…big operating system powered by crypto tokens, for the purpose of moving around… crypto tokens. — Lyn Alden

They have no connection whatsoever with anything productive in the real world. To the extent, they are able to pay high interest rates, this is because new money flowing in pays for the old.

And I kind of very much think that all DeFi users, traders and investors alike know this, and are ok with this long-term big, short-term game-only theme.

The issue is that to this day, people make direct comparisons between this smart contract open economy of future and bitcoin.

Bitcoin is a successful creation of artificial scarcity, I wrote before:

You and I can type up some numbers and letters on our computers (f5d8ee39a430901c91a591…) but they would mean nothing. The trick is to achieve an agreement among all users that this string of numbers and letters is scarce. If you send that string of numbers and letters to someone else, the database updates, something gets deducted somewhere and added somewhere else. And because that something is scarce, it is valuable. This is what bitcoin can do and it can do it well.

Being the first that has done this, bitcoin has, is and will be facing the suspicion that it is a Ponzi scheme. In reality, bitcoin is nothing like; bubbles don’t burst three times in a decade and come back stronger on each reversal.

But, if it is indeed completely abstract, and if it is lacking the higher-level programmability of the ethereum-like blockchains, then why does it have value?

It is both intuitive and ironic that some of the harshest critics of bitcoin are gold investors, who glorify the long-term importance of “owning physical,” meaning that it is always more to own gold in its physical forms than certificates based on it because certificates are only a guarantee of a counterparty; they can be manipulated, inflated, canceled, etc. They do, of course, know that “abstracting away” the physical in the form of certificates, titles and the vast universe of other layers of products derived from and built on top of underlying assets are THE invention of finance that keeps the wheels of economy spinning, but they stress the importance of owning physical because it is counterparty-free.

Again, because it is counterparty-free.

The ironic bit is that they are unwilling to see that someone in 2009 created something that performs the role of gold (scarce, counterparty-free), but in a superior way (perfectly transferable over communication channels).

Bitcoin, a new base layer of monetary system.

When you send someone money from your bank account to someone else’s bank account abroad, no money or gold or other valuable thing ever moves. Instead, the banks have accounts with each other. The bank of your recipient deducts some money from that account it has with your bank, and immediately adds it to account of its customer, your recipient. Just zeros and ones. When you do this locally, when you send money to someone else’s bank account within the same country, the central bank (e.g. FED using FEDwire) adds money to its account with the bank of the recipient and deducts money from its account with your bank.

You can see how this system is fragmented (thousands of intermediaries each keep their own version of truth) and very old from a technology perspective, since this is what money truly is:

…money and the vast universe of financial products that sit on top of it are wholly abstract social constructs that are moved around as zeros and ones between intermediaries using computers running very old code on multitude of patched together networks. Imagine hundreds of millions of lines of near machine-level (i.e. human unreadable) code consisting of instructions in number & letter combinations and low-level commands like “ADD,” “EXECUTE” and ”INIT.”

OK, the system works, but it does not work well enough to be adequate for the internet world we live in. Yes, you should be able to send value as easy as sending an email.

With the advent of cryptocurrencies, it is becoming acutely evident to everyone that this fragmented system of thousands of databases should really be replaced with a single database.

This is what bitcoin is: the layer 0 — one unified, government-free database that financial system will build new layers on top of. You can go further and say that in the same way that the wealth of countries (and their ability to take out loans) was determined by their ownership and control of gold before 1971 and the U.S. dollar after 1971, countries will have to have bitcoin.

People in Philippines earn their livelihood playing crypto game Axie Infinity, a phenomenon that started during the pandemic out of economic hardship. Elsewhere, the market value of NFTs surpassed $40B, as people exchange tokens that have some text string written in them (i.e. non-fungible) and there are now books on earning passive income from NFTs, because, you know, there is nothing people cannot turn into a market.

A circular self-sustaining speculative system propelled by easy money? You could say that this is what smart contract blockchains achieved so far and I would mostly agree.

But in the same breath, you could say that the vision of cypherpunk future that smart contract blockchains aspire to is incredibly inspirational, powerful and relatable. Seems to me that every 10 years or so, a technology comes around that inventors believe is revolutionary enough to forget the practical constraints of the world.

If you really wanted to throw a rock at bitcoin, you could say that it is a long excel table of transactions. There is a code and that code safeguards who can add to the list, i.e. send bitcoin. Its value has grown so much not because of that code, but because it is like a pandora’s box, once released into the world it can never be put back. The genesis block in 2009 at the peak of the GFC was the Emperor’s-New-Clothes moment for the global monetary system, something that was not clear back then, but is increasingly apparent in hindsight. You can copy the code, but you cannot copy bitcoin because it is that one excel table that people are using and it is that one excel table that has all the transactions going back to 2009.

