The Underlying Demand for Cryptocurrency Technology

Since the 2010s, the United States has largely preferred cashless payments to cash. With the ease of credit and debit cards, carrying around cash has, in some manners, become obsolete to the everyday man. Moreover, the growing popularity of the internet as a means of commerce continues to render cash increasingly obsolete.

While the use of status quo cashless mediums introduces a unique advantage of ease, it imposes specific trade-offs.

As the Bitcoin whitepaper begins,

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model… The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need… These costs and payments uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”

Satoshi (the author of the Bitcoin whitepaper) sums up the issue perfectly: the current system works well for most transactions types but is overly limited in other areas of exchange. For example, not all transaction types are generally accepted, such as micropayments, cross-border payments, or privacy-sensitive purchases. Moreover, while most consumers value the security of consumer protection services (the system is by no means purely extractive) higher than the cost required to fund these services, the trust needed by the third-party entity can become burdensome to the consumer.

Cryptocurrency technologies aim to resolve this dispute: to accept all transaction types while dramatically reducing transaction costs alongside. The alternative architecture of cryptocurrency is by no means a perfect solution——introducing trade-offs that would otherwise not have been of concern in the current model——but effectively functions as a genuine solution to particular issues.

The Third-Party Problem

Cryptocurrency technologies, such as Bitcoin, are aimed at, ultimately, fixing the problem that Satoshi and his predecessors laid out: the problem that is commonly referred to as the third-party problem.

The third-party problem asks, “how does an agent perform a digital transaction without the use of a third-party entity?”

In a physical, cash-based setting, transactions occur peer-to-peer without third-party mediation: there is no need to transmit identifying information and no intermediary fees. However, as global economic patterns have evolved, purely physical exchange mechanisms have become impractical for many transaction types.

To combat the costs of a physical settings, digital mechanisms have been developed to aid in the evergrowing globalization. However, in contrast to the physical setting, the digital setting is entirely based on mediation via a third-party. For example, any payment made through the medium of a credit card must be authorized by a bank. While the physical setting relied solely on the ‘consumer’ and the ‘producer,’ the digital setting requires a bookkeeper to ensure double-spending is not of concern, transactions are ordered correctly, and so forth. To successfully do this, the mediator must collect consumer information, potentially incur payment fees, and exclude certain transaction types.

For most consumers, the costs of the current digital system——information disclosure, transaction fees, and limited transaction types——are acceptable given the value of fraud protection, dispute resolution, and infrastructure reliability. Nonetheless, this cost-benefit analysis doesn’t hold for all use cases or all users, creating demand for an alternative architecture.

Who Needs an Alternative?

The traditional system’s cost-benefit analysis fails for several distinct user groups: the unbanked, cross-border remittance users, agents in unstable monetary systems, and micropayment use cases.

1. The Unbanked: as of 2021, 1.4 billion adults globally lack access to the banking industry (World Bank Global Findex Database (2021)).
2. Cross-Border Remittance Users: global average costs have reached 6.49% (World Bank Remittance Prices Worldwide Database (Q1 2024)).
3. Agents in Unstable Monetary Systems: Venezuela peaked at over 1,000,000% inflation, Argentina peaked at 211% inflation, and Lebanon has experienced 98% loss of value.
4. Micropayment Use Cases: payments under $1 are economically unviable due to standard fee models.

The Core of the Demand: Trustlessness

By far one of the most misunderstood concepts of cryptocurrency technology is trustlessness. Rather than trusting a bank to maintain accurate records, not freeze one’s account, and so forth, trustlessness represents a shift from trust in institutions to trust in cryptographic math. Trustlessness is not saying ‘no trust required’ but understanding that trust in math is foundationally more stable.

Institutional failure is not uncommon: bank runs occur, denial of service is common, and institutions can be coerced via government pressure and sanctions.

Trust in institutions is purely discretionary, while trust in math is verifiable. Anyone is able to audit blockchain code, verify transactions on the blockchain, and confirm the overall network’s state. Unlike institutional trust, which requires believing an authority will act correctly, cryptographic trust is based on mathematical proofs that can be independently verified.

The failure of discretionary trust can be illustrated by a couple examples:

1. Cyprus 2013 Bank Deposit Confiscation: In March 2013, Cyprus faced a severe banking crisis. Two of the country’s largest banks (Bank of Cyprus and Laiki Bank) were on the verge of collapse due to debt crisis. The Cypriot government,along with the European Union and IMF, decided to implement a ‘bail-in’ rather than a traditional bailout. This meant forcing depositors to bear some of the losses. Banks were closed for nearly two weeks to prevent bank runs, capital controls were imposed (limits on withdrawals and restrictions on moving money out of Cyprus), and many individuals with large savings accounts lost up to half of their money overnight. In Cyprus, the traditional architecture of banking and digital transactions failed: bank deposits were not as safe as some people thought.

2. WikiLeaks: WikiLeaks is an organization that publishes leaked documents, often revealing government and corporate misconduct. In 2010, they published a massive trove of U.S. diplomatic cables and military documents. Following United States government pressure, many of the major payment processors (Visa, Mastercard, PayPal, Bank of America, and Western Union) cut off WikiLeaks. This financial blockade lasted for 4 years, resulting in WikiLeaks losing approximately 95% of its revenue.

Financial regulators might argue the Cyprus bail-in prevented total economic collapse, and payment processors might claim they were managing legal risk in the WikiLeaks case. These defenses may have merit, but they reinforce the fundamental point: when relying on institutional intermediaries, users are subject to decisions about risk and appropriateness made without their input. Whether these institutional decisions are justified or not, they demonstrate the discretionary nature of institutional trust.

Market Failure and Competitive Response

Cryptocurrency technology addresses a fundamental market failure: the monopolistic provision of payment infrastructure by institutions that extract economic rents while excluding marginal users. The third-party problem is not merely philosophical——it represents billions of dollars in deadweight loss from transaction costs.

For many consumers, though, cryptocurrency technology is still heavily limited and overly not practical. Citizens in stable countries with above-average institutional practices may not find advancements in cryptocurrency necessary. But cryptocurrency represents more than technological novelty—it’s competitive market entry into a previously monopolized sector.