DCAP Interview Series - Prof. Dr. Aleksander Berentsen, member of the DCAP Research & Technology team, talks about the value of digital assets
March 2, 2023
For this month’s interview, we had the pleasure of talking with Prof. Dr. Aleksander Berentsen, a member of the Research & Technology team and the Advisory Board of DCAP.
Aleksander is a professor at the Faculty of Economics at the University of Basel and has been working extensively on topics related to the traditional financial sector and monetary policy during his academic career. He has written several studies and articles for prestigious academic journals as well as published the book “Bitcoin, Blockchain, and Crypto assets: A Comprehensive Introduction”.
Aleksander, how did you get involved with digital assets, i.e., cryptocurrencies, stable coins, and digital central bank currencies (CBDCs)?
I worked on monetary theory in my dissertation in the early 1990s. Questions like ‘Is it possible for a private institution to issue a fiat currency that maintains its value?’ sparked my interest. Then, the conventional wisdom was that only governments can issue stable money because a private issuer would always have the incentive to over-issue. In contrast, I concluded that private fiat currencies are perfectly fine and would work equally well as government-issued monies.
Please elaborate on the origins of your studies and findings about digital assets.
Many people associate digital assets with crypto assets. However, the beginnings of digital assets go back to the time when financial intermediaries started to use computers for recording and transferring assets. The cornerstone for crypto assets is the 2008 paper by Satoshi Nakamoto, the inventor of Bitcoin. Digital assets can be maintained and transferred without intermediaries which is a key distinction.
Saying this, I was already involved with digital assets in the 1990s. One of the papers that I published around that time was called ‘Monetary policy implications of digital money.’ I held my first presentation/lecture about Bitcoin in 2014 but my research started earlier. I was fascinated by the fact that one can issue and maintain a digital asset in a decentralised way. With Bitcoin, every person has equal rights when it comes to using and maintaining the Bitcoin network. Satoshi Nakamoto combined various technological components to create the first virtual assets that do not need intermediaries. He deserves a Nobel Prize.
Most economists (including economics professors and central bankers) are rather skeptical of Bitcoin and often point out that Bitcoin has no intrinsic value. How would you counter this criticism? What is your position on Bitcoin?
The sceptics are right; Bitcoin has no intrinsic value. In economics, we say that an asset has some intrinsic value if it can be consumed (e.g., cigarette money) or used in production (e.g., gold is used in certain industries). What the skeptics get wrong is the fact that today's monies (currency and bank deposits) have no intrinsic value either. I have not seen yet a person eating a banknote or using it in production.
This basic knowledge was valuable for me when I entered the space of crypto. It seemed natural to me that crypto currencies such as Bitcoin have no intrinsic value. In monetary theory, we even show that for efficiency reasons a currency should have no intrinsic value.
Why do you think Bitcoin is a "game changer"?
To explain why Bitcoin technology is a game changer (not necessarily the Bitcoin asset), I want to make a comparison with the Internet. The Internet is a network of tens of thousands of interconnected computer networks. It is highly resilient, but the key is its permissionless nature. Anyone can create and distribute content without seeking permission. Anyone can offer services and sell products worldwide without seeking permission. Furthermore, it is credibly neutral due to the use of open standards. The permissionless nature of the Internet is responsible for its explosive adoption.
Bitcoin technology is very similar: Anyone can create value (virtual assets) without seeking permission. Anyone can use these assets without seeking permission. It is neutral due to open standards. I expect that same explosive adoption over the coming years. Although, there is one caveat: Crypto assets are financial assets, and the financial industry is heavily regulated. There could be a regulatory response in the future that dampens the growth of crypto assets.
Do you see Bitcoin more as a means of payment or as a store of value (i.e., a kind of "digital gold")? Will we even need gold in the future?
Bitcoin is exposed to extreme volatility, and the transaction costs are too high for small payments. The lightning network helps the latter but not the former. Because Bitcoin – by design – has no central bank that intervenes to mitigate price fluctuations, the high price volatility will never disappear. So, I see Bitcoin more as an alternative investment, like gold. Furthermore, in countries with poor monetary policies, it is beneficiary for people to circumvent the local currency. For that purpose, however, the dollar is still the king.
You also see a big potential in Ethereum (Vitalik Buterin received an honorary doctorate from the University of Basel in 2018 while you were a dean). Why do you believe in Ethereum in addition to Bitcoin?
Ethereum could, in theory, replace the entire traditional financial system. The Ethereum Virtual Machine is Turing-complete: A machine that is Turing-complete can perform any computation. It is universally programmable. This makes Ethereum significantly more flexible than Bitcoin in the applications that can be made available.
Some of the rapidly expanding applications are financial services, the Metaverse, games, art (non-fungible tokens; NFT), identity, and various other decentralised applications. Unlike with centralised applications, the user owns the data, and transactions cannot be censored.
Right now, the dominant use case is Decentralised Finance (DeFi). Almost every financial product offered in the traditional finance world has a decentralised counterpart in the crypto world. Nevertheless, I think the two worlds will co-exist over a long time, and eventually, DeFi will take over.
What are the advantages of the Ethereum technology?
Like the Internet, it is based on an open standard and therefore neutral. All applications are compatible because they speak the same "language". We also speak of "Money Legos". New ideas can be developed quickly by using existing "Lego bricks" and only redeveloping certain parts. As a result, the transition from an idea to a marketable product is extremely fast. The shared infrastructure, common language, permissionless access, and neutrality of Ethereum technology lead to strong network effects and rapid growth.
What significance will Bitcoin and Ethereum have in 20 years in your opinion?
Chances are that Ethereum technology will become the standard for blockchain applications. The Ethereum network will be the dominant network for financial services. Most traditional financial service providers will adapt and continue to offer services to their clients using Ethereum technology. The user will not notice that their financial service providers are using Ethereum. Nevertheless, they will benefit from services that will be less expensive and faster.
Also, a wider range of choices will be available. A small group of sophisticated users will use decentralised financial services directly without any intermediaries. Finally, Bitcoin will replace gold under two conditions: First, removal of the 21 Million upper bound because the fee income will be insufficient to secure the network. Second, move to proof of stake because legislation against proof of work will cripple the growth of Bitcoin.
Can you discuss DCAP's investment strategy for Web3?
At DCAP, we believe that Web3 -- the Internet of value -- is a mega trend that will affect every industry and sector, so a comprehensive approach is necessary when investing in it.
Blockchain technology provides the foundational infrastructure for Web3. However, we do not only focus on technology and infrastructure. Instead, we also analyze various use cases, new business models, and companies, both incumbents and start-ups, that utilise blockchain infrastructure.
Overall, DCAP's approach to investing in Web3 is diversified and based on extensive research. We believe that the focus on diversification and research is a sound strategy for long-term success.
Although our interview series is still a young tradition, our last question is usually the more up close and personal one: how do you spend your time besides working and lecturing? How do you recharge your batteries and gather inspiration?
I love to play tennis and renovate riads in Marrakech. A riad is a traditional Moroccan house with an interior garden and Marrakech is the home of some of the most beautiful riads. I enjoy restoring them if I have the chance to find one. Staying in a riad over an extended weekend is one of the main attractions in Marrakech. Everyone wants to experience the magic of 1001 nights from time to time.