The Peter McCormack Show: Beginner’s Guide #9 - Altcoins, A History of Failure with Nic Carter (WBD190) Summary

Podcast Information:

• Title: The Peter McCormack Show
• Host: Peter McCormack
• Guest: Nic Carter
• Episode: Beginner’s Guide #9: Altcoins, A History of Failure
• Release Date: January 31, 2020

1. Introduction to Altcoins and Their High Failure Rate

In this episode, Peter McCormack welcomes Nic Carter to discuss the intricate world of altcoins, exploring their historical trajectory and examining why a significant majority have failed. The conversation underscores the allure of altcoins to newcomers and seasoned investors alike, highlighting the substantial financial risks involved.

Key Points:

• Seduction of Altcoins: Many entering the Bitcoin space are tempted by the vast array of altcoins, often leading to financial losses.
• Importance of Understanding Failures: Grasping why altcoins fail sheds light on Bitcoin's enduring dominance and its robust design.

Notable Quote:

Peter McCormack [05:02]: "The history of altcoins is a history of failure."

2. Evolution of Digital Cash Before Bitcoin

Nic Carter provides a comprehensive overview of digital cash predecessors, setting the stage for understanding Bitcoin's revolutionary impact.

Key Projects Discussed:

• Digicash:

  • Founder: David Chaum, a respected cryptographer.
  • Innovation: Introduced blind signatures for transactional privacy.
  • Outcome: Despite technological advancements, Digicash relied on a centralized issuer and ultimately failed, teaching early cypherpunks valuable lessons about decentralization.

  Notable Quote:

  Peter McCormack [11:42]: "Digicash was one of the most influential pre-Bitcoin experiments."

• E-Gold:

  • Founder: An oncologist with a passion for monetary history.
  • Concept: Created a digital currency backed by physical gold reserves.
  • Outcome: Faced regulatory crackdowns under the Patriot Act, leading to the founder's imprisonment and the system's shutdown.

• Beans and Flus:

  • Nature: Early attempts resembling what would later become ICOs.
  • Issues: Mismanagement of funds, ineffective marketing strategies, and failure to gain merchant adoption.
  • Lesson: Highlighted the pitfalls of pre-mine and poor economic planning in digital currencies.

Notable Quote:

Nic Carter [18:12]: "Everything old is new again, and beans and flus were just the first ICOs."

3. Early Altcoins: Namecoin, Litecoin, and Dogecoin

The discussion transitions to the first wave of altcoins, emphasizing their innovations and subsequent shortcomings.

Namecoin:

• Launch Date: April 2011
• Purpose: Decentralized domain name system (DNS) aiming to eliminate centralized control.
• Innovation: Introduced merged mining, allowing Bitcoin miners to mine Namecoin simultaneously.
• Outcome: Limited adoption due to technical complexities and lack of practical utility.

Litecoin:

• Founder: Charlie Lee
• Origins: Forked from FairBrick, which itself forked from Tenebrix, a Bitcoin codebase derivative.
• Value Proposition: Faster block times and a different hashing algorithm (originally Scrypt) to deter ASIC mining.
• Outcome: Despite initial success and being dubbed "silver to Bitcoin's gold," Litecoin struggled with differentiation and eventually saw ASIC miners develop for it.

Dogecoin:

• Launch Date: December 2013
• Foundation: Forked from Litecoin with added meme culture elements.
• Community: Known for its fun and charitable initiatives, such as sponsoring NASCAR cars and the Jamaican bobsled team.
• Impact: Served as a gateway for many into the cryptocurrency space, fostering a more approachable community compared to Bitcoin's serious demeanor.

Notable Quote:

Peter McCormack [46:20]: "Litecoin's value prop was, it seems kind of hilarious in hindsight, faster blocks."

