WTF is Crypto and Why Should I Care? (Part I)
Three Things #148: December 8, 2024
The recent election was a turning point, not just for US politics but especially for the blockchain and cryptocurrency industry. In fact, we’re only beginning to understand the ramifications of this election. But in its wake one thing I feel quite strongly is a sense of responsibility. I’ve felt this way for many years, but the feeling is extra strong now, especially given the rapid pace of change.
Blockchain and cryptocurrency feel, for the first time since I began working in the space over seven years ago, truly inevitable. It’s a powerful, exciting feeling, but with great power comes great responsibility. I feel a moral obligation to ensure that the things we’re building, and the reasons we’re building these things, are clear to everyday people everywhere.
It’s always good to go back to our roots and revisit the basics—which is exactly what I want to do this week. Here are some of the reasons why this “crypto revolution” is taking place, why it’s happening now, and why you should care.
Thing #1: Trust 🤝
Trust is a recurring theme in this newsletter. It’s a topic I’ve been thinking about and writing about for many years. Trust really is at the core of everything we’re building. I like to remind people that Bitcoin didn’t appear out of nowhere! It appeared in a particular place at a particular time, and in response to a particular set of social, economic, and political circumstances. The global financial crisis had just happened and trust in institutions, especially private banks and central banks, was extraordinarily low. Bitcoin was created as an alternative to fiat currency, and as a way to make money less political.
Since then, trust has fallen even further. The Pew organization has been polling Americans for decades on the topic of trust, and their polls indicate that trust in a variety of institutions, from Congress to financial institutions to companies to even science and education, is lower today than at any point since polling began. This isn’t terribly surprising. After all, these institutions lie to us all the time. They’re run by fallible humans who regularly lie, cheat, and steal, and who are corruptible. Any institution that’s been around long enough and that has enough at stake attracts sociopaths who seek to capture it and profit from it. This is an iron social law.
That’s nothing new, but what’s new is the Internet, social media, and the ability for people to both a. figure out that they’ve been lied to, and b. let the world know, much faster and more easily than ever before. The emperor never had any clothes on, but now we can easily see him for what he is.
The starting point for understanding blockchain as a technology, and cryptocurrency as an alternative form of money and as an alternative system for transacting in goods and services, is trust. More precisely, it’s this lack of trust. The superpower of blockchain and cryptocurrency is its ability to minimize trust. Note that this is sometimes referred to as “trustlessness,” but I strongly prefer the term trust minimization since there’s still some degree of trust involved.
If you transact with someone—with another individual, or with a company, an NGO, a foreign government, etc.—you have to trust that a lot of things work in your favor. This is bad enough if the person you’re transacting with lives down the road and you see them regularly. You still need to trust that the intermediate bank or banks don’t make a mistake, freeze your account, or steal your funds. You need to trust that the counterparty delivers what they promised, or that you have recourse through another means such as litigation, which means trusting in the rule of law (and your ability to hire a good lawyer). You need to trust that the contract you signed (or the terms of service you clicked through without reading) aren’t worded to your disadvantage, and you need to trust that you understood the terms correctly.
Good luck if you’re transacting with someone who lives far away, in another jurisdiction. You’re adding many more layers of trust! In addition to the above, you now need to trust more intermediaries including international banks. You need to trust international law. There may be language and cultural issues to consider. You’re exposing yourself to foreign exchange risk and the volatility of a foreign currency. The list goes on and on. Good luck seeking recourse through litigation: this is hard enough close to home, and it’s borderline impossible to successfully sue a foreigner in their home jurisdiction, even if you’ve clearly been wronged.
Blockchain fixes this. When you transact with someone on Bitcoin, the list of things you need to trust is comfortingly short! You need to trust that you have a working computer and a working copy of the Bitcoin software, and a working Internet connection (note: in the case of Bitcoin, any old Internet connection will do, by design). You need to trust that the Bitcoin network will keep working, and will keep producing blocks—in other words, the Bitcoin incentive structure, which has worked just fine for 15 years. You need to trust the transaction itself, that it’ll do what you expect it to do: your wallet software can do this for you, and if you want to be extra careful, you can have a friend or a consultant review the technical details for you. That’s more or less the whole list! When a Bitcoin transaction settles, there’s no un-settling. There are no rollbacks or chargebacks. There are no legal complexities. There’s only cold, hard math and computer code to worry about.
Of course, more complex technologies built on top of blockchains, like Ethereum-style smart contracts, to say nothing of complex DeFi applications or layer two applications such as rollups, add a great deal more complexity. This means there are more things to trust. For instance, when using a DeFi application, you need to trust the smart contract code and the application frontend. You need to trust that the developer isn’t going to rug you. You may need to trust the tokenomics underlying the platform’s unique assets. You need to consider smart contract risk and counterparty risk. If you’re using an exchange, rather than custodying your own assets, you of course need to trust that exchange.
