Game theory offers some interesting lessons for crypto investors.
If you are a fan of games of strategy like Chess, Go, or other board games, chances are that you would be proficient at spotting some incredible potential investments in the crypto space. Chess is very structured, with specific win-lose-draw rules that appeal to competitive strategists.
By contrast, Go is a very popular strategy game in the East, and it emphasizes gaining territory, and involves an entirely different approach.
These games help to develop similar analytical skills that are needed to evaluate opportunities and risks in the crypto market. Reading my blogs, you’ve probably already concluded that I do not believe Bitcoin can beat XRP as an investment. And you’d be correct. The same goes for Ethereum; So how did I reach this conclusion using my own analytical thought process?
The Competition: Bitcoin
When Bitcoin was first created, it was meant to be a currency, a decentralized mode of exchange with no central authority.
Respect should always be given to Bitcoin for being the ‘first’ decentralized currency, however, that does not mean it is the best. In fact, throughout the history of innovation, it’s usually the first version of technology that ‘gets it wrong’. Think about the Model T, or better yet analog telephones. Are either of these used to any great extent compared to their more modern cousins? Do we still use Blackberry personal organizers? Before ink-jet printers, dot-matrix printers could be found in many electronic stores packaged with computers during sales. Do you see a lot of dot-matrix printers any more?
The same is true of Bitcoin.
Its mining component is wasteful, it still depends on proof-of-work for network security, and its promise of decentralization has been broken in so many ways that any criticisms of centralization launched from the Bitcoin maximalist camp are comedic. The vision described in the original Satoshi Nakamoto whitepaper 1 was one where each user of the network would also volunteer their personal computer to conduct mining. The effort to prevent ‘gaming the system’ was mentioned in the original whitepaper itself, although the mention refers to the gaming of IP addresses as the reason the creators didn't tie Bitcoin rewards to IP addresses:
“If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote.”
Instead, predictably, people immediately started to game the system another way, piling processors on top of each other to try and maximize their “Bitcoin payoff.” Now we’ve ended up with something that looks like this:
In addition to the problem of mining centralization, Bitcoin is incredibly slow and possesses completely inadequate throughput to support scaling of transactions. It takes approximately one hour to confirm a transaction with six blocks, and Bitcoin can only process six transactions per second.
As if those problems weren’t bad enough, in late 2017, the average fees charged by miners to include a transaction in a block climbed to $55 per transaction. 2 That means you’d spend $58 for a three-dollar latte at Starbucks if you paid with Bitcoin. The situation declined so precipitously that the annual Bitcoin conference stated that they would no longer be accepting...Bitcoin! Since that embarassing episode, those same average fees have now declined to approximately $4 dollars, but you get the point; it is uneconomical to use Bitcoin for ordinary transactions.
All of these problems have now prompted Bitcoin miners and other stakeholders to try and proclaim Bitcoin as a ‘store of value.’ But what good is a store of value that cannot be easily traded or used?
The Bitcoin maximalist community has not yet given up on their ‘model T’ however; now they’ve layered another technology on top of Bitcoin, making the cryptocurrency even more inconvenient to implement and use for new developers; the Lightning network.
The Lightning Network
The lightning network is what’s known as a ‘second layer’ protocol.3 Lightning is not specific to Bitcoin, and is a completely separate network. 4 It has shown its vulnerability to issues like DDOS attacks, problems with fraud (which prompted design revisions), and vulnerability to ‘channel dropping’ that leads to immediate settlement on the underlying blockchain. The entire adoption of the Lightning network is also dependent on adoption of Segwit, which has also been a divisive issue in the Bitcoin community.
But you won’t hear Bitcoin maximalists or Lightning network proponents tell you about these issues.
And yet, this is the only significant ‘upside’ potential in Bitcoin. So much so that you see Bitcoin supporters placing a lightning symbol next to their Twitter account names. Bitcoin is losing merchants, not gaining them.5 And its share of the crypto market capitalization has steadily gone in one direction; down. 6 7
I don’t see much upside in Bitcoin. It is now coasting on its existing trade volume and ownership by large investors. The miners who are earning Bitcoin will predictably continue to support it.
