Crypto Reduces Inequality. Or Not?

Ren & Heinrich
5 min readFeb 18, 2019

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Why Blockchain Can Solve Only Some Global Inequalities While Many Problems Of The Centralized World Remain.

Source: unsplash.com

Updated in October 2021.

In this article, I take a look at the facts that speak for and against cryptocurrencies being a tool to reduce global inequality.

Turns out that Crypto does indeed offer solutions that benefit average people. But at the same time, some big problems remain.

Where Crypto Successfully Takes On Inequality

Since Blockchain technology took the spotlight in media discourse it was repeatedly hailed as an innovation that will help to solve the world’s inequality problems. To a certain extent, there is indeed some truth to these claims. For example, initial coin offerings (ICO’s) are rightly seen as a way for the average Joe (or Joanne) to invest into a company without being an angel investor, venture capitalist or a bank [1].

Blockchain technology also gives people easier access to banking and financial services. Worldwide, there still are up to 1.7 billion adults without access or accounts with financial institutions [2]. Access to financial services will have big impact on unbanked people’s quality of life. DeFi (decentralized finance) increases transparency, is permissionless and borderless. It enables people to take out loans and mortgages which in turn allows them to start businesses or make deposits. At the same time the use of cryptocurrencies allows for an easy transfer of funds.

NFTs are another promising tool that enables average people to invest in different asset classes. The tokenization of art, real estate, and other goods opens doors for people outside the one percent to have a part in high performance assets and grow their wealth.

This means that blockchain technology actually does or at least has a big potential to enable people all around the world to have better lives. But it is important to point out that we shouldn’t completely buy into the narrative about crypto and blockchain being the great equalizers, as it’s portrayed by the media or by certain figures in the crypto-sphere.

Source: unsplash.com

Why Some Inequalities In Cryptocurrencies Will Remain

While the technology will be available to an increasing number of people in the future and thus help solving some problems, pre-existing inequalities in many areas are bound to stay. An example of this is the actual ownership of crypto-assets which mirrors the global distribution of real world assets. Put in simpler terms: Those with money invest in crypto and harvest the rewards while the poor will stay poor — the underlying mechanisms of blockchain technology and cryptocurrencies will not change that.

This claim about inequalities in Crypto is supported by worldwide investment trends in cryptocurrencies. Even though the data is incomplete or lacks depth, sources like UoC’s 2nd global cryptoasset benchmarking study [3], public data by institutions like coin.dance [4] or even maps visualizing the worldwide distribution of ATMs for cryptocurrencies [5] show a big gap in the ownership of crypto-assets throughout the world.

Cryptocurrencies are mainly owned by people and institutions in developed countries. In less developed nations only the elites have the knowledge and resources to buy crypto-assets. A Kenyan farmer who lives on 3$ a day simply doesn’t have the opportunity to invest into a cryptocurrency in hopes that it will return a nice profit at some point later — even if it only costs the fraction of a cent.

Controlled by a powerful few

The unequal distribution of crypto-assets and their return on investment are also reflected in the mechanisms that build the foundation of blockchain technology. Various kinds of consensus algorithms are used by blockchains to achieve a universal shared ledger in real time:

  • PoW: Proof of Work algorithm works so that the miners compete against each other to use computing power to solve mathematical puzzles in order to gain the right to generate new blocks. Examples of this application include Bitcoin, Litecoin, Ethereum, etc. [6] When Bitcoin was established in 2009, it was possible for everyone to mine BTC using a Laptop. Today, only those with enough computing power can do so. Without the funds to buy the proper mining equipment and access to cheap electricity, mining Bitcoins is impossible.
  • PoS: Proof of Stake algorithm is an alternative way to PoW to validate transactions. The validator has to stake a certain number of coins in order to gain the right to mine blocks, the amount of mining power each miner has is proportional to the coins the miner stakes. [7] Examples of PoS application include WaltonChain, Neblio, and NavCoin. Again, those who have the resources can amass power and gain the benefits.
  • BFT: Byzantine Fault Tolerance has the advantage that no mining is needed in order to validate transactions. However, the consensus nodes used for validation are mainly in the hands of established institutions. An example is NEO’s distribution of nodes. At the moment, five are held by developers of NEO, one is owned by the dutch telecommunications company KPN and another one is held by City of Zion, a group of open source developers.[8]

All these examples show, that those who already have much will continue to get more while those who have less, will continue to get less in the future.

It is important to note that this is not a bad thing, per se. As of today, blockchain technology wouldn’t be able to function if it wasn’t for these established mechanisms that require an uneven distribution of power and wealth.

However, we should resist in blindly believing stories that promise us a more equal world at the hands of these technologies.

References

[1] https://hackernoon.com/can-blockchains-reduce-social-inequality-792653bc3623
[2] https://globalfindex.worldbank.org/
[3] https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2018-12-ccaf-2nd-global-cryptoasset-benchmarking.pdf
[4] https://coin.dance
[5] https://coinatmradar.com/
[6] https://cointelegraph.com/explained/proof-of-work-explained
[7] https://www.investopedia.com/terms/p/proof-stake-pos.asp
[8] https://medium.com/neo-smart-economy/how-to-become-a-consensus-node-27e5317722e6

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Ren & Heinrich
Ren & Heinrich

Written by Ren & Heinrich

I analyze crypto trends and turn them into easy to read and understandable research articles for thousands of crypto investors.

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