WTF is Crypto and Why Should I Care? (Part II)
Three Things #149: December 15, 2024
Last week, I wrote about some of the motivations behind the “crypto revolution” that we’re in the midst of, in the hopes of elucidating some of what we’re up to and why it matters so much. There are a lot more than three reasons. Here are a few more.
Thing #4: Permissionless 🚦
In seeking to understand the long arc of human history and society, it’s helpful to understand concepts including centralization vs. decentralization, and control of knowledge. The basic trend is as follows (if you’ll grant me poetic license to simplify vastly over time and place for the sake of simplicity). In the very beginning, in the tribal, hunter gatherer days, human society was relatively flat and meritocratic. Over time, however, as groups of people began to put down roots and build cities, then city states, this began to change. Society became far more hierarchical, with a small number of educated, wealthy elites who exercised moral and religious authority over the uneducated masses. Everyday people were beholden to the word of God, and the word of God could only be read and interpreted by a coterie of elite priests. In other words, the elites had a total monopoly on the production and transmission of knowledge.
Things remained this way for thousands of years, until quite recently. Technologies enabling mass communication, and, eventually, mass education, such as the printing press, telegraph, telephone, radio, and Internet, began to erode the monopoly power of the elites, first gradually and then all at once.
It started with the printing press. Before its invention, books were incredibly scarce and valuable. Everyday people had no access to them, and even if they did, they weren’t literate. Within a few generations of the invention and dissemination of the printing press literacy began to spread, pamphlets and later books were mass produced cheaply, and eventually everyday people had access to a great deal of knowledge. In turn, they of course began to reject much of what they were told by the elites. It’s no surprise that massive upheavals such as the Protestant Reformation and the Thirty Years’ War happened not long after the invention and spread of the printing press.
Still, the process of devolving power and control of knowledge from the center has been extremely gradual. While books have long been available to everyday people, every successive generation of information technology has been captured by the elites and used to their advantage. Just one generation ago, basically everyone still got their news from the same few newspapers and the same few television stations. There were only a handful of publishers with wide distribution, and you needed the support of a publisher to publish a book. This meant that TV producers, newspapers, and publishers could effectively exercise a monopoly over public discourse, and everyone just sort of went along with it because there was no better alternative. The elites behind these mediums wielded enormous power as a result.
All of that has changed rapidly over the last generation, thanks to the information revolution, which is still playing out. With the rise of the Web and tools like blogging, social media, and podcasts, the power of the word is firmly back in the hands of everyday people. Trust in traditional institutions is at an all-time low. Legacy media outlets, from once-popular newspapers to TV channels to book publishers, are struggling, and many are failing outright while grassroots publishers are thriving.
There are, of course, severe tradeoffs. We’ve lost our shared understanding of the ground truth, which is dangerous and has manifest in scary ways like the proliferation of conspiracy theories. Fringe, extremist content, endorsing conspiracy theories, violence, racism, or worse, is also thriving. What’s more, trust in authority is at an all time low because of how easy it is to debunk the lies of the elites and to spread that information in real time.
I don’t want to downplay the risks of these tradeoffs, but I think they can be managed. On balance, I think the trend is a good one. Putting creative power in the hands of as many people as possible will ultimately benefit society. We’ve already seen that play out in news, music, and podcasts, and today there’s a plethora of popular content creators, many of whom produce extraordinarily good content, that would never have made it through traditional channels.
The name for this wonderful phenomenon is permissionless innovation. The idea is that everyday people should have access to the tools they need to both create content and to distribute it to a wide audience, thanks to the Internet. The trend began long before Bitcoin, but blockchain and cryptocurrency are its latest manifestation. Whereas blogs, social media apps, and podcasts give everyday people the ability to publish content without anyone’s permission, blockchain and cryptocurrency for the first time give everyday people the ability to create scarce, valuable digital assets such as coins, tokens, and NFTs—without needing permission. It allows builders of open source software and those creating public goods to experiment with new business models, new investment schemes, and new incentive designs. It also gives creative entrepreneurs and builders the ability to launch innovative applications such as lending platforms, risk management platforms, insurance platforms, and better banking experiences—and all of this is just the tip of the iceberg.
Ten years ago, if you wanted to build an application or a service that engaged in creative financial engineering, you had no choice but to go hat in hand to the relevant local authorities and beg their permission. In many jurisdictions the process of launching any company is enormously burdensome. Building financial infrastructure is significantly harder, given its inherently sensitive, political nature. Licenses for banking and money transmission are extraordinarily expensive. They’re beyond the means of most entrepreneurs, and they’re beyond the means of all entrepreneurs in many places. This causes entrepreneurs to give up, or work on something else, and we all suffer as a result. There’s a reason that banks, airlines, mobile phone providers, and health insurance companies are pretty much universally terrible—they have almost no competition! The barriers to entry are far too high. This severely dampens the capitalist impulse, removing the effects of creative destruction and their incentive to improve.
