January 13, 2023
Crypto for rational skeptics
I enjoyed Scott Alexander’s recent post on crypto. Where I disagree with him, it’s with respect, and I would like to nudge him and others a little further down the crypto funnel. This post is for people who haven’t completely made up their minds about crypto.
Scott Alexander’s post is below (it’s good if you want to read).
I’d like to highlight one section where I think he’s wrong, then leverage an analogy of his where he’s sorta-correct but doesn’t go far enough.
Specifically this space analogy:
“Yes, The Crypto Financial System Is Just Reinventing The Regular Financial System Except Worse In Every Way, And That’s Fine”
“The space program has existed for more than fifty years, and mostly succeeded at reinventing things we already have on Earth, only worse. The only excuse for any of this is: yes, but it’s in space.”
He goes on to say about crypto:
“In the same way, everything about the crypto economy is worse than the regular economy. The only excuse is that it’s decentralized.”
“This means you can use it for all of those cool things - sending remittances, circumventing corrupt banking systems, resisting authoritarian governments - that are hard to do with regular money.”
This post will focus on the space analogy (which I like), but prior to that, I want to disagree with the premise that ‘everything’ is worse.
It’s easy to be wrong when using the word ‘everything,’ but crypto isn’t anywhere close. Binary stances in either direction (overly pessimistic/optimistic) are seductively simple - unfortunately the value is in the gray area with all the messy details.
Crypto is faster and more efficient on many tangible vectors: instant settlement, cost, and is borderless.
I don’t need to include a comprehensive list of non-economic features: transparent, trustless, self-custody, permissionless, distributed, digital property and attack resistant. This distracts ultra-skeptics from seeing the obvious evidence of existing product-market-fit.
You don’t even need to touch anything decentralized, open, or self-custody to see the value. In fact, most consumers don’t.
The top consumer apps are centralized companies — think, Binance, Coinbase, OpenSea etc.
Even many of the top tokens are not decentralized, in the top seven by market cap, No. 3-7 are centralized. The top three stablecoins are centralized, which make up more than 90% of total stablecoin market cap. Bitcoin miners are centralized and further consolidating, some with big energy companies.
People, on average, are using the products because of product-market-fit and value, not because of anything libertarian, anarchist, or ideological. This is the big misconception from the outside. Skeptics are too distracted by Twitter and podcasts to look up and see the scoreboard (combined market caps and transaction volumes). If I only saw the combined market cap for the NASDAQ, I’d see enough points on the board to know there's surely product-market-fit bubbling underneath, regardless of the cyclical contractions and expansions.
Let’s step back to describe these markets in a more fundamental sense.
The internet was always going to generate a native financial and property output. Crypto/blockchain is purpose built for the internet, so it will naturally be an improvement along many vectors within its own native context. This makes sense.
Let’s leverage the space analogy to pull up a few levels from a higher altitude.
I think crypto/blockchain is less like recreating things in space and more like extending extremely productive urban real-estate into the sky. It’s like building a floating NYC, SF, and LA above the clouds. It allows NYC/SF/LA to extend their key industries (ie, finance, internet, media), but with new features that only blockchain and tokenization can offer. It’s a parallel layer of the economy - and this layer has a different set of physics and capabilities.
In this new parallel layer, blockchain’s blockspace is the new real estate, while the applications are the businesses on top. The new layer of the economy has standardized how they think about value: with tokens. A full spectrum of assets are represented in an internet native token. One open question is, how many more parallel cities and industries can we or should we build?
How would we think about this if we were to strip away even more of the crypto-specific micro? What do we really care about?
These new cities and industries in the sky contribute to GDP and employment and would not have otherwise existed. The combined economy would be smaller and there would be fewer jobs (certainly fewer exciting ones). This is the area that most people miss or dismiss with regards to the crypto/blockchain enabled economy. It is positive-sum (it’s in the sky - it doesn’t compete with our real estate) - that’s not to be dismissed. Assuming we’re discussing an honest and moral effort (within constraints of human rights), it’s worth celebrating crypto/blockchain on these merits alone. More is more - and on the margin, we live at a time when we need more, not less (especially post-1973 or “the great stagnation”).
It’s not only positive-sum, it’s the new frontier, exciting, and in many ways replaces the awe inspiring deep space aspirations we once had in the Kennedy era. This is why talent is pouring into crypto/blockchain at unprecedented levels. In some ways it’s a modern massive-scale distributed Manhattan project, without a war or government to coordinate it. The best talent is opting-in to crypto, seeking something exciting and truly new to work on. It’s obvious we’re been in an inspiration shortage, not a surplus.
On employment and talent, it’s important to look at the alternative. The alternative is not that all these hyper-talented folks would otherwise volunteer with the poor or work on a cure for cancer. People judge crypto efforts on some type of fictional idealistic alternative where all these engineers would otherwise teach kids in Africa or curing rare diseases, but this statistically is not the case. The alternative is more likely that they’d focus years of energy to get digital ads clicked on at Facebook or Google, and a few others would be quants at hedge funds. None of us would notice their contributions at this point, furthermore, FB and Google have an extremely deep bench of talent sitting on the sidelines.
Do we really need the smartest people of our generation working on getting ads clicked-on, optimizing social media feeds, or sitting on the bench with no visible contribution? That’s not for me to judge, but it seems healthy to funnel some portion of them to functions that are net new innovations, positive-sum, and broadly inspiring. On the margin, we get far more from talent when they tinker and try new things.
Crypto without the Crypto
If you strip away all the crypto terms, it's simply an exciting new parallel layer of the economy, that’s positive-sum, has PMF with consumers, and makes better use of talent (on the margin!) with novel (some say breakthrough) technologies.
On the margin, we need more of these things, not less.