DogeCoin (DOGEUSD)

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Breaking down Elon Musk’s latest market-moving Dogecoin tweet

https://finance.yahoo.com/news/breaking-down-elon-musk-latest-020028001.html?.tsrc=fin-srch

Leave it to Elon Musk to give Dogecoin the lift it sorely needed.

With yet another market-moving tweet on Friday, the Tesla chief—who famously dubbed himself “The Dogefather”—lifted Dogecoin out of its recent slump, driving the crypto meme-coin back above 22 cents after a steady decline that had seen it slip below 20 cents on Thursday. That’s still a long way from Dogecoin’s heady highs in May, when it broke 74 cents in the buildup to Musk’s hotly anticipated Saturday Night Live hosting appearance.

BTC & ETH are pursuing a multilayer transaction system, but base layer transaction rate is slow & transaction cost is high.

There is merit imo to Doge maximizing base layer transaction rate & minimizing transaction cost with exchanges acting as the de facto secondary layer.

— Elon Musk (@elonmusk) July 9, 2021

But while the notion that Musk can move the crypto markets with the push of a button is well established at this point, it was his thoughts on the wonkier aspects of digital currencies that made this instance particularly curious—especially for those not well-versed in their technical intricacies.

In responding to YouTuber and Dogecoin investor Matt Wallace’s observation that upcoming updates would “position Doge perfectly to become one of the most used currencies in the world,” Musk pitched his own thoughts on upgrades to Dogecoin’s blockchain transaction system that, in his view, would give it an advantage over Bitcoin and Ethereum.

Whereas Bitcoin and Ethereum are encumbered by transaction rates that are too “slow” and transaction costs that are too “high,” according to Musk, Dogecoin could avoid such issues by using exchanges like Coinbase and Binance as a “de facto secondary layer” to process transactions—in theory enabling them to be quicker and more efficient.

As Musk noted, both Bitcoin and Ethereum have pursued “multilayer” transaction systems that aim to alleviate such issues, with Bitcoin’s Taproot upgrade expected to roll out this coming fall. But in the case of Dogecoin, the Tesla CEO appears to believe that it would be better served deploying crypto exchanges as an additional layer to allow faster, cheaper trades.

As Bitcoin.com notes, Dogecoin developers are currently working on the updates that Wallace mentioned in his original tweet, which promise to lower Dogecoin’s fee structure and increase transaction rates. And there were no shortage of crypto-conscious Twitter users who responded to Musk to mention existing blockchain platforms that they said could do the job asked, such as Lightning Network and Solana.

If the idea that crypto exchanges could serve as a “de facto secondary layer” to authenticate and process Dogecoin transactions seems curious, if not questionable, that’s because it could very well be. David Sacco, a professor at the University of New Haven’s Pompea College of Business, tells Fortune a system granting third-party crypto exchanges a role in processing transactions seems “counterintuitive” to the very appeal of cryptocurrencies and their underlying blockchain technology.

“Cryptocurrency is about transacting peer-to-peer without third parties; the value of crypto comes from that [blockchain-enabled] impenetrability that allows it to exist without any third party,” Sacco notes. In that regard, Musk’s suggestion “is a bit of a conflict for me," he says.

There’s also the possibility that granting an outsized role to certain exchanges could hinder Dogecoin’s overall “fungibility,” according to Sacco, by making it harder to trade the coin on certain platforms not involved in its transaction process. “It sounds like Ethereum and Bitcoin are doing [upgrades] that make these currencies more fungible and easier to trade,” he adds. “If Dogecoin goes its own route, I don’t know how that makes it more attractive.”

Of course, when discussing Dogecoin, it’s hard to discount the thoughts of Musk—who, more than any other person, is most responsible for the phenomenon that is Dogecoin, and has also played a sizable role in the promotion and adoption of cryptocurrencies at large. As ever, the wider crypto world is left to watch his Twitter account and see what happens next.