[zer01]

You know, I think if you take a time machine back to the early 90s you’d see similar sentiment about the internet and internet based companies.

“You want to put CREDIT CARDS on the INTERNET?!”

“You want to replace the POST OFFICE with the INTERNET?!”

“You want people to post details about their day on the INTERNET?!”

Those “snake oil” investments at the time eventually became Amazon, E-mail, and Facebook. The first ideas funded aren’t always the final execution of it (Facebook was not the first social media platform) but the idea is that VC funding spurs innovation and people taking risks with new ideas, which pushes the entire space forward.

People who see the entire crypto space as a “scam” are (in my experience) unaware of the real cryptographic research currently being done. Threshold based signatures, multi party computation, zero knowledge proofs, etc are new tools and primaries to build a better internet and give us better, concretely provable, tools to shape society.

Are there scams in the space? Yep, and I don’t like them just as much as you don’t since they delegitimize the real work being done. But I also see the future Googles, Amazons, and Facebooks of the world emerging from this unique space to do some truly amazing things despite those scammers in the same way that those companies rose from the early internet cesspool of scams and ads.

[drumhead]

I was there, and the difference between crypto and the products and services you mentioned is that email, Amazon Facebook, digital banking were all delivering useful outcomes to users. I can't see anything useful from crypto other than laundering the proceeds of criminal activities.

[zer01]

> I can't see anything useful from crypto other than laundering the proceeds of criminal activities.

I think it's a pretty arrogant stance to say that just because you don't see the value in a thing that value doesn't exist. I don't see the value in Tiktok/Facebook/Snapchat, but others clearly do. Maybe it just wasn't built for me.

My general thesis on the crypto industry is that it's a fertile space, and provides new tools to people who want to build things. Is the next Google going to shake out of it with 100% certainty? Of course not, no-one knows the future.

On the flipside though, fertile spaces with new tools are exactly the conditions that gave rise to orgs like Facebook/Google/Netflix/etc, which changed the world in a number of ways.

If we're in the 90's and I'm pointing to this newfangled "HTTP 1.0 Protocol" RFC and trying to describe to you web browsers, Netflix, etc, I'm pretty sure most people will look at that as a pipe dream that will never see reality in their lifetimes. It also took many many websites and iterations to get to the Netflix we have today (Netflix being a proxy for "streaming services" for video content).

Same deal with putting credit cards on the internet for faster payments and describing Amazon or Ebay. Does e-commerce have obvious credit card fraud and criminal activity on it? Absolutely, if anything it's grown as a parasite in lockstep with the success of e-commerce.

Does this mean e-commerce is a bad idea in general? My position is no, new technology just presents new challenges with the benefits they also bring.

Social media is the humanity hurdle du jour in a lot of ways, but does that mean we should get rid of it wholesale?

[oneoff786]

> I think it's a pretty arrogant stance to say that just because you don't see the value in a thing that value doesn't exist. I don't see the value in Tiktok/Facebook/Snapchat, but others clearly do. Maybe it just wasn't built for me

No, you just don’t appreciate the value of those social media services. If you don’t see it then you’re blind. They let people connect and share stuff they enjoy seeing. It’s fine if you don’t like it, but the use case is obvious.

What is the use case for crypto. Do you have a vision for it?

[zer01]

Right, people in the crypto space also feel like "If you don’t see it then you’re blind", which was the point I was trying to make.

> What is the use case for crypto. Do you have a vision for it?

Short term, the crypto space is building neat things like multi-sig contracts, decentralized finance products (with unique characteristics like flash loans), DAOs to govern things in a decentralized way via on-chain voting, and spurring innovation into real cryptographic research, including things like privacy-preserving crypto and multi-party computation. People are thinking very deeply about things like trust relationships and engineering systems to be trust-less.