Ok, so an excel table that allows you to transfer unlimited value with a single click and no one can stop you. Goes pretty far toward realizing that cypherpunk vision, no?

But wait, what if we make a better excel table, one that can also perform programs (smart contracts) wouldn’t that be better? Because then the better excel table can not only add transactions to the list; it can also add transactions to the list when some pre-determined conditions are met. So, for example, the better excel table could create a loan agreement between two people. One sends collateral to an address to get a loan from another person. If the terms of the agreement are not met because the borrower doesn’t pay interest to the lender’s address, for example, the collateral would be liquidated by the smart contract. All of this automatic, but even more importantly outside of control of people.

Aha! This sure sounds like the cypherpunk visions come true. If you could convert even complex legal financial instruments like a loan or insurance to a code, then the whole economies can be run anonymously between people peer-to-peer with no involvement from government or corporations, in a more egalitarian world of future, where socio-economic structures are not determined by elite intrigues?

“Hello,” a distant voice of reality.

It is not too difficult to get concerned about the fact that anonymity prohibits credit creation. In DeFi, you cannot get a loan unless you deposit a (much) larger collateral because anonymous parties do not have, by definition, any creditworthiness (and also because crypto is volatile and the value of the collateral can fluctuate).

This applies to other instruments as well. If a farmer wants to hedge his harvest because he is unsure of weather next year, he’d like to buy insurance, which is really just a derivative contract for an investor. If in a hypothetical scenario that a crop future is encoded in a smart contract, both the farmer and investor cannot just maintain a margin to be in the future, but have to pay up in full, i.e. there is no credit, this is immensely limited. 

This is not a matter of a lack complexity either. You may be able to encode a complex legal contract into a code, but the code can only reach and take what is on blockchain.

There is no eye for an eye in finance and credit is the blood of real economy. The (many) smart contract blockchain powered decentralized financial applications seem to ignore that. So far, they are operating systems “powered by crypto tokens, for the purpose of moving around tokens.”

The other fun thing to do that has perhaps a little more serious consequences is to point out how centralized the decentralized blockchains really are. And look, I don’t know if everyone knows this, but the leading smart contract blockchains (ethereum, solana, cardano, polkadot, etc.) are much closer to centrally run corporations than to the cypherpunk visions of the 1980s that gave rise to bitcoin. 

You could say that this is partly a result of the technological constraints because as soon as you start increasing performance and computing power of a blockchain, you need better hardware, thus naturally restricting the ability to run (validate) the blockchain to a fewer larger, wealthier participants (or you sacrifice on its other qualities—Vitalik’s Blockchain Trilemma). But it is also because many of the layer-1 blockchains and the applications built on top of them are, in fact, startups funded by VCs.

And this is something that Jack Dorsey tried (and succeeded) making very publicly visible in a tweet storm last month. Dorsey is a long-time bitcoin supporter, seeing its unconstrained ability to transfer value as much more transformative than most people comprehend, and going as far as calling it the next global reserve currency. Twitter integrated bitcoin to allow its users to send tips to each other. Dorsey’s other company Block (prev. Square) is one of the companies that has been funding bitcoin developers. 

Legal Defense Fund.

Now, Jack Dorsey is creating a legal defense fund to protect bitcoin developers after a number of notable names left the project last year. I don’t know if this is surprising to anyone, but it takes a large team of top programmers/academics to maintain and improve bitcoin. These bitcoin maintainers propose Bitcoin Improvement Proposals (BIP) to the Bitcoin network, and if accepted, they publish the BIP to bitcoin’s GitHub. After it is diligently tested, reworked and updated, the network has to vote on it, before the bitcoin code can be finally changed to reflect the upgrade. 

The fund’s first activity will be to defend some of the most famous bitcoin developers in the Tulip Trading lawsuit — a multi-billion dollar case brought by Craig Wright related to the Mt. Gox hack.

And look, a thing that I think intuitively makes sense is that if someone from the outside has to raise money to protect people that are absolutely essential to the functioning of a ˜trillion dollar cryptocurrency, then you can probably say that it is not run like a corporation. 

See, even the harshest critics poking jokes at the NFT/DeFi-enamored crypto industry would admit that bitcoin is successful at being what it is — creation of artificial scarcity. You can transfer unlimited value and no one can stop you. It has withstood many attacks, forks and attempts for centralization in the name of improved efficiency. 

