Week 49
Discover more from The Gap
Today, I’ll share two posts with you.
One about crypto anno 2022 with perspective from Matt Levine, Vitalik Buterin, Rune Christensen, and yours truly.
The second post is my response to Sam Altman’s “American Equity” where I discuss universal basic income in the face of the ongoing AI revolution.
Enjoy!
Crypto Anno 2022
Matt Levine's take
In late October, a highly regarded financial journalist, Matt Levine, published "The Crypto Story", a cover-to-cover issue of Bloomberg Businessweek detailing "where it [crypto] came from, what it all means, and why it still matters." As the editor, Joel Weber writes in the preface:
"(..) crypto has dug itself into finance, into technology, and into our heads. And if crypto isn't going away, we'd better attempt to understand it."
It's interesting to read when someone with a deep knowledge of traditional finance gives an in-depth take on crypto. Especially, since the crypto industry is IMHO destined to merge or at least bridge with TradFi in the not-so-long-term future. Otherwise, it will likely "embark on a journey to irrelevance" to use the lingo of ECB. Here's a cartoon from the Bitcoin maximalist community:
Anyway, the Bloomberg columnist Levine published a long post this Monday titled "Crypto's Credit bubble" about 3AC and FTX/Alameda. Levine would like to compare the crypto industry crisis of 2022 with the financial crisis of 2008 since both events are strongly connected by an intense demand for "safe assets". Levine explains:
"Safe assets," in this context, means places to invest your cryptocurrency or stablecoins that earn interest, that feel like bank accounts rather than speculative investments (..) You wanted to own normal understandable stuff (dollars, perhaps Bitcoins) and get paid a lot of interest for participating in "crypto".
However, crypto is unable to manufacture "safe assets" in this sense, since "there are not a lot of people borrowing Bitcoin or stablecoins to buy houses or build factories or whatever." Quoting Levine again:
The safe assets in crypto — interest-bearing accounts at Voyager or Celsius or BlockFi or Gemini — are created by making unsecured billion-dollar loans, negotiated in a single phone call, to arbitrage trading firms that are actually just making long-term bets on the marketing abilities of blockchain entrepreneurs. Crypto shadow banks did not manufacture safe assets out of risky investments; they just relabeled the risky investments as safe assets. There were people taking wild speculative risks on brand-new, sentiment-driven crypto projects, and there were people who wanted to invest safely and earn 8%, and they were the same people.
The essence as I see it is this: prices in the crypto market have so far mainly been driven by hype, marketing efforts, and value created out of thin air. This could change in time, but I remain skeptical.
Vitalik Buterin Looks Towards the Future
While Matt Levine looks back at 2022, Vitalik Buterin looks towards the future and writes about what excites him in Ethereum's ecosystem. He makes one point in particular that I would like to dwell on.
To Buterin, "the first and most important application" of crypto is "money". He recalls a time when he was able to pay with ETH in a random coffee shop in Argentina. This showed him the "sheer reach of adoption" although he admits that the transaction did not make a lot of practical sense:
The one issue with my coffee transaction is that it did not really make pragmatic sense. The fee was high, about a third of the value of the transaction. The transaction took several minutes to confirm: I believe that at the time, Status did not yet support sending proper EIP-1559 transactions that more reliably confirm quickly. If, like many other Argentinian crypto users, I had simply had a Binance wallet, the transfer would have been free and instant.
If the transaction was made from one Binance account to another, it would be exactly like a regular bank transaction but in crypto. "Free and instant", perhaps yes, but honestly to me, and I believe to most other people, everyday Visa transactions seem pretty free and instant too.
One thing that I am genuinely curious about:
When Layer 2 solutions such as the Lightning Network are further developed, and Bitcoin can be used as a more practical means for everyday payments, what would that mean for other cryptocurrencies? Bitcoin being a much larger, more secure, and more censorship-resistant network. In this light, are other cryptocurrencies even relevant as money? I think not, but prove me wrong.