Medium term, I see protocols like Compound eating the profits of the large banks and either forcing them to innovate (which would be great) or replacing them entirely. Why does my savings account yield 0.01% when they lend out my very same dollars at 5% in the form of car loans/mortgages? I'm not discounting FDIC insurance or the federal reserve, but things have tipped too far into the banker's favor IMO. Same deal with the traditional markets, there's a lot of fees and friction unless you're a big boy that locks a lot of retail out of the game. Private capital markets are in for a wake up as well - VCs hold a crazy amount of power and potential upside exposure because they're just the only ones who can get in on deals early (think early Google investors) - if that was more access-able we might be able to break the VC hegemony which loves throwing good money after bad and propping up terrible companies.

Long term, I see it as a series of tools and protocols that can establish a more "global-native" economy. Our world is getting more global, not less. A core foundation of immutable software feels like a more reasonable base layer to build on than trusting politicians and a gordian knot of deals. Someone from North Korea can build a smart contract and I don't need to trust them that it does what they say it does, because I can verify it for myself. Also economically, having a store of value that is also impossible to counterfeit is hugely useful, so people can't paint lead yellow and call it gold - https://www.reuters.com/article/us-china-gold-kingold-jewelr....

[oneoff786]

> Medium term, I see protocols like Compound eating the profits of the large banks and either forcing them to innovate (which would be great) or replacing them entirely. Why does my savings account yield 0.01% when they lend out my very same dollars at 5% in the form of car loans/mortgages?

If the car loan defaults, you don’t lose your money. That’s the primary reason.

> Same deal with the traditional markets, there's a lot of fees and friction unless you're a big boy that locks a lot of retail out of the game.

Crypto fees are often terrible. The ones that aren’t tend to rely on a few centralized party for trust.

> Private capital markets are in for a wake up as well - VCs hold a crazy amount of power and potential upside exposure because they're just the only ones who can get in on deals early

That’s… not true and risky startup investing is a snake pit for ordinary investors

> Someone from North Korea can build a smart contract and I don't need to trust them that it does what they say it does, because I can verify it for myself.

And go to jail because you’re violating international sanctions?

[gamblor956]

Multi-signature contracts already exist in the real world. Just so you know, multi-signature contracts have been a requirement of real world contracts for several centuries.

Decentralized finance products also already exist. They're called microloans. Someone got a (memorial) Nobel prize for this in 2006.

Multi-party computation. Have you heard of SETI@home? It came out in 1999. It was followed by Folding@home in 2000.

So basically, all of the "innovations" of "crypto space" are just things that have already been done in the real world, but now are being done online less efficiently. I guess that's what counts for progress if you never bothered to learn history.

[zer01]

I understand that contract law and notaries are a thing, but people’s signatures are easily forged and a huge amount of the legal system is currently dedicated to resolving conflicts with this. On the flip side building a smart contract to divvy up control of an administrative function or control of funds in a bank account between a threshold of people is a completely different thing that and doesn’t involve scribbles on paper whose only recourse for forging them is the legal system and lengthy litigation. For one, what happens when you want to do business with someone internationally? Can you rely on the courts to back you up at that point? Low level international fraud is rarely prosecuted because it requires things like extradition. If I want to share control of a thing with a business partner in even somewhere like the UK the only recourse I have is the courts. OR I can use a multisig contract and balance the power in such a way where we either both consent to a change (and cryptographically attest to that consent) or it simply doesn’t happen.

Decentralized finance products like uniswap and compound are not the same as micro loans, and micro loans have massive issues with trust, fraud, and solvency. Being able to swap or lend assets in a completely trustless way is something new, and enables new and novel technology like flash loans to exist (which make for more efficient markets). Plus I can go read the actual holdings of these protocols and build whatever machinery I want to respond to changes. Both protocols have a governance process with a timelock so no changes are made without the market having time to react, which overcomes a lot of the risk of malicious proposals (if I somehow pass a proposal that says “pay me all the money in the contract” then everyone will pull their money from the platform before it executes).