Dorsey’s bitcoin pitch is that you can do a lot with that. The founders of solana, cardano and the likes dream of putting entire socio-economical structure on blockchain, but really? Lets call it intellectually exciting; the idea that you can make decentralized not just the simple transaction, but the complex logic and dependancies that have to govern it. (You don’t just want to send a token x to Eritrea, but do it in full compliance because the entire compliance, regulatory and legal rules are integrated in a smart contract library). 

Two things: 1. as we said, the more programming you want to do on a blockchain, the more high-performing, i.e. centralized it has to become, and 2. you can see how putting the compliance, regulatory and legal rules of a country on blockchain will take decades and will be an enormous undertaking, the outcome of which is not at all certain, not because of work involved, but the complexity and incumbent displeasure from replacing current socio-economic structures.

And, not surprisingly, most applications built on smart contract blockchains are circular, self-propelling solutions for trading and speculating that offer high returns because the new money pays the old — the inflow of fresh capital (incl. retail investors) pays the holders. They are detached from real assets and productive activities because attaching them is hard?

Meanwhile, as simple and limited as it is, bitcoin is proven to do what it can do — transfer value. You could imagine building complex layer-2 solutions on top of bitcoin, secured by its PoW*. 

Then again, they would most likely be built and run by centralized VC-funded startups… So I don’t know which one is better.

*see Liquid network or Sovryn.

And I am grossly undereducated and somewhat overpaid to write this paragraph (this is the kind of stuff that academics write about, right?), but Americana is exceptional at turning everything into business. It was in the U.S. that greed got reinvented as a good thing [and] it was the new world that injected poor immigrants with the idea of American dream and made money into a universal merit of success.

Clueless art.

Again, just dancing on the surface here, but there is this fun interplay between artists pushing the envelope and testing how much is too much, and the society accepting or rejecting it. Though mostly accepting because (contemporary) art got so detached from reality by now that saying what is or isn’t art is no longer the right of a man, but the power of the market.

Like, lights being switch on and off in a room is an art because it is controversial, it catches our attention, it is a topic, but mostly because someone actually bought it for a lot of real money (Tate acquired it for its permanent collection for £110,000). You could almost say that it was the market that attached very deep meaning to it, not the artist.

The artist can be completely clueless, as long as he understands the signals of the market? A high price tag brings attention, brings persuasion, art critics, the deep meaning attached. And watching an interview with Martin Creed, the artist behind The lights going on and off, might instill that perception in you, I don’t know.

There is a not-so-completely-outrageous thought that this ingraining of market mechanism in art has something to do with the fact that the centre of the art world moved from Paris to New York after WWII.

It’s bubbles everywhere.

Not just art though, money is everywhere and in the post-covid world, money has become an entertainment. People buy blockchain records of ownership that have absolutely no legal validity and contain only a url pointing to a .jpeg or a .gif saved on google cloud for hundreds of thousands, if not tens of millions of dollars. Buying stocks of bankrupt companies is a hobby and a personal statement — you belong to a tribe when you ape into a stock of Gamestop or AMC. Assets and information and signaling about them has become completely detached from reality, as companies scramble to hire CEOs that want to have fun, not consult with their lawyers. 

And you know, with every new headline of a kid making millions in crypto or on NFTs or whatever, bankers on Wall Street feel more threatened because they are losing their prestige? Look, I can’t say that I don’t feel bad for them? Ever since American Psycho and Wall Street, in Americana, they were the highest paid risk-takers / inventors of speculation.

You could say that the madness of crowds is a recurring theme in human history, and that the crypto/NFT/meta space looks like it is reaching its final stages and I would mostly agree, although I tend to think that the madness in this bubble cannot be blamed on crowds. When the FED buys billions of dollars of corporate bonds, sellers of those bonds (companies issuing their own new bonds, investors owning old bonds, etc.) recycle those billions back to the financial markets by buying stocks, bonds and other financial products. This does, of course, cause the markets to rise, make rich asset owners richer still, but also attract normal people outside of the market to use some of the covid free money to start betting. Repeat the cycle several times and you end up in the Everything bubble.

A lot of the times, crypto can look outright useless too. A few weeks back, a couple of meme traders and activists set up ConstitutionDAO with the goal to raise money to buy a copy of the U.S. Constitution at a Sotheby’s auction. After raising record-breaking $47M, they were still outbid by Citadel CEO Ken Griffin. 

The parody starts with how easy they made it for Griffin to outbid them (the funds they had raised were clearly visible on blockchain); it continues with the sole fact that it was Ken Griffin, yes, the ultimate enemy of all meme traders, who many believe masterminded the restriction on small traders during the Gamestop short-squeeze saga in January 2021, when small traders were almost winning against evil big hedge funds. 