Blockchain and crypto changes all of this. Literally anyone can launch an application on Bitcoin, Ethereum, or the other public, permissionless chains. All of the information you need to do this is available online for free. There’s an active, enthusiastic community of thousands of people around the world who are excited to help newcomers, also for free. There are tons of excellent meetups and hackathons literally everywhere.
What’s more, you don’t need anyone’s permission to make contributions to the core infrastructure or to participate in governance. It doesn’t matter who you are, where you live, how wealthy you are, or what you look like. And, most importantly, you don’t need anyone’s permission to build on or contribute to these platforms. You don’t need any KYC checks. You don’t need any API keys. You don’t need a bank account or a credit card.
This has led to a Cambrian explosion of innovation in the industry, and it’s still the very, very early days. It’s inspiring to witness, and it’s how society should be run at large. Open blockchain platforms are taking the power out of the hands of the gatekeepers once and for all. They’re the purest manifestation of meritocracy, and this is to be celebrated.
Thing #5: Sound Economics 🔊
When crypto folks talk about fixing economics, they’re usually talking about a nuanced, confusing thing called “sound money.” This has multiple definitions, but you can roughly think of it as money that you can rely on (it refers to stable purchasing power, but also to a predictable supply). We don’t want our money to lose too much of its purchasing power, and we don’t want prices to be too volatile, because these things make life difficult and make many forms of business impossible. Put differently, in order for a particular form of money to be useful, you should be able to trust that when you put it in the bank today it won’t lose too much value before you have a chance to spend it.
Sounds easy enough, right? But it’s a tall order for fiat money. Whichever economic school you subscribe to and whatever your definition of sound money, there’s literally no fiat currency on earth that’s sound over the long term. The most stable currency in the world, the Swiss Franc, lost 90% of its purchasing power over the last 100 years. And this is to say nothing of basketcase currencies like the Argentine peso and Turkish lira that have been subject to hyperinflation. These currencies have rebased multiple times in the past, effectively chopping off several zeroes in order to maintain a false sense of stability. As if that isn’t bad enough, consider currencies like the Zimbabwe dollar that died completely because the government caused severe inflation by overprinting.
What about the USD? We’re all aware that there’s been a ton of inflation over the past few years, which is another way of saying that the dollar has lost purchasing power. There are multiple reasons for this including supply chain disruptions, but the biggest reason is the unprecedented amount of money printing that’s been going on lately.
Inflation has calmed a bit in the past year, but the long term trends are still extremely worrying. As I wrote about previously, American economics aren’t looking so good lately. In addition to nonstop money printing, the national debt is rising at an unprecedented, terrifying pace: a trillion dollars every few months. Entitlement spending such as social security and pensions are unsustainable due to an aging population: based on the present trend, the social security trust funds will be depleted in about ten years, after which point benefits will be cut, which doesn’t bode well for my generation.
While I remain optimistic overall about the state of the country, we have an incoming president who has a tenuous grasp of economics at best and whose primary economic policy, tariffs, will likely do more harm than good. No one seems to have any realistic plan for managing inflation and the rising debt burden, other than suggesting we simply outgrow the debt (a nice plan if you can do it). This doesn’t bode well for the future of the USD.
Now consider commodities such as gold that have maintained their purchasing power over the same time period. And then, of course, there’s bitcoin, which has increased exponentially in purchasing power since its introduction a mere 15 years ago. Bitcoin is the soundest form of money the world has ever known: the supply is fixed and known in advance, no one has the power to change it, and it has more than maintained its purchasing power over time.
In contrast, the fiat money system is deeply broken in some important ways. Governments are out of control and can print as much money as they like to fund forever wars. This is doubly true of the United States, which due to the reserve currency status of the USD has been able to print far more money with far fewer concerns about currency devaluation than other countries. Other currencies are experiencing hyperinflation, and still others aren’t freely tradable or convertible. I don’t see any way of fixing fiat money short of going back to the gold standard, which isn’t realistically going to happen.
Cryptocurrency is a safe, reliable, peaceful harbor in a world full of bad, unsustainable, unsound monetary policy. The total supply of bitcoin is perfectly predictable: we know exactly how much bitcoin will be minted when, and we know that there will never be more than 21 million coins. Everyone who transacts on the Bitcoin network plays by precisely the same rules (more on this in a moment), and unlike fiat money newly-minted bitcoin doesn’t go unfairly or undeservedly into the hands of the wealthy and powerful. What’s more, whereas issuance of fiat money is totally at the whim of whichever administration happens to be in power at any given moment, the rules of Bitcoin change only very gradually, if ever.
I trust Bitcoin 1,000x more than I trust the USD. I want my wealth, and my family’s wealth, denominated in BTC, not USD. I am not alone, and the number of people who feel this way is rapidly increasing.
