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I really can't decide what to make of crypto
and I hope I won't be cancelled for this
I have been trying to put together some thoughts about crypto for a while. But each time I wrote something, I have never felt I was able to express a proper balanced argument about it. Today I feel that I am ready to jump into the fire.
The reason why I know feel ready to talk about this is that I think I have created a model for crypto in my mind, both for its success and its demise, and I am ready to share it.
An argument that cannot be proven or disproven is religion
This is what makes the crypto discourse so toxic: any successful technology at early stage look exactly like any failed technology.
So any argument like “This is like the WWW in ‘94” is exactly like “This is like Betamax in ‘75”.
Or “This is going to fail, it’s impossible” is going to sound exactly like "If God had wanted humans to fly, he would have given them wings!"
I will try to stay away from any argument like this, and in general any religious argument that is about the phisical world isn’t going to end well.
Instead I will focus on what I think should be fixed for this technology to be viable, and why.
The reverse-network effect
The power of the current big technology companies is their network effect (or their “flywheel”):
Amazon needs supplier to put products on the shelf to attract customers
Customers go to Amazon and buy
More customers → more attactive for suppliers
More supply → cheaper prices
Cheaper prices → more attractive for customers
This mechanism creates a virtous cycle that makes it extra convenient for new users to join an estabilished service and creates the “de facto” monopolies of the current tech giants.
The Web3 advocates want to attack those monopolies and replace them with new center of powers, nothing new in business but they suffer from a deadly flaw.
Much of the current use cases in crypto (tokenomics, NFT, cryptocurrencies) have an opposite effect: the early users buy tokens/coins for cheap betting that more users will come → new users buy more expensive tokens/coins or pay higher gas fees → once the price is high enough users stop coming and the users move to the next coin/token.
Vitalik Buterin, creator of Ethereum and the only crypto philosopher out there, suggested that this is good, speculation gets people on the platform and eventually they will stay in the ecosystem (as opposed to monopolistic services).
In my opinion this is the biggest weakness of the current use cases, they are tied to a never ending growing market (and this is why the critics call it a ponzi scheme).
There are of course use cases that do not require a growing market (DAOs or non-algorithmic stablecoins) but they are not the ones that power the ecosystem today.
The only use case that I can think of that has a real network effect today is Ethereum, but that isn’t enough to justify the current craze.
This thread and its replies actually explain the problem (and possible solutions) much better than I possibly can.
The arguments against bitcoin are flawed but that doesn’t mean wagmi
There are a few arguments against bitcoin (and cryptocurrencies in general) that are often repeated and that since are either not entirely right or not entirely wrong, people on both sides tend to dismiss them. But isn’t that the point of discussing something?
Blockchain transactions are very easy to track!
There is no denying that cryptocurrencies have enabled a new wave of cyber crimes that did not exist before. An anonymous alternative to cash transactions? A dream for the thieves! But while the usage is real, the reasons why the bad guys don’t get caught aren’t inherent to the protocol.
You might have heard of a bunch of arrests made in relation to some scams or attacks to crypto exchanges. How did they track those people?
Well every transaction in the blockchain is record and public, this is the very core of the ethos of blockchain!
This has created a new branch of financial forensics that is embodied by a service that has been featured on various news stories already: Chainalysis.
If following transactions is hard for a human, it’s a piece of cake for a computer, and this is what they offer: follow the money on the blockchain as a service.
The transparency and immutability of the blockchain limits its adoption
Regularly, some new startup proposes to use blockchain to reduce monopolies by making all data (especially transactions) accessible via blockchain.
This is not new, the european union has been trying this for years and is also trying to make healthcare data and messaging apps interoperable.
The trouble with using blockchain for many of those use cases is that transparency and immutability aren’t necessarily a feature.
Some use cases are obviously wrong, for example a decentralized social network in which your posts are all public and immutable FOREVER1, but others are maybe less so.
Take the use case of making supply inventory completely transparent using blockchain, the idea is to “cut the middleman” and match supply and demand directly. While this is theoretically possible, opacity in the market is where many people make money and incentives simply just don’t align between the proponent of the technology and the final users. So maybe something is in there, but is not easy as it looks at first glance.
DAOs are nothing new
Many say that DAOs are the real innovation of crypto, I don’t agree. They are interesting as a concept but I feel like that the proponents never owned an house or participated in an assembly.
The problem with DAOs is the human nature and there is no amount of technology that can fix that, especially when money and ownership is involved.
A possible way forward: a platform not a product
At this point in this write up I think it’s time to make explicit that I am fairly optimistic on the basic premise of the Ethereum blockchain (and smart contracts in particular) but fairly pessimistic on Bitcoin or other shitcoins in general.
The internet economy is enabled by a series of open protocols that make sure that a bunch of people around the world can exchange information, we pay for those services with our internet subscription but much of it is still basically on the shoulders of volunteers and open source associations. Ethereum is an attempt at making something similar on an higher level of abstraction, and at the same time trying to pay those volunteers that make the platform work.
Environmental concerns are justified but not enough to make a difference
The entire premise of the blockchain is artificial scarcity, limit transactions in a way to avoid deflation. As long as this artificial scarcity pays off, the environmental concerns won’t really make a difference to miners or users. However, I think this will soon change as the Proof-of-Stake is merged over the Ethereum blockchain.
There is a lot of material on PoS and I am not the right person to teach about it, but my personal opinion is that Satoshi’s original idea was to decentralize and democratize, that original idea failed as many “whales” took over Bitcoin (if you don’t know about it, search about the hard fork incident).
So now PoS is a better alternative, on a theoretical level it’s not as decentralized as proof-of-work but on a practical level it’s going to be better for everyone (including hopefully lower fees).
The Ethereum foundation is also working on making the math better and the system faster (and therefore less energy intensive → cheaper). For example with breakthrough so complex that I can barely scratch the surface of it:
There are three things that matter for crypto: regulations, regulations, regulations
Maybe the most promising use case for Ethereum and crypto is stablecoins (or alternative digital currencies) plus smart contracts.
Before I start, I am not talking about “algorithmic” stable coins that gives you crazy returns, (like the Terra-Luna affair) those I think are a big scam and you should stay away from it.
What I want to talk about are stablecoins such as Tether or, more interestingly, the digital Yuan.
My expectation is that we will soon see a series of heavy regulation on crypto currencies, less heavy handed than the chinese ban, that will cripple many use cases but will make the stable coins use case extremely viable.
There are places in the world in which the local currency is either worthless or in the hands of a cleptocracy, exchanging dollars requires to talk to some shady people. This is where digital currency is very very handy.
And I won’t be surprised if the federal reserve will be more willing to rollout a dUSD, a stablecoin that is worth exactly one USD and guaranteed by the Federal Reserve, together with the regulations that impose the same requirements on KYC (Know Your Customer) as traditional banks to all the exchanges with similar white/gray/blacklists.
Smart contracts are even more exciting, or at least they have been to me since the inception. The idea that you can codify a financial contract with code instead of ink can change the way many businesses get digitalized, and the ability to product original content and have royalties attached to it via smart contracts (like NFTs, just better) is a game changer for creators.
BUT, and this is a big but, the current model isn’t safe enough. Smart Contracts need proper security reviews and a quality management system to be implemented. Luckily there is no need to reinvent the wheel, we already have all of this codified as part of the ISO certifications that technology companies in the financial sector need to acquire.
Will a regulated crypto be able to survive or its adoption will plummet? I really can’t decide what to make of it
I am not getting into NFTs because honestly I find that use case a bit silly (and no, is still silly even if you made millions out of it)