But it won’t be enough.
The Competition: Ethereum
While Bitcoin deserves credit for being the ‘first’ decentralized cryptocurrency, Ethereum deserves credit for its reputation as an unparalleled innovation in its own right: A blockchain that can execute smart contracts and decentralized applications.
But it, too, suffers from scalability issues.
While its creators designed it to be faster than Bitcoin, it still cannot scale to anywhere near what is needed to be a true currency. It can process approximately fifteen transactions per second, and it takes roughly two minutes to settle one transaction. 8 9
Although this is measurably better than Bitcoin performance, its developers depended on competitive mining to draw financial interest and to help secure and decentralize its network. Ethereum depends on ‘proof-of-work’, and it also now suffers from the ‘gaming’ of that incentivized structure:10
Ethereum Smart Contracts
Ethereum was the ‘first’ blockchain to contain native support for decentralized applications. As a result, its smart contract capability was far more complete than other networks, and it allowed the creation of custom tokens as well, known collectively as “ERC-20” coins.11
This ability to create custom tokens is what eventually drove the demand for the Ethereum blockchain and its native digital asset, Ether.
Initial Coin Offering after Initial Coin Offering has been conducted on Ethereum. To make these ICOs work, users are required to trade in their Ether for custom tokens created by various developers. Ironically, this approach has included some competing smart contract networks to Ethereum, such as TRX and EOS.12 13
Vitalik Buterin has promised that Ethereum will transition to a ‘proof-of-stake’ method of transaction validation at some point in the future to address its scalability issues. 14 So is the potential of a faster POS-based Ethereum network a significant-enough upside to propel Ethereum to new heights in the crypto market?
No. The ability to process smart contracts in its current fashion is not nearly enough to reserve a significant future share of future real-world business use cases.
Why do I make this claim? One reason is that there is a lot of competition incoming from other new crypto networks that can process smart contracts. EOS, Qtum, TEZOS, TRX, NEO, and other networks stand waiting on the wings for their opportunity to lure developers. Some of those networks are very much designed in the same vein as Ethereum – only much faster.
However, the most important reason Ethereum will struggle is its flawed design. Smart contracts in Ethereum are tied to the Ethreum blockchain, and hence are restricted by its limitations. Ethereum also requires developers to use only one programming language - a scripting language called Solidity. So what is the smart contract application that is not limited by its connection to a cryptocurrency network? Codius.
XRP & Codius
XRP is a cryptocurrency network that uses a consensus algorithm that supercharges its performance above proof-of-work systems by one or more orders of magnitude. It can process 1,500 transactions per second compared to Ethereum’s 15 transactions per second. That’s 100 times the throughput of Ethereum and more than 200 times that of Bitcoin. 15
Its settlement time is under four seconds, compared to Ethereum’s two-minute wait time, and Bitcoin’s full hour.
The smart contract program that integrates with XRP is an external platform known as Codius. Codius can integrate with any cryptocurrency network - and any ledger that supports the Interledger Protocol, or ILP for short. This offers a significant advantage above Ethereum.
Codius is not bound by the speed of a crypto network; it runs at the horizontally-scalable speeds of ILP, which means that it could theoretically reach throughput levels in the stratosphere: 16
There are other advantages of XRP over Ethereum and Bitcoin just from a performance and capability standpoint, but what really sets XRP apart in terms of its future upside potential is the size of its use cases. They are gargantuan, and can be divided into three main categories of development and usage:
1. Ripple Use Cases
2. Coil Use Cases
3. XRP Community Use Cases
Each of these is quite large, but the largest known one is the first – Ripple use cases. Ripple specializes in numerous tools and applications for banks and financial institutions. They have three main solutions, and one of them is specifically geared for helping banks and remittance processors source liquidity for transitioning one fiat currency to another while making a cross-border payment.
