For many of the participants in the cryptographic markets, the involvement of institutional investors is essential for the growth of the sector. In fact, people are so obsessed with these investors that they often overlook the negative effects they could bring with them. Recently, Jack Palmer, one of the brains behind the development of Dogecoin, said that institutional investors could reduce the objectives of cryptographic space.
Jack Palmer believes that the obsession between crypto community members for the involvement of traditional financial service providers are unhealthy. In a post published on the Diar, an online cryptocurrency newsletter, Jack said that these institutions could divert the course of the cryptocurrency industry.
The subject tackled by Palmer is based on the three main advantages of digital currencies. He believes that institutional investors will inhibit the realization of these benefits, which include:
Resistance to censorship
One of the main reasons for creating Bitcoin was to eliminate dependence on a single point of failure. Bitcoin tackles this challenge through decentralization: where if one node fails, the others on the network replace its functions without an obvious malfunction in the operations. Furthermore, its mechanism of consent to the working test guarantees that no single entity has rights of censorship on the other nodes of the network.
The inclusion of banks as a gateway to cryptocurrency trading re-establishes the only point of failure that Bitcoin seeks to eliminate. For example, if an exchange platform or bank is not online, a user can not access the Bitcoin network. In addition, exchanges and banks can easily censor a user's account if they suspect it.
Transactions without trust
A "trustless" currency is one that does not trust a central authority. This is the case of Bitcoin, because each user has his own private keys that give him full control of his money.
Currently, a significant number of trading platforms offer custody solutions to their customers. This goes against the principles of financial transactions without trust, one of the fundamental ideologies of virtual currencies. Basically, Bitcoin storage allows exchange platforms to monitor customer funds.
In addition, Jack claimed that large amounts of cryptocurrency held by a central authority are vulnerable to hacker attacks. In this regard, he referred to the Mount. Gox incident where millions of digital currencies have been stolen by hackers.
Bitcoin rose to prominence after it emerged that the infamous 2008 financial crisis was caused by negligence. Unlike the legal currency, Bitcoin was immune to manipulation by central banks, since all members of the network had access to a public blockchain ledger. This log allows Bitcoin users to track the full history of their transactions. Its immutability means that the records are reliable.
However, the influx of institutional investors led to the creation of private off-chain databases. The excuse for this practice is that off-chain databases are scalable, faster and cheaper. In contrast, transactions can no longer be verified using cryptographic algorithms and are therefore vulnerable to removal.
Impact of institutional investors on the cryptic market
As mentioned above, the involvement of institutional investors contradicts the key objectives of cryptocurrencies. Over time, these institutions are able to establish their own cryptocurrency tokens on which they have total control. In fact, the warm welcome offered by the Crypto community will also push banks and exchanges to issue and manage their cryptocurrencies. A perfect example for this is the introduction of centralized stablecoin like the USDC.
The only hope for digital currencies is the improvements on their underlying blockchain protocols. These standards are resistant to the dominance that institutional investors can impose on virtual currencies. For example, scaling solutions such as Lightning and Plasma do not require the storage of users' digital resources. Likewise, there are several privacy-focused cryptocurrencies like Grin and Zcash.
However, the decision is up to the crypto Community. Will they affect the fundamental ideologies of cryptocurrencies in favor of the growth of the market and the immense capital offered by institutional investors? For now, let's wait and see.