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Elon Musk ... now the world's richest man and perhaps the most influential voice on all things technology ... has been playing a dangerous game with Crypto. Not dangerous for him. He has a net worth of $200 Billion. No, his game is only dangerous to those that don't realize he is joking about Dogecoin.
Bitcoin will survive this game. That was never at issue. Bitcoin can't be stopped by 3AM tweets by a likely under the influence Elon. Like Gamestop was for the stock market ... Dogecoin will crash and concerns about its impact on crypto markets will fade. Only those who never took the time to understand what they were buying and selling will get hurt.
So why is Dogecoin at risk of going to zero?
Namely two reasons.
Dogecoin will converge to zero because it has infinite supply.
Dogecoin is at higher risk now of a 51% attack.
We explain why in this article. Hopefully you read this before the fools that bought the tops of Gamestop and Dogecoin following billionaire memes and message boards hoping to find a greater fool.
Dogecoin ... a history
Dogecoin was created as a joke in 2013 by Jackson Palmer and Billy Markus. The creators didn't keep any of the initial coins because they made changes to source programming that they believed made it a joke. The most important of which is the fact that it has no supply constraint. Like US dollars and other fiat money created and controlled by central banks...there will be more and more Dogecoins.
So why do people buy it?
Dogecoin initially started as a joke based on a popular meme featuring a Shiba Inu (a Japanese breed of dog). It is a fork off Litecoin and thus uses the same proof-of-work technology.
Dogecoin has grown in large part because its funny!
Many people like the mascot (below). Many also like the fact that each coin is so cheap...a result o the creators flooding the supply with over a hundred billion of them. This has made Dogecoin popular for tipping on social media content.
Dogecoin has received a lot of positive publicity over the years. In 2014, Jamaica's bobsled team qualified for the Winter Olympics, but it didn't have enough money to attend. Co-creator Palmer decided to help and raised $25,000 worth of Dogecoin donations on Reddit.
So what exactly is the purpose of Dogecoin?
Crypto Value Propositions
There are thousands of crypto assets but most fall into one of three value propositions. Money, Smart-contracts, and Tokens.
Money includes Bitcoin and other cryptocurrencies that have a fixed supply. A fixed supply is critical because without it the cryptocurrency cannot be a store of value safe from inflation. While Bitcoin is by far the largest and most secure, there are many other cryptocurrencies that fit this as well such as Litecoin.
Smart-contracts and decentralized applications (DApps) more broadly are entirely different. They provide a mechanism for two unrelated parties engaging in a digital agreement without the need fo a third party to enforce. Ethereum is the largest and most secure DApp network. If you want to learn more about it you can read our article on Why we bought Ethereum.
Tokens are cryptocurrencies that are used to run DApps. They exist inside DApp networks like Ethereum. They are called tokens because they function very much like the tokens you might buy at a carnival. You use the tokens to do things like play games, but the tokens only have value inside the park. There are hundreds of DApps running on Ethereum and many of them have their own tokens which you must purchase in order to use the service.
Dogecoin doesn't fit any of these propositions.
Dogecoin was created for the purpose of trying to make crypto assets like Bitcoin look like a joke. The creators purposefully gave Dogecoin an unlimited supply and made its mining rewards volatile to discourage its use as a sound money.
Today ... Dogecoin has found a legitimate use. The community surrounding Dogecoin has given it meaning and purpose. They derive joy and a sense of community from the memes they share and stories like Dogecoin's role in helping the Jamaican Bobsled Team.
Donations, games, and mems are a good use case for Dogecoin, but it is not sound money. Anyone who buys Dogecoin needs to know that they are holding funny money...not because all crypto is funny money...because Dogecoin was designed to fail as a storehold of value.
Dogecoin will eventually be worth nothing because it is designed to inflate away...but recent events have made the probability of a drop to zero in the near term much higher.
Risk of 51% Attack
A 51% attack is when one entity controls more than half of the hash power on a blockchain. If that happens they can theoretically use their mining power to double spend transactions or otherwise distort payment accounting on the blockchain.
Cryptocurrencies that use Proof of Work (PoW) rely on mining nodes to recognize the blockchain with the most blocks as the correct history. To conduct the attack the entity controlling a majority of a blockchains hashrate could simultaneously send coins to one address on the original blockchain and a forked copy they create by devoting their hashing power ... exceeding the 49% from other mining entities on the main chain.
The attacker essentially tricks the minority nodes into accepting payment on the original blockchain and the new forked blockchain. So long as the attacker maintains a higher hashrate the forked blockchain will mine the next block faster and release it to the minority nodes first...technically making it the 'correct' chain because it is longer. This causes the original transaction to disappear. This completes a "double spend" attack as the wallet receiving the double payment on the original chain is no longer available.
