Three Things #41: October 30, 2022
Bear Market Blues
I’ve been working on blockchain technology full time for five years. During this time, market sentiment has ebbed and flowed and my mood has bounced back and forth between highs and lows. While I still believe in the long term transformative potential of these ideas and technologies, and while I’m as excited as ever by the technological progress being made in the space, I’ve recently begun to feel exhausted and a bit bearish about the direction we’re moving as an industry. Here are three reasons why.
Thing #1: Decentralization Theater
We make a lot of noise about decentralization in crypto land. For many people and many projects it’s the sole raison d'être. If you ask, “Why Web3? Why not just do it in a faster, cheaper, easier, more centralized way?” the answer is inevitably that we need decentralization to achieve properties like censorship resistance and incorruptibility. Nevermind the fact that decentralization is not appropriate for the vast majority of things, and that the vast majority of applications would be easier to use if they were architected in a centralized way. Decentralization is ineffable and sacrosanct and we’re not allowed to question it.
As a result, lots of crypto projects jump through all sorts of hoops to appear decentralized. They spin up foundations and the like to manage their token sales and treasuries. They create DAOs that ostensibly control governance. They give out grants to remain arms-length rather than funding in-house teams. And, of course, they decentralize their infrastructure with tokens and incentive compatibility and multiple independent node implementations.
Decentralization done correctly can indeed achieve things like censorship resistance and resilience. If we’re not achieving those goals, then we either haven’t done decentralization correctly, or else we just fundamentally don’t understand decentralization in the first place.
What the Tornado Cash episode taught us above all (other than the capriciousness and irrationality of the nanny state) is that decentralization, at least as it’s carried out in the Ethereum ecosystem today, has failed to achieve these objectives. It’s failed on multiple layers. No viable, popular alternative to Tornado Cash has arisen, which shows that the ecosystem is too dependent upon a single utility—and for good reason! Strong privacy requires a large anonymity set and lots of liquidity. You by definition cannot decentralize these things!
What’s more, dozens of high profile projects rolled over and kowtowed to OFAC sanctions, even when those sanctions made no sense, are likely unconstitutional, and in any case didn’t even designate the people that were blocked and didn’t specifically require this action. This shows that even ostensibly decentralized, unstoppable applications (i.e., smart contracts) running on Ethereum have many centralized points of failure, such as frontends, domain registration, the companies behind them, etc..
And the degree to which Ethereum validators are filtering for OFAC-compliant blocks is the icing on the cake. Even at the protocol layer, censorship is winning. Decentralization is a great idea but it’s really, really hard to get it right in practice, and Ethereum is not even close to getting it right at the moment.
I think the community is facing a critical junction with two distinct paths forward. One path is the current path, which is also the easy path: keep engaging in decentralization theater and keep failing to achieve censorship resistance (the reason we started in the first place). The harder path is the cypherpunk path, the path of resistance. This includes censorship resistance, yes—which will require much more robust, serious decentralization—but also resistance to arbitrary, misguided, misapplied regulation, i.e., resistance to bad rules and bad laws in all their manifestations.
For more: Read the cypherpunk manifesto to remember what we’re fighting for, why it matters, and how decentralization plays such an important role.
Thing #2: Joy, or Lack Thereof
Crypto projects and Uber have something in common. Like crypto, Uber also faced an uphill regulatory battle, and Uber also played fast and loose with regulation. Uber is notorious for a hypergrowth, blitzscaling strategy that put it directly in conflict with regulation, taxi lobbies, and even taxi cartels in many markets globally. However, there’s a key difference between Uber and crypto, something that was a major factor in Uber’s success scaling massively in the face of regulatory uncertainty. Care to hazard a guess?
What Uber had working in its favor was the millions of happy customers who desperately loved Uber and were willing to lobby on its behalf. Uber had a product that worked, and one that people genuinely loved using. In a nutshell, this is why Uber won in the end in most of the markets it entered. (Of course things are a bit different today but for now we’re focused on the first few years of the Uber story.)
Why were Uber’s customers so enchanted by the service, to the extent that they were willing to fight for it against taxi lobbies and cartels? In a single word, the answer is joy. The first dozen times you used Uber it was a truly joyful, magical experience. This may sound silly now and it’s easy today to take services like Uber for granted, but—for those who maybe aren’t old enough to remember—getting around in the days before Uber was really, really bad. It was difficult or sometimes impossible to get a taxi, especially if you were unfortunate enough to be in a non-central location, or in a second- or third-tier city, or if it were late at night. Most taxi drivers treated passengers poorly. There was no accountability in the system whatsoever, and taxis regularly gouged prices. The incentives were all wrong.
