Gridcoin: A Period of Stealth Expansion

Gridcoin can be best summarized as a decentralized financial incentive to reward voluntary scientific computing. It can be used as a medium of exchange, but that’s not what it’s generally used for currently, nor are any of the other cryptocurrencies used for that purpose. Instead, Gridcoin utilizes an interesting property of cryptocurrencies: The ability to generate massive paper wealth, with relatively small net inflows. Analysts from J. P. Morgan claim that a net inflow of 6 billion dollar, resulted in a market capitalization of 300 billion dollar for cryptocurrencies. This is possible, because unlike other asset classes, there is generally no increase in production when prices rise. Inelastic supply encourages the formation of economic bubbles.

Economic bubbles can be dangerous for those who participate in them. Investing in cryptocurrencies, especially during periods of enormous public attention, can lead to enormous losses. The reality is however, that the unique economic properties of cryptocurrency can be used for good too. If a net inflow of six billion dollar leads to a market capitalization of 300 billion dollar, cryptocurrencies can be used as an effective means to encourage societal developments we consider desirable.

Consider the example of Solarcoin. Solarcoin is a coin that serves as a reward for people who install solar panels on their roof. Solarcoin’s value is estimated at 10 million Euro today. The actual inflow of money however, would have been much smaller. By functioning as a speculation vehicle, cryptocurrencies can serve as a tremendous multiplier for any of the money we invest in projects we consider desirable.

Projects are currently underway, to create cryptocurrencies that serve as a bounty for carbon sequestration. You could donate a million dollar to people engaged in a tree planting project. You could alternatively set up a cryptocurrency, invest a million dollar in the cryptocurrency, witness other speculators flock to your cryptocurrency and award tokens equivalent to a million dollar to those who engage in the tree planting project. You have now created an enormous multiplier for your original investment.

You might argue that this system can’t continue forever and you might be right. I can’t know for sure how it evolves, cryptocurrency is a new phenomenon. We have reason to be optimistic however. The scheme may collapse if everyone wants to withdraw their money simultaneously, but the same principle applies for the exact same reason when people have money at a bank. If everyone sought to simultaneously withdraw money from a bank account, the bank would collapse too.

Unlike banks however, it seems that in the world of cryptocurrency the scheme can continue forever. Once a cryptocurrency crashes by 90% or more, the scheme doesn’t necessarily die. In the past, these kinds of collapses have merely created opportunities for enormous returns on investment. Consider Litecoin. Litecoin was valued at 40 dollar back in December 2013. A year later, the coin was valued at less than three dollar. By December 2017, the coin was valued at 300 dollar. Invest during a period of dormancy when everyone outside a group of core supporters has lost interest in the project and the value of your investment might just go on to grow a hundred fold.

This phenomenon doesn’t occur with every cryptocurrency. There are currencies that died, for various reasons. Developers moved on to other projects, the fundamental properties of the currency proved unappealing, exchanges abandoned support, the currency might have suffered continual 51% attacks. Many of the currencies people invested in back in December 2013 did not turn out as Litecoin, but simply lost all value. Can you recognize the duds in advance? I think with a bit of knowledge you can recognize enough of them to make the cryptocurrency investment endeavor worthwhile. So far I can say it has proved worthwhile for me.

To start with, any coin that uses a proof of work algorithm is vulnerable to disruption. Those with a nefarious agenda will happily destroy such coins. An exchange won’t support a coin where deposits can be rolled back and the exchange can be robbed blind. In contrast, coins that use a proof of stake algorithm can only be attacked in such a manner if someone would own 51% of the currency itself, thus going directly against their own financial incentive.

Any coin with a significant pre-mine is likely to prove to be a dud. Such coins tend to be even more vulnerable to enormous bubbles than regular cryptocurrencies. A single holder of such a currency will happily continue to sell the coin at whatever price people are willing to offer for it. For this reason, such coins tend to die a slow death and never revive.