4. Categories of Altcoins and Their Challenges

Peter and Nic delve into various altcoin categories, outlining their intended purposes and the inherent challenges that led to their failures.

a. Bitcoin-like Money Coins

• Examples: Bitcoin Cash (BCH), Bcash, Dogecoin.
• Issues:
  • Centralized Leadership: Figures like Roger Ver (Bcash) and Charlie Lee (Litecoin) became focal points, creating vulnerabilities.
  • Pre-mine Concerns: Allocation of coins to founders or developers undermined fairness and decentralization.
  • Market Dynamics: These coins often failed to offer substantial innovation beyond Bitcoin, leading to diminished value over time.

Notable Quote:

Nic Carter [28:27]: "Having a leader actually proves to be a point of failure."

b. Privacy Coins

• Examples: Monero, Zcash.
• Pros:
  • Enhanced Privacy: Implemented cryptographic techniques to obscure transaction details.
• Cons:
  • Technical Trade-offs: Increased transaction sizes, reduced scalability, and potential vulnerabilities.
  • On-Chain Privacy Concerns: Methods like Monero's confidential transactions complicate auditability and introduce risks like inflation bugs.

Notable Quote:

Peter McCormack [31:33]: "Privacy comes at the cost of auditability, which is a significant trade-off."

c. Smart Contract Platforms

• Examples: Ethereum, EOS, Cardano.
• Issues:
  • Scalability vs. Decentralization: Ethereum’s move towards higher scalability introduced centralization risks.
  • Governance Problems: Projects like EOS faced allegations of masternode collusion and ineffective governance structures.
  • Complexity: Increased protocol complexity often led to unforeseen technical issues and vulnerabilities.

Notable Quote:

Nic Carter [34:36]: "Ethereum's directionally is becoming more centralized, adding more risk."

d. Stablecoins

• Examples: Tether (USDT), USDC, TrueUSD, Paxos.
• Pros:
  • Market Utility: Provided traders with a stable asset against Bitcoin’s volatility.
• Cons:
  • Centralization Risks: Reliance on centralized issuers and banks introduced single points of failure.
  • Regulatory Scrutiny: Entities like Tether faced legal challenges and credibility issues regarding reserve backing.

Notable Quote:

Peter McCormack [37:06]: "Stablecoins rely on centralized issuers, making them susceptible to regulatory pressures."

e. Utility Tokens

• Examples: BAT, Augur, 0x.
• Issues:
  • Economic Flaws: Many utility tokens suffered from poor economic models, leading to lack of real utility and value appreciation.
  • Market Saturation: The ICO boom saw an influx of tokens with little to no genuine application, diluting market value.

Notable Quote:

Peter McCormack [39:38]: "Utility tokens represented the worst fallacy of the blockchain space in the last five years."

5. Detailed Case Studies

Peter and Nic explore specific altcoins to illustrate the broader challenges faced by the altcoin ecosystem.

a. EOS

• Founder: Dan Larimer.
• ICO Success: Raised approximately $4 billion, making it the largest ICO in history.
• Innovations:
  • Delegated Proof of Stake (DPoS): Introduced masternodes requiring significant token holdings to participate in network governance.
  • No Transaction Fees: Users' ability to process transactions was tied to their EOS holdings.
• Challenges:
  • Governance Issues: Centralized control through a small number of block producers led to allegations of collusion and inefficiency.
  • Technical Problems: Difficulty in running full archival nodes, making network participation prohibitive for average users.
• Outcome: Despite raising massive funds, EOS struggled with governance inefficiencies and maintaining network decentralization.

Notable Quote:

Peter McCormack [84:23]: "EOS is the greatest example of optimism and techno-utopianism in the crypto world."

b. Bitcoin Cash (BCH)

• Origin: Forked from Bitcoin in August 2017 over block size debates.
• Intent: To enable larger blocks for increased transaction capacity.
• Issues:
  • Market Perception: BCH struggled to achieve parity with Bitcoin, maintaining only a small fraction of Bitcoin's market value.
  • Technical Direction: Lacked significant innovation beyond block size increases, leading to limited adoption.
• Outcome: BCH remains a minor player in the cryptocurrency market, illustrating the difficulties of sustaining an alternative to Bitcoin.

