FTX revelations from recent months have led a chorus of voices – including actor Ben McKenzie and Nobel Laureate economist Paul Krugman – to allege that cryptocurrencies in general may be described as a Ponzi scheme.
This, of course, is not true, as explained in today’s post. Whereas the FTX exchange was centralized and run by bad actors, cryptocurrencies themselves are based on blockchain code for the purpose of removing human intermediaries that can mishandle funds and tamper with transactions.
Since FTX collapsed into bankruptcy and its Ponzi-like shell game with investor money was revealed, many commentators have doubled-down on their criticism of cryptocurrencies themselves as a type of Ponzi scheme.
For those who need a review, Ponzi schemes start with initial investment from an early round of investors, and the money is then used (and spent) for the purposes of the general partners or issuers of the investment opportunity. When the time comes that the original investors want to withdraw their funds, their investments are returned through funds invested by subsequent rounds of investors, giving the illusion of solvency and returns.
Similarly, FTX kept making funds available to earlier investors on its exchange using the deposits of subsequent investors – those earlier investments had been swept away to Alameda Research, the sister hedge fund to the crypto exchange.
But let’s be clear: Though bad actors are using cryptocurrencies as a medium with which to conduct Ponzi-like schemes, crypto itself is not a Ponzi scheme.
For one thing, tokens like bitcoin and ether do hold value, even in down markets, and are not dependent on inflows of new money to pay off investors. Rather, holders of these tokens can exchange them for other items of value, or fiat currency, any time they can find a counterparty willing to take their crypto.
There is no central entity giving these tokens the illusion of value, but instead the investing public’s willingness to pay $17,000 or $21,000 or $68,000 for one bitcoin that determines the ultimate market value of the token.
The most popular cryptocurrencies are able to deliver value in and of themselves without the manipulations of a Ponzi scheme operator.
There’d be no bitcoin without bitcoin mining. Invest in GDIO.
Grayscale Digital Infrastructure Opportunity (GDIO) combines Grayscale’s proven track record in investment management with Foundry’s bitcoin mining expertise as the operator of the world’s largest bitcoin mining pool. GDIO is a new offering for accredited investors that aims to invest in bitcoin mining equipment, mine and sell bitcoin daily, and distribute a portion of its operating income to its investors quarterly.
Diversify your crypto investments with GDIO. Visit grayscale.com/gdio to learn more and for important disclosures.
Investing involves risks and the possible loss of principal.
Decrypting Crypto
What Is a Dapp? Decentralized Apps Explained
(GettyImages)
A decentralized application – or dapp – is like a digital app found on any smartphone or laptop, with the additional feature of employing blockchain technology to keep users’ data out of the hands of the organizations behind it. Just like cryptocurrency is decentralized money, dapps are decentralized apps.
Dapps are as varied as conventional apps: They can provide social networks, games, entertainment, productivity tools and so on. Many are designed as tools to help consumers access decentralized financial services, or DeFi. This latter function is so widespread that the Ethereum network white paper categorized dapps into “financial,” “semi-financial” and “other.”
Ethereum has been the dominant host for dapps so far. At its foundation, one of the primary goals of the network was to make dapps easier to create.
Dapp users may feel more secure in the knowledge that the creators of the application cannot control how it is used – at least, not in the conventional way. For example, the creators of a social network dapp are powerless to remove a post or exclude a user. They are also unable to sell users’ data to other entities because dapps run autonomously once they’re launched.
How is this possible? It’s all down to the use of smart contracts – computer programs deployed and on a blockchain designed to execute the rules of a contract without human involvement.
Consensus is a place for the crypto and Web3 communities to come together, take stock of everything that is happening, talk through difficult challenges and figure out what is needed to make this industry stronger. We want you to be a part of that conversation. Use code CFA15 for 15% off.Register now.
What does the next year hold for crypto? We’ve rounded up predictions from smart people in the space – from the bullish to the skeptical.
Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
