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The Stablecoin Monster: CBDCs Are A Red Herring

What Ethereum’s upcoming fork can teach us about governance, stablecoins, centralization bottle-necks and the ever-important U.S. dollar system.

This is an opinion editorial by Mark Goodwin, director of print editorial at Bitcoin Magazine.

I know it pains some of your laser eyes to even see the word Ethereum printed, and while I respect that to a degree, the lessons being learned by the extended alternative cryptocurrency space are too important to ignore. Water’s Warm Maximalism is perhaps one way to look at it, but regardless, ignoring others, even as they potentially fail to centralizing forces, can only leave us ill-equipped to face the similar battle ahead; only the truly naive should view this cooperation between the state and private financial entities as anything but a dire warning of what is about to come to Bitcoin.

Bitcoin is not immune to centralizing forces. Bitcoin is not immune to dollarization. There are many avenues in which Ethereum continues through this fork as a financial entity without any of the supposed benefits of being “the world’s super computer.” This same fate can come to fruition in Bitcoin, and while remaining a formidable financial asset, leave behind many of the taken-for-granted privacy qualities of physical notes. The state understands this to some degree and the push for central bank digital currencies, or CBDCs, has only just been acknowledged in government offices across the globe. For some reason, this perfectly reasonable fear of loss of privacy and property rights innate to centralized money was only placed on money directly owned and most importantly, issued by the state; the suddenly too-big-to-ignore stablecoin industry was left undisturbed, maturing to over $100 billion issued, mainly in the form of ethereum ERC-20 tokens. Circle’s USDC alone has $54 billion in issued stablecoins, and now finds itself seated at the big kid’s table as they prepare for their biggest consensus test yet; proof-of-stake.

Despite how Ethereum is often painted when being compared to a 90%-issued, teenage Bitcoin, a proof-of-work model currently upholds consensus. From more-or-less the get-go, the foundation decided to encode a block height-triggered, exponential difficulty adjustment to ensure any changes the consortium wanted to make on the base layer could be done so without accounting for the incentives of the eth miners. This action perverts the incentives away from block creation of the marketplace towards block validation from the system’s stakeholders. The reason the Ethereum Foundation was able to get away with this perversion every time is because they held the lion’s share of the underlying asset and thus their economic activity going to one side of the fork meant everything. Whether or not you believe Ethereum to be started in good faith or not is beyond irrelevant now; the U.S. dollar system just drank its milkshake.

Visual Credits: Baza with Midjourney

The difficulty bomb was created for exactly this reason, the upcoming transfer from proof-of-work to proof-of-stake, but naivety left the keys to its detonator up for grabs. The weight of the coming fork, between PoWEth, Eth2.0, ETC, etc., is suddenly in the hands of private corporations, cozying up to regulators and state departments by the hour. Which utopic variety of the supercomputer will the USDCeth allow to exist? Already we see Secretary of State Antony Blinken, by protocol name-calling out TornadoCash, an eth-based privacy mixer, with coordination from Circle in blacklisting every address per request of the U.S. Treasury. This is a signpost, and one that should be far from celebrated by freedom of speech maximalists.

But it is also a lesson in perverting incentives, and presumptions about consensus withholding corrupting forces. Ethereum could have been started 100% in good faith or 100% in bad faith, and the potential for a bottomless purse to capture market share while amassing such economic weight it perverts consensus, was always going to exist. But we are seeing something quite dire in the silencing of programmers’ GitHub accounts who contributed code to the now-sanctioned TornadoCash. This is of course a far cry from a deposition, but should we be so carefree about who considers what to be protected speech? We might all understand a bitcoin transaction to be nothing but the expression of speech between two willing parties, but that doesn’t mean our regulating bodies will. Interestingly enough, Blinken accused the party of directly working with North Korea to launder funds; funds denominated not only in U.S. dollars, but using a privately-issued token. Decentralized stablecoins are a logical fallacy, arguably in how they eventually do rely on centralized consensus, but certainly in their ever-at-the-whim of the dozen Federal Reserve governors and extended board; all the benefits of the CBDC without any headache. In fact, a private entity stablecoin probably reserves more rights for customer exclusion and asset seizure than a directly controlled government entity would.

You might claim Bitcoin suffers from lack of features, but what it gains in simplicity is a far smaller target for centralizing forces to exploit. Could a bottomless coffer such as the Federal Reserve dollarize bitcoin or any of its layers in a similar fashion? Luckily, Bitcoin consensus is fork-adverse by nature, as opposed to being pro-fork by nature; the approach of the majority of today’s smart contract platforms. Can an entity backed by the dollar pervert mining incentives enough to capture a large enough hash share to successfully censor transactions? Can an entity backed by the dollar create perverse incentives enough to dissuade proper custodial use of bitcoin? Can an entity backed by the dollar create malicious nodes in order to leak open-topographical network data to remove avenues for increased anonymity sets? Can an entity backed by the dollar scare developers enough into no longer publicly working on privacy tools? You bet they can.

While this may read as a victory for the folks that understand security law or those that view Ethereum as a bad faith project, what this really is, is another victory for the U.S. dollar over civil liberties, property rights and freedom of speech. The current Eth2.0 staking contract was funded directly from a TornadoCash output. Are the billions of dollars locked into that contract now at risk of being seized, blacklisted or frozen by regulators and their stablecoin enforcers?

For those that think “It can’t happen here,” consider how sure the foundation must have felt in their kingdom; even a 70% pre-mined headstart wasn’t enough to keep the greenbacks at bay. Bitcoin simply does not suffer from the same consensus failures as Ethereum; it suffers and strives uniquely on its own.

Being leader of the pack is a comfort for sure, but as we look back at the oncoming U.S. dollar system, we see yet another rider completely and utterly consumed by the gluttonous beast. We can see how they zigged when they might have zagged. We can see how the beast positioned itself, how it clawed and gained its ground. We spent so much time looking for CBDCs, we missed the private-entity stablecoin monster right in front of our eyes.

This is a guest post by Mark Goodwin. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.