Having trouble following all the technical mumbo-jumbo ... here is a video clip from Silicon Valley that might help.
Bitcoin is far more secure because the hashpower behind it is so large, distributed, and mined by stakeholders not willing to rent out their hashpower. The physical cost of purchasing the mining equipment to conduct a 51% attack on Bitcoin is complicated, but one estimate puts the number at maybe $5.5 billion. Factoring in all the R&D costs to catch up to existing hardware manufacturers and data center equipment needed probably put this number much higher.
A website called Crypto51 estimates the cost of a 51% attack for many cryptocurrencies. The theoretical cost of $716,000 an hour for Bitcoin assumes sufficient rentable hashpower...but according to this website less than 1% of Bitcoin's hashrate is available for renting. More than 100% would need to be available to attempt a 51% attack without buying physical hardware.
What this means is that a 51% attack on Bitcoin is possible...but extremely costly and would more than likely lead to the attacker losing billions. For an entity to conduct a 51% attack against Bitcoin they would need to spend more than $5 Billion on mining equipment, conduct an attack to steal Bitcoin from the original chain, and in the process permanently damage Bitcoin's reputation as a secure store of value. Should the attack be successful it would render the coins they stole near worthless along with their specialized mining equipment.
However, many smaller and less secure crypto could be quite easily attacked without any physical investment and result in a windfall. The reason is the relatively small hashpower backing coins like Dogecoin. Dogecoin has a hashrate of about 256T per day which is on par with its original blockchain Litecoin. The overlap below is not a coincidence. In 2014, Litecoin and Dogecoin merged mining so much of the hashpower devoted to one is also applied to the other in order to mine both coins simultaneously.
Here is the same chart but with Bitcoin added. Note that Dogecoin and Litecoin don't even register.
An attacker on Dogecoin can also get away with using just about any desktop computer to add to their hashpower. That's because Dogecoin uses Scrypt while Bitcoin uses SHA-256. This is an important difference because Scrypt mining needs a lot less power and is a lot quicker than SHA-256. This is what makes mining Dogecoin so much easier and thus more susceptible to a 51% attack.
Smaller cryptocurrencies have less hashing power securing the network, making it possible to simply rent hashing power from miners on a service like Nicehash for a few hours. This significantly reduces the capital costs of an attack.
In conclusion...Pretty much all the crypto besides Bitcoin and Ethereum are at material risk of a 51% attack, and it's not just a theoretical risk. In May 2018 a fork of Bitcoin called "Bitcoin Gold" was the victim of a 51% attack in which $18 Million was stolen.
Dogecoin is going to zero because it was designed to go to zero. When you hear on Twitter or in the news that it was meant to be a joke...that was not just the intention...its built into the source code. The reason why is that it's exceedingly easy to mine new coins and there is no limit to how many can be created. This was again...by design...but the problems with Dogecoin don't end there.
The vulnerabilities built into Dogecoin's source code put it at a much higher risk of a 51% attack. It would be fairly trivial for just one person or company to rent out the computing power to destroy Dogecoin. The reason why is again...built into the source code. The creators made it so you can use pretty much any decent computer to add to the hashrate in an attack on Dogecoin, and there are not enough computers dedicated to Dogecoin to make attacking it cost prohibitive. There never will be because...again...of changes the creators purposely made to the source code.
Why would someone want to hurt poor little Dogecoin?
Well...for one it would be potentially profitable. By the time the attack was complete the attacker could move the stolen coins and buy Bitcoin. In contrast, a successful attack on Bitcoin would undermine credibility in the entire Crypto ecosystem so they would lose just about everything in the process. But recent events have raised this risk even higher for Dogecoin because of all the attention it's getting. No one cared when it was just a little funny money meme game. Today it's frustrating most of the true crypto community.
Investors and developers in Bitcoin and Ethereum understand the real value that decentralization is already providing real people and businesses around the world. Dogecoin was created as a joke, meant to attack the value proposition of Bitcoin. Dogecoin has become the target of pop-and-dump tactics from wallstreetbets and Billionaires like Elon Musk who should know better.
If you are playing with a little Dogecoin for fun and don't mind losing it all in a second...by all means keep playing.
If you bought it because you mistook Elon's memes for anything other than a joke...the joke is on you.
For those looking for crypto assets that are not designed to be worth nothing and actually help solve real problems...feel free to read our article on Crypto the new asset class, the Investable Universe and Why we bought Ethereum.