Notable Quote:

Peter McCormack [81:02]: "Bitcoin Cash is essentially a failed experiment in governance and technical scalability."

c. Bitcoin Private

• Concept: Merged the Bitcoin UTXO set with ZClassic to introduce Zcash-style transactions.
• Failure Points:
  • Covert Inflation: An unforeseen 10% increase in supply went undetected for nine months, leading to loss of trust.
  • Legal and Financial Repercussions: Resulted in lawsuits and the eventual dissolution of the coin.
• Lesson: Demonstrates the fragility of altcoin projects and the severe consequences of governance and technical mishaps.

Notable Quote:

Peter McCormack [89:09]: "Bitcoin Private was an example of how things can go terribly wrong with an altcoin."

6. Future of Altcoins and Emerging Projects

The conversation touches upon emerging projects like Libra (now known as Diem) and their potential impact on the cryptocurrency landscape.

Libra (Diem):

• Proponent: Facebook-led consortium.
• Objective: Create a basket-backed stablecoin to facilitate seamless global transactions for billions of users.
• Challenges:
  • Regulatory Hurdles: Faced intense scrutiny and skepticism from global regulators wary of a private entity issuing a digital currency.
  • Vision vs. Reality: While ambitious, concerns about centralization and regulatory compliance remained significant barriers.
• Impact: Libra represents the next wave of corporate-backed digital currencies, blurring the lines between traditional financial systems and decentralized cryptocurrencies.

Notable Quote:

Nic Carter [95:36]: "Libra is the first case of corporate money being created in the crypto context."

7. Conclusion: Lessons Learned and Bitcoin’s Dominance

Peter and Nic wrap up by reflecting on the high failure rate of altcoins and reaffirming Bitcoin's unique position in the cryptocurrency ecosystem.

Key Takeaways:

• Inherent Challenges: Creating a new monetary system is fraught with technical, economic, and regulatory hurdles.
• Bitcoin’s Resilience: Bitcoin's decentralized design, limited supply, and robust security have enabled it to withstand numerous challenges that saw altcoins falter.
• Market Dynamics: The dominance of Bitcoin is reinforced by its established infrastructure, community trust, and continuous innovation.

Notable Quote:

Peter McCormack [96:03]: "It's not surprising to me that virtually all of these altcoins have failed. Bitcoin succeeded because it overcame challenges that altcoins could not."

Final Thoughts

This episode serves as a crucial guide for beginners, emphasizing the importance of understanding the historical context and inherent risks associated with altcoins. By dissecting the successes and failures of various projects, listeners gain valuable insights into why Bitcoin remains the cornerstone of the cryptocurrency world.

For further information or feedback, listeners are encouraged to reach out via Peter’s email: hello@whatbitcoindid.com.

Notable Quote Recap:

• Nic Carter [05:02]: "The history of altcoins is a history of failure."
• Peter McCormack [11:42]: "Digicash was one of the most influential pre-Bitcoin experiments."
• Nic Carter [18:12]: "Everything old is new again, and beans and flus were just the first ICOs."
• Peter McCormack [31:33]: "Privacy comes at the cost of auditability, which is a significant trade-off."
• Nic Carter [34:36]: "Ethereum's directionally is becoming more centralized, adding more risk."
• Peter McCormack [37:06]: "Stablecoins rely on centralized issuers, making them susceptible to regulatory pressures."
• Peter McCormack [39:38]: "Utility tokens represented the worst fallacy of the blockchain space in the last five years."
• Peter McCormack [46:20]: "Litecoin's value prop was, it seems kind of hilarious in hindsight, faster blocks."
• Peter McCormack [84:23]: "EOS is the greatest example of optimism and techno-utopianism in the crypto world."
• Peter McCormack [81:02]: "Bitcoin Cash is essentially a failed experiment in governance and technical scalability."
• Peter McCormack [89:09]: "Bitcoin Private was an example of how things can go terribly wrong with an altcoin."
• Nic Carter [95:36]: "Libra is the first case of corporate money being created in the crypto context."
• Peter McCormack [96:03]: "It's not surprising to me that virtually all of these altcoins have failed. Bitcoin succeeded because it overcame challenges that altcoins could not."