And the parody goes on because, haha, oh yes, the practical side of crypto is still bad? Like, the investors in the ConstitutionDAO now cannot get their money back because gas fees on ethereum are so high that they spent about 50% when they sent the money to DAO in the first place, and would now have to spend another 50% to get it back*? 

When you have a company, shareholders have shares and each share has one vote .. only, they don’t have time to vote on every single thing the company does, so they elect directors, who then delegate some power to executive directors, etc.

This is what happens next: the directors get influenced by other directors, other people, the world in general; they do, of course, make decisions (within limits) that favor them, their relatives, their friends, their friend of friends and also based on their world-view; no they don’t decide optimally, nor based on what the majority would want, but like a human being caught in the mess of social-regulatory apparatus because the world runs on relationships.

And I don’t know if everyone understands that this is the reason why crypto is overhyped for more than a decade now. Not so much efficiency, but elimination of social power structures. People would literally dream of decentralized autonomous organizations run on blockchain instead of going to therapy, or trusting each other, whichever you like.

*Gas fees in combination with the general complexity and multitude of crypto services: for someone to exchange $ to $PEOPLE (the token of ConstitutionDAO), the person first had to buy ethereum on an exchange like Coinbase for a fee, then send it to metamask wallet for a gas fee, then send it from metamask to juicebox for some more gas fees. Because gas fees are so high, around 50% of money sent was consumed by fees.

And .. people have tried (and will keep trying) to do the same thing with other things, property titles, art, etc., but boy that is tricky. It is tricky because the normal old world does not recognize it. You could mint a token representing a property title and send it to someone’s wallet, but that would not constitute a legal transfer of ownership unless you do it on paper (according to the legal rules of the country, etc.) too.

But people really really wanted to do this (look blockchain is fascinating), and so they started trading NFTs, which is essentially the same thing (tokens) except that they represent things that don’t have any value. And I don’t think that people appreciate just how much this is true? .. or if it matters at all?

Hey, the NFT market has grown to over $7B over the past <2 years and you could maybe say that much of that growth was driven by widely broadcasted monetary easing swelling and insulating the markets to such an extent that it triggered a meme culture of casino-like trading, more than any belief that NFTs are the future of ownership, but there was some of that too.

Like with bitcoin, when you send some numbers and letters that represent an NFT to someone, the database updates, something gets deducted somewhere and added somewhere else. Within those numbers and letters is a hyperlink to a .jpeg or a .gif, etc. usually stored on Google Drive or some other cloud. Does it give you right to that .jpeg or .gif? Absolutely not. Not at all. Anyone can right-click, save as that digital picture million times, anytime, without limit.

But also, maybe? The NFT community does recognize that right and assign it to you because you have some numbers and letters in your wallet, so it does have value? And that community will grow over time, so the right to the .jpeg is very real? Because, you know, a legal ownership document to a piece of art is also abstract and not tied to the piece of art? Basically, the question here is: can the social-regulatory apparatus of what constitutes ownership be replaced by a purely computer mechanism if sufficiently large population follows it?

Boy, a thin line.

Mostly bubble, but also something to it? The problem is that things get complicated when people get excited about making NFTs out of real things. If you make an NFT of a Picasso, then it is not a legal title to it. You can either sell both (but what value does the NFT have when the real painting hangs on someone’s wall) or you can destroy the painting. And for a while there has been a trend of people burning actual paintings to then sell NFTs of them. Damien Hirst’ latest artwork is a clever reaction to this, haha, practical problem.

A somewhat more constructive, but also ephemeral idea is the one people at Particle had: selling hundreds of thousands of NFTs, each of which represents a digital piece of an actual physical artwork, which is then bought and put in Particle Foundation .. to be toured and displayed internationally. Sounds really good, right? ..and if not that, then at least like something that is perfect for the current age. Except that concepts like “foundation” or “charity” have a very functional meaning in the art world, often as structures to keep ownership, but defer taxes. Boy, it will be important to see just how restricted and committed to NFT owners will that Particle Foundation be, otherwise there could just be many paintings hanging on someone’s wall, part paid by the NFT “owners”.

”The basic innovation of crypto is the production of artificial scarcity,” but let’s not make a farce of it like the Bohemian prince.

There is also this: that millions of computers have to run blockchain to verify transactions so that we can exchange strings of numbers and letters that don’t represent anything is a bit annoying from ecological perspective (?), and some great practical jokes have been made of it, like a pirate website that lets you download the whole database of all NFT .jpegs and .gifs, etc.. There are, you could say, also some very real jokes, like what if the cloud where the .jpeg is saved goes down? You buy a $69M Beeple image, open it up, click on the hyperlink to see your precious artwork and get a 404 error. That could be a bit annoying?