Cryptocurrencies are decentralized and censorship-resistant due to the inherently robust nature of their internal function i.e. how the Bitcoin network operates when isolated from its external environment. However, the story dramatically changes when you consider other real-world externalities that can have an effect.
Ethereum uses the term “grieving attacks” to describe any attack that comes from the outside world and can have a detrimental effect on the price, causing existing and potential participants to experience some form of grief. In my opinion, attacks like these are the single most dangerous thing to any decentralized network.
With the rise of decentralized networks, economics rooted in game theory has once again emerged at the forefront as the most sound and viable option. But to use this game theory for building systems that are only internally robust (or internally ungameable) is a major pitfall of this art.
Logic must come before anything else when it comes to understanding the weaknesses of a network. And logic alone dictates that internal strength is not enough; the entire network must be resistant to external censorship for being censorship-resistant – not just internal censorship attacks.
A lot of scenarios to figure out miner equilibrium and the incentive for dishonest mining were either completely excluded or were just barely touched by the external world. Most of the theories revolve around the profitability of reordering transactions or reorganizing blocks, sunk costs of the miners, etc.
But what if a miner has a strong vested interest in another network (decentralized or centralized), one that could gain massive value from Bitcoin undergoing a mass loss of confidence? In order to be truly robust, we need to consider factors like this in our economic frameworks.
In terms of value capture and price, let’s look at Ethereum. Looking at it from an unbiased perspective, it is difficult to think of another network that had as much dApp and fundamental growth. DeFi was singlehandedly propelled on Ethereum with other smart contract chains contributing negligibly. Despite this, does it mean ETH is set up to increase in value? What are the externalities?
The PlusToken Ponzi has about 800,000 ETH, which can create a massive impact on price, suppressing it to levels where demand cannot absorb supply, creating an excess and dumping price. Many believe the fundamentals of ETH and the launch of ETH 2.0 will create demand for ETH. However, at least initially, this demand will absorb the massive amount of supply coming into the market, which means until PlusToken runs out of funds, ETH is effectively susceptible to price suppression.
So, there you have it, ladies and gentlemen. Ignoring external factors is dangerous for an economic framework. We must remember we live in the real world, and not some fairytale paradise where the internal metrics of a system are all that matter.