How Not to Fall Into Cryptocurrency Pyramid Scheme

In the last article, we analyzed the main objections of people against cryptocurrencies. Among other things, we talked about people's concern about being involved in a pyramid scheme and the possible collapse of the cryptocurrency. And this is really possible if you give in to the desire to get rich quick and neglect the criteria that we outlined in the first article on the topic of cryptocurrencies. And today we will analyze a couple of examples of cryptocurrencies that do not meet our criteria, and see what happens if our criteria are neglected. That is, today we will solemnly send two cryptocurrencies to the trash can, namely Terra and its LUNA coins, the dramatic collapse of which we could observe in recent days, and Tron, which recently took a similar course and risks repeating the fate of Terra.

So, let's see how these cryptocurrencies meet our criteria.

Our first criterion is a limited number of coins.

The main purpose of the Terra cryptocurrency is to serve as the basis for algorithmic stablecoins, that is, cryptocurrency tokens pegged to some fiat currencies, for example, to the dollar, using a certain algorithm. To ensure this peg, the Terra protocol provides for the mutual exchange of Luna coins for a stablecoin and vice versa at the current market rate of Luna to the fiat currency to which the stablecoin should be pegged. To exchange a stablecoin for Luna, the protocol provides for the issuance of new Luna coins to replace the stablecoin in such an amount as is required at the current rate. And that means two things. Firstly, that the number of issued Luna coins does not have any specific limit. And secondly, and this is much worse, the number of issued coins is completely unpredictable, because the exchange rate of Luna coins against fiat currencies is also unpredictable. And this means that the coin can break into hyperinflation. Which is what happened. Dramatic, and for some even tragic consequences of the Luna hyperinflation, we could observe in recent days. Thus, Terra (Luna) catastrophically fails our first criterion.

Tron also fails our first criterion because the protocol provides for inflation of a few percent per year. But this is not a catastrophic violation of our criterion, because, firstly, inflation is limited and predictable, given by the protocol. Secondly, it can be offset by staking coins, that is, by rewards received for participating in the election of validators who conduct transactions. But what is a catastrophic violation is a protocol modification planned for October-November of this year, which introduces the same possibility of issuing coins to provide stablecoin pegging in the same way as it was in Terra.

White paper on the USDD stablecoin and expected changes to the Tron protocol to ensure it is pegged to the dollar: https://usdd.io/USDD-en.pdf

The second criterion is a relatively even distribution of coins among users.

Both of the cryptocurrencies we are considering do not meet this criterion at all, because for both Terra and Tron, most of the coins, more than 50 percent, were distributed among developers and a narrow circle of investors. Luna's hyperinflation quickly made this distribution much more even (at least some benefit from such hyperinflation). But it’s too late. And Tron’s distribution remains just as skewed. Also, no one is trying to hide it.

About Tron, including the distribution of coins: https://research.binance.com/en/projects/tron

Our third criterion is a high degree of decentralization.

Neither of our cryptocurrencies meet this criterion at all. The protocol itself provides for the operation of only a limited number of validators, and the rest of the users can only vote for certain validators. But we already know what such elections turn into over time. Of course, elections on the blockchain are completely transparent, and results of the elections are executed instantly and automatically, and the elections take place not once every few years, but every few hours. However, there are other ways to manipulate voters outside the blockchain, in real life. And as a result, who owns the propaganda, he wins. In addition, the extremely uneven distribution of coins, and hence the voting power, in favor of developers and investors, leads to catastrophic centralization, but behind the screen of democracy on the blockchain.

Our fourth criterion is fast transactions for pennies or for free.

There are no complaints here. Both cryptocurrencies perfectly satisfy this criterion. It is with these fast transactions and high scalability that they are trying to justify centralization.

The fifth criterion is the absence of geographical restrictions.

On the one hand, both Terra and Tron seem to meet this criterion, there are no restrictions. But centralization of validators could theoretically lead, for example, to the fact that, for example, Korean validators, which make up the majority, stop processing transactions from certain countries. Sanctions will be imposed, so to speak. Centralization is the cause of many of these risks.

The sixth criterion is censorship resistance.

It’s the same here. So far, everything seems to be fine, but centralization of validators can theoretically lead to the fact that they will stop processing transactions from certain addresses, which will actually mean freezing the account.

The seventh criterion is that they allow you to transfer money directly without the participation of banks.

Yes, it’s all right here. Private keys are stored only by users, and without a private key, no one, under any centralization, will be able to send cryptocurrency from one address to another. In this sense, users are their own bank.

Our eighth criterion is that security is guaranteed by the blockchain. It is impossible to delete a record from the blockchain.

Here, too, everything seems to be fine. But there is a small nuance. Terra and Tron do not use mining, which supports the network with the computing power of miners, which is precisely what makes rolling back the network even one block back insanely expensive and pointless. Instead, validators use the votes of voters, i.e. users. And voter manipulation can be cheaper and easier than accumulating mining power and then fighting off the power already available with dubious success. It is especially easy to manipulate if the means of propaganda, that is, the zombie box, are in your hands.

Our ninth criterion is that you can start a wallet without bureaucracy, without providing documents.

Yes, it really can be done in both networks easily and simply. But if centralization goes so far that censorship is possible, which I mentioned in the sixth point, then one can imagine a situation that only transactions from addresses for which documents and personal information are provided will be processed. That is, the degradation of the cryptocurrency into an ordinary bank can occur, and even worse, because you will not have any privacy. After all, all transactions in the blockchain are transparent.

And the tenth criterion - Adoption in the world for making payments.

Terra had absolutely no adoption for this. Tron has some adoption on some online platforms, and is not present offline in any way, that is, in physical stores. It was created not as money, but as a platform for smart contracts.

Thus, we can conclude that the considered cryptocurrencies Terra and its Luna coin, and Tron with its Tronix coin, grossly fail some key criteria, and therefore their rightful place is in the trash can.

Therefore, carefully study this or that cryptocurrency before taking it into your own hands. Check them against the criteria of their ability to perform the function of money. And then your chances of falling for another Luna will be minimal.