Rune Christensen's End Game Plan
In connection with Maker's End Game Plan - which the community has voted in favor of - founder and CEO of Maker, Rune Christensen, wrote a top-notch essay where he argues why DeFi will likely move towards a new paradigm with more regulation and centralization.
He described "the post-9/11 paradigm" that "when taken to its extreme, divides all financial activity into two boxes: Either you're fully compliant, regulated bank, or you're a terrorist."
According to Christensen, DeFi and crypto had a window of opportunity to prove to the financial world and to regulators that a happy medium could exist between the two extremes. If DeFi and crypto could provide tangible benefits to people, for example by mass financing renewable energy projects or by helping people in developing countries to access financial services at scale, the industry could perhaps escape "the terrorist box", avoid heavy regulation, and be treated by governments as a public good like Linux or roads.
However, that window of opportunity is now closed for good.
First of all, the blockchain industry completely and utterly failed to produce anything of value during the bull run. Basically nothing was achieved and no new products, services or anything with tangible benefit derived from blockchain technology has entered the mainstream consciousness at any level.
And then on top of that, disasters such as Terra, Celsius, and other crypto scams (recently FTX) are now "synonymous with blockchain and crypto in the public consciousness".
On this background, it should not come as a surprise to anyone that crypto regulation is coming, and probably coming hard. For most crypto projects this means comply or goodbye.
My Own Opinion
In full disclosure, I have taken some brutal beatings for my crypto investments this year. So if I come across as kind of bitter, it's because I am.
For one thing, my MetaMask wallet was recently hacked. I had a weird, eerie feeling as I saw how my crypto funds were transferred to a stranger's address, but there is nothing to do. Customer service told me to contact the police but it should be extremely obvious that they don't have the means to identify the culprit or retrieve the stolen crypto.
In sheer desperation, I reached out to a group on Reddit to see if someone had been in the same situation and could offer guidance. Within ten minutes I received something like twenty friendly requests from other Reddit users offering their help. Almost every single one of them, perhaps with one or two exceptions, was trying in sneaky ways to make me send a screenshot of my private keys. Like scavengers closing in on a wounded animal.
One of the major selling arguments for DeFi over banks is that DeFi is more transparent. However, because of the inherent complexity of using DeFi, this is not the case for most users. Unless you are experienced and able to skillfully audit smart contracts, which you by the way should be able to if you invest in the space.
Because of the inherent complexity and complete lack of regulation, DeFi is a breeding ground for cybercriminals. They can literally commit theft without consequences. Navigating the space is difficult, since scammers, hackers, and fake gurus are standing at every corner waiting to sell you a dream while they take your money. You don't know who to trust, and the lack of trust is a major issue, although crypto in theory should be "trustless".
The lack of legal regulation is of course not sustainable. And besides, crypto needs to become convenient for regular people to use. If broader adoption is the goal, Vitalik Buterin and other developers should probably put less energy into exchanging nerdgasms, and focus more on making crypto services user-friendly and beneficial.
I share Rune Christensen's sentiment that crypto is likely moving towards more regulation and more centralization. I believe this is a desirable development. Bitcoin is (hopefully) going to remain the same at its core.
Credits to Jimmy Song for the cartoons!
Response to Sam Altman
Tuesday I published an in-depth response to Sam Altman’s “American Equity” for Hackernoon. A brief summary:
Back in 2017, OpenAI founder and CEO, Sam Altman, suggested a universal basic income model in the US where citizens receive an annual share of the US GDP. Sooner or later, I think such an initiative, in one form or another, will be a must in all technologically advanced, democratic countries.
Universal basic income seems to be a fair solution to mitigate technological inequality, where all the powers and resources are concentrated in the hands of a small elite, and technological unemployment, where workers lose their jobs to AI systems - systems that they have unknowingly helped to train for free with their data.
In “the age of technology” we are faced with new dangers and new opportunities. One of the most important opportunities is to solve “mankind’s economic problem” which John Keynes predicted 100 years ago we would be able to do today.
That was it for today. Thanks for your reading!