If we look at Gridcoin, we notice these problems don’t apply. There’s a direct interest for people to continue to participate. They receive interest on their balance and can engage in scientific computing, to earn more of the coin. The coin uses a proof of stake algorithm that allows the coin to function without any significant risk of malicious actors seizing control over the blockchain. Finally, although the coin certainly has early adapters who own a significant share of the currency, there’s no pre-mine.

One aspect that’s very useful about this cryptocurrency is the fact that it has an internal voting system. This has the effect of decentralizing the power of decision-making, as it can easily be determined whether a consensus exists around a topic. As an example, whereas Bitcoin has a subreddit that censors any criticism of the continued insistence on maintaining the 1MB blocksize limit originally implemented in the protocol as an anti-spam measure, Gridcoin could organize a simple vote to determine how users think about increasing the blocksize limit if the issue ever proved relevant.

Stealth expansion

The state Gridcoin is in today is one I would describe as stealth expansion. The value of cryptocurrencies in general is in decline, a decline that might very well continue for the next few years. The phenomenon itself isn’t going away however. Gridcoin itself is inevitably affected by the decline in value that affects the ecosystem as a whole. This decline in value however, actually represents a perfect buying opportunity for Gridcoin in my opinion. To understand why can be summarized in one graph:

In the above picture, you can see the total amount of research units produced by various teams, with Gridcoin shown in dark purple. People join this team, to perform research while earning Gridcoins. This doesn’t include all Gridcoin users however, as some users perform their research independently without joining the team. What’s clearly visible however, is the ongoing growth in users, in spite of the decline in price of Gridcoin. This reveals what could be considered a stealth phase, where a project has turned successful, while the market hasn’t recognized the success yet.

Similarly, it’s important to consider whether a coin is still under active development or not. In the case of Gridcoin, developer activity is estimated to be comparable to coins ten to a hundred times higher in market capitalization than Gridcoin. One reason for this is because developers are compensated for their work, through the Gridcoin foundation. Compensating developers helps ensure the project’s long term viability.

The case for investing in Gridcoin

It’s always difficult to estimate the fair value for a cryptocurrency, but I consider Gridcoin to be a unique cryptocurrency that has the potential to eventually be valued at multiple billions of dollars, which would imply a growth in value of two orders of magnitude. It has a unique use case with its own niche within the broader ecosystem, that isn’t yet sufficiently appreciated by the general public. What’s necessary to reach such a valuation, is to continue to attract more users.

My recommendation to anyone who wants to invest in cryptocurrency in the current situation, would be to invest in a relatively obscure coins like Gridcoin instead of the more established currencies. The general trend of cryptocurrency has been that coins that are young show tremendous growth in value, whereas older coins grow less in value. There are multiple reasons for this phenomenon.

In case of Bitcoin, the protocol is clearly running into scaling issues. The hardcoded blocksize limit of 1MB wasn’t originally meant to be upheld for so long, but is now maintained in an effort to avoid further centralization. In addition, Bitcoin is running into real world physical limits. The protocol currently uses 0.26% of global electricity supply, according to conservative estimates. If we assume Bitcoin itself has no impact on global electricity prices, a tenfold increase in value would cause Bitcoin to consume as much electricity as the global air travel industry. That’s something that’s just not going to happen, this economic sector is going to have to migrate to more energy efficient protocols than Bitcoin, or find itself regulated out of existence.

The fact that cryptocurrencies suffer scaling issues, serves as a strong motive for me to choose relatively obscure currencies to invest in. In most industries, there exists no comparable scaling issue. A company that moves early can easily capture a market. In the world of cryptocurrency, a project that captures a market, succumbs under its own weight. For this reason I have liquidated my investments in Bitcoin. The money I earned from investing in Bitcoin is going to be reinvested in cryptocurrencies like Gridcoin, that manage to find unique use cases for the properties of the cryptocurrency phenomenon.

2 Comments

  1. I’m excited for this blog. Take your time. I’ve been reading since Ran and the other one.

    If you dare, there’s a big blog scene on Twitter that would read you

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