- Crypto could be even more dangerous than the current flawed financial system, Sen. Elizabeth Warren said at the Tuesday hearing
- Much like 10 years after creation of the internet, Coin Center director argues, crypto has not yet reached full potential
Several cryptocurrency and blockchain experts testified in front of elected officials of the US Senate Committee on Banking, Housing and Urban Affairs on Tuesday to lay out the benefits of crypto networks and parts of it that still need to be addressed.
During a meeting called “Cryptocurrencies: What are they good for?” senators heard from Angela Walch, professor at St. Mary’s University School of Law and a research associate at UCL Centre for Blockchain Technologies; Jerry Brito, executive director at non-profit Coin Center; and Marta Belcher, chair of Filecoin Foundation.
Keep reading for some of the session’s main takeaways:
The power of crypto miners, software developers can be dangerous
Walch argued that the positive terms associated with cryptocurrencies, such as “decentralized” and “disintermediated,” can be misleading.
“Crypto, understood through a realistic lens, is not a miracle get-out-of-the-financial-system-free card,” she explained. “It has the same problems. We need to examine the power concentrations within it and make thoughtful policy and risk decisions about how to address that power.”
Pockets of power within crypto include software developers, Walch said, as well as miners, who can exploit their power within proof-of-work systems by choosing the order in which transactions go onto the blockchain.
“[Miners] can delay people’s transactions, they can take money to do what are called things like sandwich attacks and front-running and back-running and all kinds of games,” she added. “They are intermediaries and multi-million-dollar, multi-billion-dollar financial systems. They need more scrutiny.”
Brito said that though miners are technically intermediaries who can affect the order that payments are confirmed on the blockchain, they cannot redirect, steal or initiate a user’s payments.
While the order that transactions appear on the public ledger don’t matter in a case of one person sending money to another person, he added, it can matter in decentralized exchange transactions on something like Ethereum. The same problem exists in traditional financial markets, which Brito noted is why high-speed traders build proprietary infrastructure to get their trades in as soon as possible.
“One advantage of decentralized finance is that the blockchain reveals these strategies publicly, rather than happening secretly thanks to murky internal policies at a large financial institution,” Brito said.
He noted that a solution could be to implement alternative market mechanisms that reduce the advantages of transaction ordering, adding that many economists favor using frequent batch auctions rather than continuous order books.
“If we were going to change from a continuous order book to frequent batch auctions at CME or the New York Stock Exchange, that would require one massive institutional change,” Brito explained. “With crypto, it’s trivially easy for anybody to build a competing exchange that users will go to…and we’re beginning to see this. Also, the developers of the Ethereum network itself don’t want to see this and they’re going to be addressing the problem as well.”
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