Thing #6: Can’t Be Evil 👼🏻
Famously, in the beginning, Google’s motto was “Don’t Be Evil”. That lasted until Google turned into a corporate juggernaut and got called out for dodgy practices like collaborating with the Pentagon on military uses of AI, and voluntarily censoring its search results in China.
I don’t use this example to pick on Google specifically. Rather, I use it to highlight an issue with companies, and with human institutions more generally. I wrote last week about how companies and other institutions are run by fallible humans who are corruptible and who lie, cheat, and steal. I wrote about how blockchains, cryptocurrencies, and the other applications that run on blockchains aren’t susceptible to the same issues. But the issues aren’t just with the people behind the institutions. The issues are with the institutions themselves.
Institutions develop a life of their own, despite the best intentions of their founders. This is exactly what happened to Google, and to countless other companies like it. There are complex social and economic reasons for this. Most of them are related to investors and to market forces, which in most cases are beyond the control of the founder or even of a company’s officers.
My favorite example of this is Jack Dorsey. Jack is a cofounder of Twitter, and he ran the company from 2015-2021. During this time, he was genuinely concerned about the oversized influence of the platform’s advertisers, and about the degree of censorship taking place on the platform. He made a legitimate effort to fix things, but despite being both cofounder and CEO, he couldn’t overcome the institutional momentum moving Twitter in a different direction—in a woke direction, one that involved more and more censorship and deplatforming, to keep its advertisers and, by extension, its investors and Wall St. analysts happy. It took Elon paying twice what the company was worth to acquire it and take it private to turn things around.
Sadly, Google and Twitter aren’t isolated examples. The direction taken by the vast majority of companies and other institutions over a long enough time frame is one of becoming worse and worse, eviler and eviler. The best explanation of how and why this happens is enshittification, as explained by Cory Doctorow. It’s a concept worth understanding in some depth because it’s everywhere and it’s important. In brief, companies first invest in attracting customers, causing them to fall in love with a product or service, but then, over time, they’re forced to betray these early customers by degrading their offerings in order to maximize shareholder returns. The list of companies that have managed to avoid this fate is so short I can count on one hand. (Foundations, coops, and other nontraditional organizations are less susceptible to this problem, but they have lots of other problems.)
Blockchain applications and institutions take a different approach. Rather than relying on the founder’s intentions or unkeepable promises, they bake this principle into their very DNA from the outset: hence, Don’t Be Evil becomes Can’t Be Evil. As an example, on chain lending markets allow everyone in the world to see their balance sheet, and the state of all active loans, at all times, so it simply isn’t possible to, say, quietly gamble with user funds or make loans while insolvent. As another example, Web3 social applications use open data and standard formats, like JSON, and in many cases the user custodies their own data, so that they can easily take their data with them at any time.
How are blockchain applications able to achieve this? They have a number of superpowers: transparency, immutability, and credible neutrality.
I already gave an example of transparency: lending markets whose up-to-the-second balance sheet is always visible. Imagine if you could peek at the financials, headcount, etc. of your favorite company at any moment, for free, without anyone knowing, and be absolutely sure that you’re seeing the most accurate, up to date information. Imagine if you could see how decisions were being made internally, as you can with DAOs that have open governance. Imagine if you could assess the health of a product, platform, company, or ecosystem simply by observing real-time metrics that are publicly available. All of this, and a lot more, is possible on chain.
Immutability is just as important for Can’t Be Evil. In its simplest possible form this just means that confirmed transactions cannot be reverted or changed. It’s simply not possible for a nefarious actor to update the data unilaterally: say, moving money from one user’s account to another, or skimming a little off the top.
Immutability also makes payments much simpler. Unlike credit cards, with cryptocurrency, there are no chargebacks. This gives vendors much more confidence that they’ll be paid after a transaction settles, and it massively reduces the cost of cryptocurrency transactions vs. credit card transactions, where chargebacks add a great deal of cost. There’s some additional nuance to immutability: for instance, as in git and other version control systems, you can see all of the previous states of the data. You can see all of an NFT’s previous owners, and all of the previous prices at which it changed hands! This is an extraordinarily rich data set and it enables all sorts of applications that aren’t possible off chain.
Finally, in my opinion the single most important feature of blockchain, cryptocurrency, and other blockchain applications is credible neutrality. In brief, as I wrote before, it means that all of the rules of the protocol or application are known, and everyone plays by precisely the same rules. There are no different classes of user (other than those explicitly coded into the application). There’s no special treatment. There’s no pulling strings or asking favors. There’s no under the table handouts to friends. All of an application’s users are exactly equal before the “law,” i.e., the protocol. Imagine if our real world, off chain institutions and even governments worked this way.
Taken in combination, this powerful and unique set of features ensures that public chains and blockchain applications don’t need to rely on the goodwill or good intentions of their founders or leaders. If they’re designed correctly, if their code and data are open and verifiable, they simply cannot be evil regardless of these things. That’s a powerful idea, and it will change the world. It already has.