that sounds very democratic, it is.

A decentralized system like this, with no one entity in charge, has one tremendous advantage: it can be very hard if not impossible for outsiders to successfully attack or destroy the system.

2. Distribution of new coin is by “mining”

Bitcoin distributes new coin to the population via a process colloquially known as “mining.” Mining is the name of a technical process whereby any technologically capable and motivated party has an opportunity to mint new coin at a modest rate.

3. A permanently fixed currency supply

A permanently fixed currency supply is one of the most interesting (and, to many, most attractive) features of cryptocurrencies. A permanently fixed money supply is designed to help protect users against abuse and is a mechanism to prevent gross inflation, intentional or arbitrary. It also is a powerful fuel for currency speculation: “like real estate, they’re not making any more of it.”


Block Chain Architecture Disadvantages

Now, let’s take a quick look at the disadvantages of each – and why it makes sense to consider alternatives:

1. Peer-to-peer architecture

The very advantage of a peer-to-peer architecture, that no one entity is in charge – is also the root of its biggest disadvantage: no one entity is in charge to fix things for a user when things inevitably go wrong.

With a peer-to-peer system, quite simply a ridiculous amount of responsibility is pushed to the individual user.

For example, each user is responsible for performing their own backups. And each user is responsible for remembering their own password – without fail.

Loss of a device, if not backed up, means loss of an account. And loss of a password means loss of an account.

Of course, a given user can get around some of these dangerous realities by using a third party to supply these services (for example, in the bitcoin world, Coinbase is a popular example), but then the user is back to something familiar: this user is back to being dependent on a centralized authority.

2. Distribution of new coin is by “mining”

Mining, while on the surface a fair and impartial means to distributing new coin, in practice (a) guarantees that only the technically savvy participate and (b) creates a continuous technical arms race amongst miners that, in turn, essentially guarantees that mining is a perpetually low margin proposition.

3. Permanently fixed currency supply

While it is out of scope to debate this in detail here, many economists think that strong deflationary pressures on a currency has powerfully negative effects. For example, deflation can drive people to hoard a currency rather than use it in circulation. Accordingly, many believe that modest inflation is the ideal trend for a given currency.

Certainly, a currency with a permanently fixed amount means that, should it become desirable in the future to do so for any reason, there are no means to adjust the currency supply – something that all traditional existing currencies can do today.


The Centralized Authority Alternative

Now that we’ve seen some of the disadvantages, let’s consider what is possible if you don’t use a cryptocurrency architecture, but instead use a centralized authority to create a virtual currency.

1. A centralized authority can provide basic consumer protections (and can be plenty secure in practice)

No widely adopted modern consumer Internet technology requires users to do their own backups or has meaningful consequences for lost passwords. This alone argues strongly for a central authority.

This is the deep advantage of centralized authorities: a central authority can fix things when things go wrong.

Accounts can be reset and passwords can be recovered. Fraudulent or mistaken transactions can be reversed. Bad actors can be detected and kicked out of the system.

There is a reason all major consumer services are central authorities. Consumers want convenience. Consumers want someone else to manage the details. Consumers want to be protected from themselves. Consumers want someone to call when things go wrong.

Bottom line, a centralized authority brings in the balance a better feature set for the average everyday user than peer-to–peer systems.

And we can see this in practice, where even in the cryptocurrency world a rash of successful third party centralized authority services have sprung up to provide a protective layer of services for average consumers. And certainly most consumers don’t even consider that they are surrendering some of the advantages of a peer-to-peer system when they sign up for a third party to hold their cryptocurrency. They just want someone to be able to reset their password.

And to quickly comment on the pure security side, peer-to-peer systems do offer advantages over a centralized system. (Famously, the Internet itself was originally specifically designed in a decentralized, peer-to-peer manner in order to avoid destruction in the event of a nuclear strike.) However, it is worth pointing out that most of the major institutions in the global economy (from banks to transportation to agricultural) are run by organizations that are ultimately successfully controlled in a centralized, albeit heavily redundant, manner.

2. A centralized authority can provide an even distribution of new coin to all users

A cryptocurrency mining system requires some technical know-how and some determination.

Why favor the technically proficient?

Why not simply make a steady supply to all?

New coin distribution by a steady allowance to all individuals is a system universally accessible to all, and thus, by most any measure, a more fair means of providing new currency into the system.

3. A centralized authority can provide a dynamic currency supply

A permanently fixed supply of virtual currency has become such an important idea to cryptocurrency that we have to remind ourselves that no other successful current currency has this feature, or, if you will, this constraint.

A centralized authority allows a currency system to react to real world events, such as growth of the system, and to moderate potentially harmful trends, such as deflation.

Critics will be quick to correctly point out that there is nothing technically stopping a central authority from flooding a system with excess currency. And of course real-world examples of this are easy to find. Just search for the term “hyperinflation” [connect to wikipedia article] for some spectacular examples.

However, in the case of a virtual currency, there is a powerful reason why this is not a practical danger. Flooding any currency system with excess money is clearly self-destructive to the system. Even the most casual arm-chair economist understands this. So why would an otherwise rational centralized authority ever intentionally destroy their own system?

This does happen in the real world, but hyperinflation in the real world is a danger of national currencies under strong external pressure, usually specifically to fund the continued operations of a specific government.

After all, a national currency is first and foremost a tool of a national government. And therefore, a national currency is subject to all the powerful forces in play, including the funding of unbalanced national budgets.

When faced with choosing between stopping paying the police or printing excess money, it becomes rational to print excess money – even if those doing this understand that they are just kicking the can down the road a bit.

Absent of such circumstances, no rational centralized authority would intentionally destroy their own system, and in fact, the larger the system becomes, the more a centralized authority has a vested interest in the care and preservation of its system.

This, therefore, is a tremendous advantage of any virtual currency: a virtual currency is not the tool of any national government, and is not then subject to its often conflicting and very powerful demands. A virtual currency is only responsible to itself.

The chance of a centralized authority virtual currency printing excess money in practice is the same as the chance of any centralized authority – in any field – unilaterally deciding to self-destruct.


Closing Thoughts

The purpose of this discussion is not to attack bitcoin’s brilliant architecture, something that is literally genius and very elegantly solves problems which many people have been trying to successfully address for decades.

Rather, the purpose of this discussion is to illustrate that when it comes to a virtual currency that is best suited for a typical consumer, there are rational reasons for not using this elegant cryptocurrency technology and instead use a much simpler old school architecture: a centralized authority.

The eternal tug of war between peer-to-peer and centralized authorities exists – in technology, in politics, and in other aspects of our lives – because there are meaningful tradeoffs with each architecture.

Bitcoin’s peer-to-peer design was clearly optimized to address technical considerations. And it has clearly succeeded.

zippcoin’s centralized authority design was optimized to address social considerations. And we’ll see how it may succeed.


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