Ripple’s tools are primarily based on ILP, because their strategy is to enable their clients to settle in any currency, not to force them to use a specific digital asset. However, XRP is the best fit for these use cases, and Ripple has indicated that xRapid is ideally suited for XRP.
This use case – liquidity sourcing and replacement of Nostro-Vostro accounts, will result in cost savings that have been measured as high as 81 percent of current processing costs. 17 18 In addition, the overall market for cross-border payments and Nostro-Vostro replacement can be measured in the quadrillions. 19
Coil is a new company that was founded by Stefan Thomas, Ripple’s former Chief Technology Officer. He and a handful of other leaders are aiming to champion a new international standard known as “web monetization.” 20 21 This standard’s goal is to allow ease of integration between a browser and automated micropayments. When this new standard is completed, Coil will look to accelerate and champion new applications that can operate with this web monetization standard.
How big will the usage and adoption of XRP be due to Coil’s efforts? It’s currently unknown, but the idea is to allow artists and other content creators to easily create web-based content and then be paid for it as browser users opt-in to making micropayments for ad-free content and services. I predict that this will immediately create a sizable market that will steadily grow to large proportions. Some people will be reluctant to opt-in to micropayments for content no matter how small the cost, but others have been waiting for the ability to pay for a service that does not rely on users sacrificing privacy for convenience. 24
Currently, services like Facebook are advertised as ‘free’ but the real cost is the sale of your personal data to advertisers and other stakeholders to provide a revenue stream for the companies involved. Coil’s efforts could change all that. Its revenue model could make more content-rich sites like Wikipedia available to world-wide users, while avoiding invasive and distracting advertising - or prompts for donations.
Last on the list is community development and applications. So far, we’ve seen a large number of these applications developed by both individual developers and by small companies that are building on the XRP Ledger. The usage of these applications has surprised many, and it’s only a matter of time before one or more of them transform into viral applications that could potentially result in widespread adoption of XRP for usage in distributed applications or even games and entertainment. There are many developers who have been investigating Codius for building independent applications, and a number of businesses and individuals have stepped forward to become Codius ‘hosts’ as well. 25
A Codius host can earn money via their hosting of others’ distributed applications and smart contracts.
Sometimes when I say “XRP Community,” readers visualize individuals or small companies, but keep in mind the target audience for Codius: It was positioned to provide maximum capability and flexibility for large financial companies. The ability to build a smart contract that can settle on any ledger that contains an ILP connector truly sparks the imagination.
Susan Athey, a Ripple Board Member, stated in a presentation from 2015 after the first incarnation of Codius, that a whole new generation of derivative products could potentially be created because of the abilty for Codius to bring certain currently-overlooked derivatives and hedging instruments down to a cost-effective level:
That’s business-speak for “massive demand for Codius.” And which cryptocurrency network does Codius support out-of-the-box? That’s right: XRP. 26
Your Own Upside & Downside Evaluation
When investors compare the top crypto networks to try and evaluate both the downside (risk) and the upside (opportunity), they should remember some of these key strengths and weaknesses. It’s not enough to look at the existing volume of a network on Coinmarketcap and think there’s any convincing reason for a network’s market valuation; you have to look deeper into the entire picture to develop a sound understanding of its future potential.
Don’t be fooled by sloganism or those that would try to convince you with unsupported statements: Look at the facts, and don’t compromise on using your critical thinking. While you may not agree with his controversial and misguided statements about cryptocurrency, Warren Buffet’s advice about investing in stocks is also good advice when applied to cryptocurrencies. Let me restate it a bit for our purposes: 27
“If you aren't willing to own a (digital asset) for ten years, don't even think about owning it for ten minutes. Put together a portfolio of (digital assets) whose (utility will) march upward over the years, and so also will the portfolio's market value. ”
This quote, updated for the current age, is definitely something to consider, even in the volatile and high-risk world of crypto markets.