As for MPC I’m taking more about cryptographic MPC than something like SETI. A HUGE problem with managing cryptographic keys, be they root dns keys (13 of which control essentially the entire internet) or keys for SSL certificates is that they must exist somewhere in memory to be used. If they’re in memory they can be stolen and no one can actually tell if they’ve been stolen or not until it’s too late. Right now we have ok solutions to some of this through HSMs but then how do you also do backups properly? The MPC research I’m talking about specifically offsets these risks by never having the key exist in one place, and instead it being similar to a multisig where participants come together to create this material. An added benefit depending on how you set this up is that it only requires 1 party to be honest for the whole system to remain sound. ZCash did their entire setup for their protocol this way (https://z.cash/technology/paramgen/). Coinbase also just rolled out support for doing this at scale so that they can have users participate in these crypto protocols without having to manage their own keys (https://cointelegraph.com/news/coinbase-unveils-web3-mobile-...).

So yeah I can see how if you’re a person who has done 0 research into this things sound similar on the surface, but you’d probably also be in the camp of “we already have the post office, what’s the point of email” back in the 90s.

[LawrenceX]

This conflict between I call "technological enthusiasts" and "economic realists" is extremely prevalent in any discussion on cryptocurrencies.

I find this extremely fascinating and I think stems from both understanding things that the other side doesn't fully appreciate. I wrote about this more on my blog: https://lawrencexie.wordpress.com/2022/05/13/on-crypto-misco...

[zer01]

Nice blog, I'll preface this response with the fact that I'm not an economist, but I am an engineer and a technologist at my core. I also work in security so that's usually a lens I use to look at these things.

Also, sorry for the wall of text, but I'm legitimately interested in engaging with you on this topic (obv).

On Terra/Luna - there were a ton of people who did 0 due diligence on it, saw a money printer, and didn't possess the capacity to understand that the economics of it were unsound. On the flipside, I know of a good number of people who predicted that it'd destroy itself on the first bear market cycle. Retail loses here because they believe the hype train, and that's not a good outcome.

MIM (https://coinmarketcap.com/currencies/magic-internet-money/) is another stablecoin that's over-collateralized (first pioneered by MakerDAO with SAI/DAI), but has people similarly nervous, not because of its economic design (which they lifted from MakerDAO's SAI/DAI) but because of the stewards of the protocol - https://rekt.news/sifu-scandal/. Similarly the same people who saw Terra on a crash course have sent out warnings about MIM, and in general it has stalled in terms of its market penetration, which is the market working IMO.

DAI is the most popular algo stablecoin, and I believe it to be sound because of a smart contract based liquidation process that ensures that any DAI generated are over-collateralized with other assets, even if the underlying price of the collateral falls rapidly (there are economic incentives for people to liquidate others when this happens). I disagree with them using multiple baskets of crypto (DAI's collateralization is largely backed now-a-days with USDC, another stablecoin) vs the initial model where it was backed solely by ETH though, since I think it compounds risk in the system.

> In many ways cryptocurrency projects are recreating many of the (failed) experiments in traditional economic history.

I agree with this wholeheartedly. People are taking risks and trying to overcome old problems with new technology and sometimes failing as a result. It doesn't to me mean that those risks shouldn't be taken, and I'm extremely glad that the UST/Luna explosion was isolated basically entirely to the crypto markets since I see this all as expieremental.

That said, I think that there are other tools/protocols/etc that are being built that are not purely economic in nature - things like multisigs are hugely useful for taking coordinated action in a trustless way, they just haven't been productized properly yet.

> However there are some fundamentals that technologists forget when thinking about cryptocurrency projects. One of them is that the total value of a system remains unchanged unless there is actual utility provided by a new product or service.

Value creation is something that's always hard to gauge, and is what leads to speculation I think.

Take Uniswap for example - it's by far the largest decentralized exchange (DEX) that exists. It recently surpassed $1T worth of value transacted, and even had stretches in the past couple years where it overtook the trading volume of Coinbase (binance of course shadowing both of them - https://www.theblockcrypto.com/data/decentralized-finance/de...). Is that value creation? I'd say providing a service to more easily swap pairs of assets with a very small finality window IS valuable.

Additionally, Uniswap (and some other protocols) have this notion of a "flash loan" or "flash swap" that, as far as I understand, are unique to on-chain crypto. The TL;DR is that this mechanism allows someone to borrow essentially infinite money as long as they repay it in the same transaction (with a fee). This leads to a situation where you don't need deep pockets to capture the value from an arbitrage opportunities - you can write an arbitrage contract that will either guarantee you a profit through a complicated chain of arbitrage, or it'll simply revert. To me that's a pretty unique primitive to build a more efficient market.