However, as many items as there are on this list, it’s still a much shorter, more transparent, more comprehensible list than the things you need to trust when you interact with a legacy institution such as a bank or a company. What’s more, the nature of these risks is different! For a truly crypto native application, you can easily verify each of these things yourself by reading the code—or, again, by outsourcing this task to someone you trust. Both the data and the code are fully transparent. Good luck verifying the balance sheet of a legacy company that you transact with (even assuming the company is telling the truth in the first place, and there’s a high chance it isn’t).
Social trust still matters enormously, and at the end of the day blockchains are people, too. Blockchain doesn’t totally or perfectly alleviate the need for social trust. But it goes a long way towards addressing shrinking trust in institutions—by introducing a new type of institution with very different, more favorable trust assumptions, and one that cannot lie or be corrupted. The idea is that any ordinary, motivated person can transact comfortably and with peace of mind. Blockchain isn’t quite there yet—the UX still needs to improve to the point where more people feel comfortable interacting with it—but it’s come a long way and will continue to improve rapidly.
Thing #2: Go West, Young Man 🌵
It’s important to put blockchain and cryptocurrency in a broader social and economic context. They may seem radically novel, but when we put them in context we can see that they’re in fact just the most recent manifestation of much older, more universal trends.
One of these trends is the Wild West trend. Broadly speaking, the world can be divided into two kinds of places: developed and developing. Developed places are charted, “known” territory. They’re safer, and usually have strong rule of law. The tradeoff is that there is, by definition, less opportunity in developed places.
Developed places of course started out as undeveloped, and then pioneers moved in to capitalize on the many available opportunities by starting needed businesses. Those easy, “low hanging fruit” opportunities are now gone, long ago having been capitalized upon by these early pioneers. That’s not to say that there’s no opportunity in developed places! There are many types of opportunity, and even in the very most developed places, one can still innovate using new technology, new process, new business models, etc. But on average these are riskier, less certain forms of innovation and, on average, the returns are lower than those on “pioneering” innovation. Put simply, if you’re the first person to open a hair salon in a booming gold rush town, you’re going to do just fine, regardless of how good your haircuts are. If you’re the 100th person to open, you’d better give darn good haircuts in order to compete with the 99 other hair salons.
And, broadly speaking, there are two kinds of people in the world. Let’s call them employees and founders. Employees have a relatively low appetite for risk and prefer stability, e.g., receiving a stable, reliable paycheck, and having a clearly defined role and responsibilities. Most people are employees, which is perfectly natural and also a good thing, since the world wouldn’t work without lots of employees!
Founders, by contrast, have a different mindset. They’re the pioneers. They have a much higher appetite for risk and a much higher tolerance for chaos. They’re also highly ambitious, and typically aren’t satisfied working for someone else. There have always been, and always will be, pioneers in every population. This is also a good thing because pioneers cause society to progress, and without progress society would stagnate and decay. In the American mindset, pioneers are exemplified by the phrase, “Go West, young man” (pioneers are typically, though of course not exclusively, young men)—as in, you won’t make a name for yourself here in the developed, old money East if you’re not already a member of the Old Boys’ Club. Go West, to a frontier, pioneer town, where there’s less rule of law, lots more opportunity—and also, a lot more risk.
Historically, those frontier places used to be geographies—typically places like the Wild West, in the American case, far from the old centers of power and civilization. Today, there are basically no undeveloped places left in the world, and competition is fierce even in developing places. Which is why the most ambitious entrepreneurs today—who, not coincidentally, also happen to mostly be young men—have flocked to frontier industries like crypto and AI.
This is also key to understanding this industry and the impact it will have, and indeed is having, upon society. To use myself as an example, immediately prior to joining this industry I ran a healthcare technology startup. The startup was traditional in every sense of the word: an ordinary corporation with ordinary governance and shareholders, doing business in an ordinary, highly developed industry. It was extraordinarily difficult to innovate in American healthcare due to a host of reasons: too much competition, not having an established network in the space (i.e., not being a member of the Old Boys’ Club, figuratively speaking), not having enough capital, an enormous burden of regulation, and an extreme risk aversion on the part of the potential customer and many other stakeholders.
As a pioneer, I found all of this stifling, and indeed, soul crushing. After several years in the trenches, I understand now why it’s so hard to innovate in industries like healthcare, and why the pace of change is so slow (i.e., why doctors are still using fax machines). I learned a lot from the experience and met amazing people, but I was all too happy to move on when the time came.
When I discovered the blockchain industry accidentally, it captivated me. It felt like the Wild West—there was very little regulation, everyone was comfortable taking risks, things moved very fast, there was an enormous amount of “low hanging fruit” opportunity, and I felt like I could do anything. In other words, it was the exact opposite of healthcare, and it felt like exactly what I was looking for. Since my painful experience trying to innovate in healthcare, I always advise first-time entrepreneurs to avoid established, risk averse industries like healthcare and traditional finance, and to find spaces, like blockchain and cryptocurrency, where they can be free to innovate.
