Only The Rich: How Some Cryptocurrencies Unfairly Advantage the Wealthy

how cryptocurrencies advantage the wealthy

Cryptocurrencies have done a lot of good for the financial world. They have given us a way to democratize finance, eliminate middlemen, lower fees, and a number of other benefits.

But for the less wealthy among us, there are still a lot of opportunities that pass us by. I am a firm believer that cryptocurrencies should inclusive, not exclusive, and these are just a few of the ways that cryptocurrencies are excluding the non-wealthy.

Dash and Master Nodes

Dash is a cryptocurrency that built its strength and a large market cap on its lightning-fast transactions, low transfer fees, and of course, the ability for users to create what’s called a “master node.”

In the simplest terms, a master node is a computer or server that has been set up to process Dash transactions quickly, in a method that is quite different from mining (which the Dash network also has). The owner of the master node is rewarded for operating the node with frequent Dash payments.

Sounds great, right?

Well, only if you have about $300,000 sitting around. You see, in order to set up a Dash master node, you must have least 1000 units of Dash.

At today’s rates of around $300 each, that means an upfront investment of $300,000 is required. There are a few other less-popular cryptocurrencies that make use of master nodes, and they too typically have minimum upfront requirements in the thousands or tens of thousands of US dollars in equivalent crypto.

Initial Coin Offerings (ICOs)

In the business world, it’s a pretty well-known fact that only big, wealthy investment firms and venture capitalists have access to investing in the most exciting and potentially lucrative start-up companies.

With cryptocurrency ICOs, that all changed. Suddenly, regular people are able to get in on the ground floor with these incredibly exciting companies. Things are starting to change, however, with many ICOs having massive minimum buy-in amounts in order to get involved.

Projects like ChainLink are demanding 100 ETH (about $25,000), and Streamr, the platform that I recently wrote about here and here, is asking for a minimum of 5000 Swiss Francs ($5,160).

On the official Slack channel, Henri Pihkala stated that: “Bitcoin Suisse (the company helping with the ICO) imposes a minimum of 5000 CHF equivalent, so the minimum cannot, unfortunately, be below that – at least not for the presale. We would certainly like the minimum to be lower.”

Pihkala is not without some understanding for the less financially flexible. He continued in the same comment as above by writing: “We are looking to arrange a way for smaller contributors to participate in the actual crowdsale¬†while still keeping a high standard of compliance with laws and regulations. It is not trivial to accomplish since identification and AML processes require some manual work for each individual, and doing that work for a large number of small contributors is not feasible.”

Pihkala’s argument is essentially two-fold. An ICO is in itself a very complicated endeavor, especially if you intend to fully abide by complex European financial laws, as they are trying to do by involving Bitcoin Suisse. This requires KYC, or Know Your Customer minimums to be met.

If the ICO were to be flooded with 100,000 contributors all giving 0.1 ETH, it could be chaos. Each potential contributor needs to submit verification of their ID, such as a passport scan, and this needs to be verified somehow.

But why 5000 Swiss Francs?

To me, that just seems like an arbitrary, large round number meant to keep small investors out. It’s possible this amount was set by Swiss law, I personally do not know.

Pihkala asked a number of people who commented on this topic what they felt was a fair minimum buy-in. The answers tended to range from $250-$1000, an amount which I personally also agree to be much fairer and more inclusive to the average investor.

While I appreciate that Pihkala is trying to essentially offer condolences and hopefully offer a cheaper, though most certainly less lucrative opportunity down the line, the fact still remains that smaller investors are being left out.

Proof of Stake (POS)

The proof of stake method of consensus that has been in the news almost constantly ever since Ethereum announced its plans to move to it, and other exciting new currencies like OmiseGo (OMG) and Crypto Improvement Fund (CIF) are planning to use it as well. POS has been around for a while, with currencies like PeerCoin, CureCoin, and Clams using it.

The idea behind POS is very attractive to investors. Buy and hold cryptocurrency in a wallet, and periodically be rewarded with more and more crypto, just like a savings account earning interest, or stock shares earning dividends. That’s how it works in theory, but the truth isn’t always so simple.

POS platforms do not work in the same way that a bank would pay interest. At a bank, you will get paid a certain amount of interest, based on the published interest rate, and paid to you on a specific day.

With POS, there is a big element of chance involved, and it is, in fact, a lot more like a lottery. The more tickets you have, the more likely you are to win. With POS, the more crypto you hold, the more likely you are to successfully get a staking payout. Holding just one or two units of the currency will almost certainly result in you receiving zero stake payouts.

It has also been heavily debated on Reddit about Ethereum’s upcoming proof of stake, and if it will require minimum amounts of ETH in order to even be eligible for staking.

Estimates have ranged online from anywhere between 32, 100, and even 1000 ETH ($250,000). At this point, Ethereum staking is all conjecture, but if we look at a currently functioning POS currency, Cure Coin, we can see from this calculator based on Peer Coin, that you would need to have at least 1000 CURE untouched for 90 days in order to even stand a chance at getting a staking payout each month.

Let’s compare this to the stock market. If one were to buy just a single share of a divided yielding stock, they will receive that dividend each and every payout period, without exception. With POS, it’s not only up to luck, but also up to how much money you put into it that will decide if you even stand a chance of earning a payout.

While the crypocurrency world overall has opened up many doors for the less wealthy, it is clear that there are still some things in the crypto world in which only the rich are welcome.

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