Uber changed all of that. Once you tried Uber, you never went back to old-fashioned taxis. It was so much better than the previous experience in basically every way. I mean this quite literally. I can count on one hand the number of times I’ve ridden in a regular hailed cab in the past ten years, and in all of those situations I had no choice. I have nothing against independent taxi companies in principle, but truly, the incentives are all wrong and there is no accountability. In my experience they’re unreliable and the service is nearly always poor.
I remember advocating on behalf of Uber when it debuted: convincing reluctant friends to try it, sharing the app and discount code with them, calling an Uber for them so they could experience it. I did all of this in spite of the fact that Uber gave me literally nothing in return! No referral bonus, no stock options, nothing. I simply wanted to share the joy.
In a nutshell, this is what crypto is missing today: this joyful experience. Reflect honestly for a moment: if crypto disappeared completely tomorrow, if you woke up in the morning and Bitcoin, Ethereum, and all the other chains were offline and never came back, then—economic considerations aside—would you really miss them? Is there a single Web3 application, product, or service that you’d really, truly miss? Especially one that couldn’t easily be replicated in a centralized fashion. (To be clear, I don’t mean this as a rhetorical question and I suspect the answer will be “yes” for some of you, but I also strongly suspect it’s “no” for the vast majority of people.) In my case, I think I’d be sad that such an important, censorship-resistant tool disappeared in an abstract sense, but I can’t think of a single application I use regularly that I’d genuinely miss using.
This is the difference between crypto and Uber and, indeed, all great, successful products. We need to create products that give users a truly magical, joyful experience. Sending your first crypto transaction is sort of magical and sort of joyful, but it doesn’t feel compelling or sticky enough (at least if you live in a country with a relatively stable currency and economy). It doesn’t feel like it’s that much better than alternatives like Cash App, Zelle, Venmo, etc.—and also still entails plenty of headaches, like on- and off-ramps. We have our work cut out to achieve this level of joy.
For more: Reflect on the last time you used a new app, product, or service that really blew your mind: that really felt magical, that you felt compelled to share with friends and family, and that you would truly miss if it disappeared.
Thing #3: Tempests and Teapots
Groupthink is real. If, like me, you spend most of your time associating with people who think the way you do, and who work on similar things with similar motivations, it’s easy to feel like you’re working on the most important, impactful thing in the world. It’s easy to feel like you’re the luckiest person in the world. It’s easy to wonder, “Why isn’t everyone doing what we’re doing? Why don’t they see what we see? This is the next big thing. This changes everything. This is going to make the world so much better.”
I’m obviously referring to my experience in the crypto and, more specifically, the Ethereum community over the past few years, but I think it’s got nothing to do with crypto or Ethereum specifically and could just as well (and probably does) happen in any field. It’s especially acute in a space that’s new and legitimately has great potential, but where the degree of hype and excitement is not correlated with how much value has actually been created (see Thing #2). In fact, I think it may be anticorrelated: the more concrete value has been delivered, the less space there is to speculate and overhype the potential. The less value has actually been delivered, the more selling of unrealistic hopium.
The human brain has an acute ability to zoom in on one’s immediate surroundings, in both a literal and a figurative sense. One’s tribe can and usually does feel like the only group of people in the world that matters, and the tribe’s issues feel like the most important things in the world—even if, in the grand scheme of things, the tribe is tiny, marginal, and unimportant. In a sense, no matter how far you zoom out, whether to family, tribe, city, state, continent, empire, planet, whatever—we are still arbitrarily small and unimportant on a cosmic scale. Importance always depends on your frame of reference.
When I’m at an Ethereum event, hanging out with Ethereum friends, Ethereum feels like the only thing that matters, and Ethereum people feel like the best people. It feels like it has unlimited potential to fix everything wrong with the world, from software to money to social institutions and beyond. Nevermind the fact that only a few thousand people, at best, regularly use and rely on Ethereum or apps built on the platform, and that no matter how much money we spend or how big the market cap gets, that number doesn’t seem to move meaningfully. It’s refreshing to spend time with non-Ethereum people, to escape the bubble, to attend events that have absolutely nothing to do with Ethereum. It helps me realize how small Ethereum really is in the grand scheme of things. The most well-known people in Ethereum are totally unknown outside the community. The world doesn’t know anything about Ethereum technology and doesn’t really care about it. (And why would it? People don’t care about platforms. They care about applications and solutions that solve real problems.)
To borrow one of my favorite proverbs, Ethereum is a great example of a tempest in a teapot. It feels like a really big deal—and, who knows? Maybe someday it actually will be—but in the grand scheme of things today it really, honestly, genuinely isn’t. And this is perfectly okay. Because it means we have room to grow and improve. The most important thing is that we not get ahead of ourselves, don’t think ourselves more important than we actually are, and remain humble about how far we’ve come and just how far we still have to go. Channel beginner’s mind.
For more: Look at these active user figures. While it’s not a perfect metric, it’s better than looking at hype or market cap. There’s a single dapp with over 1M MAU, and it’s a decentralized exchange.