Abstract
Cryptocurrencies often tend to maintain a publically accessible ledger of all transactions. This open nature of the transactional ledger allows us to gain macroeconomic insight into the USD 1 Trillion crypto economy. In this paper, we explore the free market-based economy of eight major cryptocurrencies: Bitcoin, Ethereum, Bitcoin Cash, Dash, Litecoin, ZCash, Dogecoin, and Ethereum Classic. We specifically focus on the aspect of wealth distribution within these cryptocurrencies as understanding wealth concentration allows us to highlight potential information security implications associated with wealth concentration. We also draw a parallel between the crypto economies and real-world economies. To adequately address these two points, we devise a generic econometric analysis schema for cryptocurrencies. Through this schema, we report on two primary econometric measures: Gini value and Nakamoto Index which report on wealth inequality and 51% wealth concentration respectively. Our analysis reports that, despite the heavy emphasis on decentralization in cryptocurrencies, the wealth distribution remains in-line with the real-world economies, with the exception of Dash. We also report that 3 of the observed cryptocurrencies (Dogecoin, ZCash, and Ethereum Classic) violate the honest majority assumption with less than 100 participants controlling over 51% wealth in the ecosystem, potentially indicating a security threat. This suggests that the free-market fundamentalism doctrine may be inadequate in countering wealth inequality within a crypto-economic context: Algorithmically driven free-market implementation of these cryptocurrencies may eventually lead to wealth inequality similar to those observed in real-world economies.
Highlights
Economic freedom is one of the foundational pillars of the crypto-anarchist movement (Ludlow, 2001)
We report on two primary econometric measures: Gini value and Nakamoto Index which report on wealth inequality and 51% wealth concentration respectively
The top 100 accounts in Ethereum constitute over 35.13% of the wealth. Results from both Bitcoin-like and Ethereum-like cryptocurrencies suggest that the wealth distribution is initially poor likely due to only a select few participants controlling the majority of the wealth
Summary
Economic freedom is one of the foundational pillars of the crypto-anarchist movement (Ludlow, 2001). A counter-economic environment facilitates financial transactions beyond the purview of a government, leading to freedom of trade (London, 2018), where a counter economy includes the free market, the black market, and the underground economy These crypto-anarchist objectives are materialized primarily through recent developments in cryptography, privacy-focused distributed networks, and decentralized peer-to-peer currencies (Chohan, 2017), where their appeal is as an alternative to traditional financial system in that they embody increased freedom to trade (DeVries, 2016). This article explores that line of reasoning, evaluating the hypothesis that wealth distribution improves in the absence of restrictive trade regulation, in a cryptocurrencies context, using measures of wealth concentration This is a contentious hypothesis because according to the inequality model developed by Boghosian (2021), the free market model adopted by cryptocurrencies is not without limitations in this regard, suggesting that wealth naturally trickles up in a free market economy leading to wealth inequality. Current statistics from Alvaredo et al (2016) indicates that the top 1% of world population control over 19.4% of the world’s wealth, twice as much as the bottom 50% of the population: notable wealth inequality
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