Another example I'll point to is Helium (https://www.helium.com/), which aims to build a global network of wifi hotspots, but incentivized (by crypto) based on the activity on your hotspot. Fon tried to do this in the early 2010s and couldn't find traction (because why would I share my internet with others for free?). Xfinity took a stab at this recently because they have a near-monopoly on people's internet connections (with no upside to the end user whose internet is being shared). To me, helium is creating value here, and the model is preferable to any alternatives.

That's not to say that I'm blind to the fact that there are a ton of ponzis and pump and dump schemes going on in the crypto space, but my point is that there is real value creation happening as well, it's just being drowned out by the other nonsense right now. The reason crypto keeps coming back is because bear markets shake out these crappy schemes and what's left is the projects and builders who are actually creating value and plan risk accordingly.

> The second reason there is a considerable amount of misconceptions about cryptocurrencies is the issue of echo chambers

I agree 100% with this, but it's also not localized to just crypto. Go look at /r/superstonk or /r/wallstreetbets on reddit and you'll see similar things. We have the same problem with our politics too, just across different mediums. All of these have bad impacts on individuals and as society as a whole, and is IMO one of the greatest threats to global peace that exists. The internet was supposed to unify us, not divide us.

> However misconceptions do not emerge purely from lack of access to differing ideas or opinions. Instead they originate when individuals are unable to recognize the limits of their own comprehension.

Again, 100% agree. This is also a problem pervasive in a wide band of things from politics to (as you pointed out) vaccine hesitancy. One thing I've grown to learn is that it's easy for me with my skillset to say "go do some research, idiot", but a good chunk of the population literally does not possess the skills to do so.

If you google "Is the COVID vaccine harmful" vs "Covid vaccine dangerous", you get likely different results, but most people don't understand that. Even if you do get to the right data it's usually nuanced and long/hard to comprehend so people's attention span falters and they look for a youtube video to explain it to them in 2 mins. Again, a problem that absolutely exists, but I don't think is unique to the crypto space.

As for your brainteaser: > A cryptocurrency stablecoin is introduced whereby holders must light a cash dollar bill on fire in order to “earn” one unit of crypto. The issuer reasons that for this reason, each unit is worth $1. Under what circumstances can this reasoning hold sustainably true? Is it possible for this peg to hold indefinitely?

This skips over the idea of redeem-ability entirely I think, which is a necessary part of a stablecoin. By destroying a dollar you're not creating something new since it's a one-way track. I can't redeem my crypto for the original dollar because it doesn't exist anymore.

If I instead "lock" that dollar in a smart contract to generate $0.50 of crypto, I can "unlock" that dollar by repaying the underlying debt. Likewise, I can take USDC send it to Centre on-chain to have them wire me money since USDC is just a tokenized representation of a dollar in a bank account.

Anyway, you seem like a smart person so let me know if you ever want to chat about crypto and economics in a more direct way. I think we could have some interesting discussions! :)

[LawrenceX]

Thanks for taking the time to read! I'm glad you thought it interesting.

I agree with many of your conclusions, for example value creation IS occurring in the crypto space. Your examples of decentralized exchanges for example do solve a problem and increase efficiency.

And excellent - you got the brainteaser exactly! By destroying the dollar the no-arbitrage mechanism doesn't exist anymore and there is no more upwards pressure on the stablecoin to peg it to $1.

I have some other concerns with stablecoins backed by any asset correlated with crypto since it leaves the potential for market manipulation when controlled by a central party. I wrote about that in an earlier blog post too.

I'd be happy to chat about any of this more directly. My email is [e-mail]

[gamblor956]

Email predates the internet by several decades, as do blogs. Technically, even credit cards were being used "online" before the internet was readily accessible.

And what we call the "internet" today was already being used by companies and research institutions prior to becoming commercialized. The pre-web was useful from the moment it was created. It didn't need to "find" a use case; the use was immediately obvious.

OTOH, we're still waiting for cryptocurrencies to present a use case that isn't better solved by an existing technology.