Naturally, the first industry that blockchain and cryptocurrency has disrupted is finance which, like healthcare, is highly regulated, risk averse, and enormously slow-moving. This disruption is well underway, but this is just the beginning. Just as software ate the world, and all successful companies today are software companies, after a fashion, I expect blockchain to eat every industry and all successful companies to eventually also be blockchain companies, after a fashion (and AI companies, but that’s a subject for another week).
In this respect, there’s absolutely nothing new about the blockchain and cryptocurrency revolution. They’re simply the latest disruptive innovation in a long, unbroken line of disruptive innovations and industries that attract the bravest, most ambitious, most risk loving pioneers among us.
Thing #3: Censorship Resistance 🤐
Freedom is one of the things I care about the most, and one of the things I’m working to defend. The lesson of history is that freedom is the bedrock of a healthy, prosperous, sustainable society. When people aren’t free—to express themselves, in speech or in writing, to assemble, to transact, etc.—society begins to stagnate. This is because literally all new ideas, all innovation, is initially heretical. A society where people aren’t free to explore novel ideas and innovate is a society that can’t keep up with the pace of change.
In spite of this fact, and in spite of the fact that we’ve learned this lesson the hard way many times over, there are still plenty of people in the United States today who believe in restricting free speech, an act otherwise known as censorship. These include very prominent people, such as the most recent Democratic candidate for vice president. The threat of censorship is very real and very present. Due to a backwards looking, narrow minded, wrongheaded ideology that posits that certain ideas, and certain people who espouse those ideas, are simply too dangerous to be entertained or engaged with, the American left has embraced wrongheaded notions like “deplatforming” and “canceling” people and ideas they don’t agree with, rather than engaging with them on the merits in a healthy marketplace of ideas.
Freedoms such as those guaranteed by the Bill of Rights—freedom of speech, freedom of religion, freedom of the press, etc.—are essential, but essential freedoms don’t stop there. The reality is that, in order to function in a modern, capitalist society, individuals and organizations also need access to tools like banking. Money and banking are therefore inherently political, and one of the favorite tools of the powerful is preventing their adversaries from accessing banking.
The Democratic Party is guilty of attempting to cancel entire industries they don’t like for arbitrary political reasons, using underhanded tools like restricting access to banking. While they cannot legally do this outright, they’ve done it indirectly by putting pressure on banks and other financial institutions to refuse to do business with certain groups, which amounts to the same thing. And the USA is far from the only place where this happens. Right next door, the Canadian government infamously unbanked individuals who participated in the “Freedom Convoy” trucker protests in 2022, and possibly also others who financially supported the protests. This makes financial censorship resistance even more important and timely.
This, simply put, is the meaning of censorship resistance: that we need public spaces, and their digital equivalents, that are nonpolitical, where everyone is free to express themselves, whether through speech, through writing, through code, or through transacting value. The line between a public forum, where free speech must be protected, and a private space, where these protections don’t apply, is admittedly blurry, but “you know it when you see it.” Digital commons including Bitcoin and Ethereum are clearly such public spaces, and as such, censorship resistance is essential.
Censorship resistance isn’t an easy property to achieve and maintain technically! It’s typically achieved via decentralization: rather than having a single, centralized, corruptible operator, there are many operators, and you can transact with any of them. And we pay a price for this decentralization: using decentralized services will always be slower and more expensive, and will have worse UX, than using a quick, cheap, centralized service. But this is one of the key things that makes a decentralized blockchain unique and different from centralized, incumbent alternatives. And it’s a price worth paying in order to achieve censorship resistance (along with other properties such as permissionlessness, transparency, and immutability).
In sum: I may not agree with your business or your intended transaction use case, but I’ll defend to the death your right to transact on my network.
At this point you may be wondering, But how can we allow criminals and bad people more generally to transact on our networks? How can we protect ourselves from them, and from toxic content? The problem is that “bad actors” and “toxic content” are subjective ideas—my bad actor may be your revolutionary hero! Giving the government or any other central administrator the ability to ban certain actors from accessing or transacting on the network, based on their subjective notion of good and evil, would put us right back where we started.
The fact that we build credibly neutral systems that allow anyone to transact who plays by the rules doesn’t also mean that we need to directly expose ourselves to all content from all actors. The reality is that there will always be bad actors who utilize permissionless systems for nefarious things such as money laundering and inciting violence.
This is an admittedly thorny problem, but we have other technologies and techniques at our disposal, ones which work perfectly well in a censorship resistant, decentralized network, and which can be effective to limit the reach of such bad actors. For one thing, there are opt-in KYC and other identification programs that allow us to prove that we’re not bad actors, and we may choose which class of user we’re willing to transact with. For another, there are many kinds of content filters that we may choose to develop or enable. Different users, organizations, and communities will choose to use different kinds of sorting and filtering algorithms on top of credibly neutral base layers. This is perfectly harmonious with the notion of censorship resistance, which preserves the ability for such flexible filtering to exist in the first place.