There are over 4000 cryptocurrencies that exist today. In the long term, most of them will fail. We believe Dogecoin is one of them.
Dogecoin will fail because it’s inflationary, the worst crypto for the store of value, worse than USD in every possible way, transaction speed per second is slow, no institutional support, and has a limited real-world use case.
Unlimited Supply:
Unlike Bitcoin, Dogecoin is inflationary and has no supply limit. Each minute, 10,000 Doge is added into the network. At this rate, miners add more than 5 billion coins per year.
The creators of Dogecoin — Billy Markus and Jackson Palmer — had good intentions for not putting a supply cap on this coin. For example, if the total number of coins is limited, miners would stop securing the network once the block rewards decline. When Block rewards decrease, transaction fees would increase. It’s what’s happening in the Bitcoin blockchain. To solve this issue, Dogecoin creators made this crypto inflationary. But it created another problem.
Because of this inflationary model, Doge is not a store of value. In fact, it’s the worst crypto as a store of value. Almost everyone in the crypto community, including institutional investors, is buying Bitcoin because it’s deflationary. In contrast, investors are less interested in Doge because the network devalues it each passing minute.
If a company issues new shares to raise more money, it is seen as unfavorable because it cheapens current investors’ investments. Almost everyone is critical of the government because they print money out of thin air, which creates inflation. So, why are we not critical of Dogecoin when its inflation rate is higher than the US dollar?
If you use the US dollar or your local currency to purchase Dogecoin, your investment is destroyed on two fronts:
- Your Dogecoin is getting devalued each passing minute.
- The US dollar is also getting devalued by our government.
If we buy and hold Doge, we can profit if the price increase rate outnumbers Doge and the USD inflation rate.
Unsustainable Currency:
Dogecoin is not a good digital currency. Yes, as a currency, it’s better than Bitcoin but worse than USD.
We can use USD both offline and online, whereas we can use Doge online only. There’s no offline use case.
For online use, we can transfer USD using various network mechanisms such as ACH and Wire transfer. We also have VISA, Master Card, Amex, Discover, Paypal that processes our online debit or credit card purchases.
VISA alone can process 65,000 transactions per second. Each transaction clears within seconds. Now, let’s compare it with Dogecoin transaction speed.
Doge’s block time is 1 minute. It means the network takes a minimum of 1 minute to clear a transaction. However, during network congestion, this time increases significantly, sometimes up to a few hours.
We can find the theoretical transaction number per unit time of Dogecoin using the following formula:
- (Block Size Limit) / ((Lowest Possible Transaction Size) x (Block Time In Seconds))
According to this formula, we see that Dogecoin can process 70 transactions per second:
- (1024x 1024) / (257 x 60) = 68 ( 1 MB block size, 1 minute block time)
However, due to network propagation and other reasons, practically, the Dogecoin network can process 40 transactions per second.
According to the US Census Bureau, 330 million people are living in the United States.
In a single day, Dogecoin can process 40 x 60 x 60x 24 = 3,456,000 transactions (practical 40 transfers per second).
So, if every American adopts Dogecoin, each person will be able to complete 1 transfer in every 330,000,000 / 3,456,000 = 95 day (3 months) on the Dogecoin network. It does not matter how many computers we add to this network; the transfer speed will not improve unless we change the Dogecoin core protocol.
Isn’t it absurd that we will be allowed to purchase something using Doge every 95 days? How sustainable is that? Why are we even dreaming that Doge will one day replace USD?
No Institutional Backing:
Bitcoin now has a trillion-dollar market cap, Ethereum has a $200 billion market cap. It’s not because of the retail investors; it’s due to institutional backing.
Investors invest to maximize their profit. Because of Doge’s inflationary model, institutional investors are not interested in this cryptocurrency. As a result, its price would not rise.
Dogecoin is not stock; it’s a currency. When we purchase a share of a company, we get fractional ownership of that business. A company has value. If the company grows and its revenue increases, its share price also increases.
In contrast, Dogecoin is not backed by anything. Its price would rise if and only if more people buy Doge. This way, the early investors can bail out with a profit. Subsequent Doge investors can profit if more investors buy Doge and the price increases as a result.
Some companies give dividends, for example, Ford, Walmart, Apple. If we buy and hold stocks of these companies, we can make a profit in two ways:
- Collect quarterly dividends.
- Sell when the share price goes up.
There are proof-of-stake cryptocurrencies such as Polkadot, Ethereum 2.0, where we can earn (dividends) by staking our cryptos. Dogecoin does not give any staking rewards either.
For all these reasons, institutional investors are not interested in investing in this coin.
Not Technological Breakthrough:
Ethereum has smart contracts, Polkadot can be used to interconnect between different and isolated blockchains. Many cryptos give staking rewards. Bitcoin is deflationary. Cardano can process over 1 million transactions per second. But Dogecoin does not have any technological benefit over other blockchains.
Dogecoin is a copy of Litecoin, which is also a copy of Bitcoin. Dogecoin and Bitcoin’s primary difference is that Dogecoin has 1 minute block time and has an unlimited supply. In contrast, Bitcoin’s block time is 10 minutes and has a 21 million supply cap.
Limited Use Case:
Cryptocurrency, in general, has minimal real-world use. Only a handful of retail shops accept Doge. Cryptos are volatile. Its price fluctuates a lot. Thus, many business owners are not interested in taking it as a form of payment.
Doge does not provide any extra benefit over USD. It’s slower than USD transactions, has more inflation, and is more technologically complex. Why would business owners adopt it?
A trustless Dogecoin network is worse than a trust-based banking network with sufficient security with FDIC and SIPC insurance.
Branding Issue:
Billy Markus and Jackson Palmer started Dogecoin to mock Bitcoin and the cryptos in general. According to them, though the blockchain is a fantastic technology, cryptocurrency is an absurd idea. For this reason, many in the crypto community don’t like Dogecoin. They believe Dogecoin was started as a joke and should be treated as such. Many in the crypto community actively avoid this crypto.
Conclusion:
Dogecoin has the second-largest crypto community after Bitcoin. It’s fun crypto. However, this community support will not be able to eliminate the inherent technical difficulties of this coin. Inflation with the technical challenge is the ultimate reason Dogecoin will fail.
