I'm afraid this is too jargon ridden for someone who has followed crypto only casually to fully comprehend. At minimum a glossary of terms and abbreviations ought to be provided.
Umm what? I still have many questions. Like why do I want crypto? Is it just so I can buy hookers, drugs, and guns? Pay off ransom-ware attackers? Or can I use it to pay for my groceries at Safeway--for the same transaction cost as my debit card? Or buy stuff from Amazon? Or pay my taxes?
Essentially, I'm trying to figure out if I'm the guy who once asked an Enron accountant how they are so huge living off the margins of energy trades (he simply said, "it's complicated") or if I'm the guy who said, ok, that thing flying down the windy hill in Kitty Hawk is a novelty, but it can never be anything more than that.
> Like why do I want crypto? Is it just so I can buy hookers, drugs, and guns? Pay off ransom-ware attackers?
Yes, because 1. it doesn't have overhead for sending internationally 2. you can create a new bank account (wallet) without doing KYC and talking to anyone. No, because most coins are even less private than regular banks and Chainalysis will eventually find you.
> Or can I use it to pay for my groceries at Safeway--for the same transaction cost as my debit card? Or buy stuff from Amazon? Or pay my taxes?
No, because the point of taxes is that you have to pay them in the national currency. And having to pay sales taxes is just inconvenient enough that it keeps domestic transactions in the same currency as the tax. Well, that's the idea anyway - we here in the US are so good at financial imperialism we can pay in USD at places like amazon.jp and Canadian Starbucks.
re: "Initially people thought, “Let’s just peg some coin to the dollar! For every $1 in as collateral, we’ll issue 1 stablecoin out.” 👋Tether. 👋USDC. But this solution was not true to the OG ethos of decentralization because requiring reserve pools in dollars meant we’d be standing on the crutches of our broken existing system rather than ripping-and-replacing."
The first problem with this statement is that the crypto community is not nearly mature, pragmatic or earnest enough to do the Tether/USDC model properly, let alone do better. The second problem is the deluded or dishonest claim that the dollar system is "broken," which seems to refer to the usual Austrian-theory BS that "fiat" currencies are inherently doomed.
Done properly, a stablecoin is essentially substituting for a bank account, and so to be functional and competitive with the existing system it would need to credibly replace all the things that banks, bank-regulation and government crisis-management do, including:
- Reverse fraudulent transactions.
- Explicitly insure middle-class-scale deposits.
- Implicitly insure upper-class-scale deposits (bailed out in '08 via MMF bailouts).
The crypto world is currently acting as if it can have the cake (replace banks) and eat it too (escape all regulation). When boiled down to its essence, what this really means is the insiders are trying to make it possible for insiders to rip consumers off with zero accountability.
As for the dollar, it is not as Austrian-theorists claim some kind of paper chit, it is a financial instrument issued by the government of the United States of America, with a value based on the nation's productivity and the government's taxation power, stabilized by an inflation-targeting central bank with an established record of predictability. One can disagree with the 2% inflation target, or one can wish that the system wouldn't allow a spurt of significantly higher inflation during a massive pandemic for the sake of avoiding recession spiral and averaging out economic pain that would otherwise concentrate on specific groups of people. But as long as the crypto community shows no sign whatsoever of even thinking about how to create a financial instrument with value anywhere near as stable as the dollar, crypto clowns who call the dollar system "broken" are simply lying and suckering people into something much less reliable.
Speaking up for the Austrians, I do think that a lot of the bad rap comes from gold peddlers and Ron Paul purist types. My professor called himself an Austrian economist and found a lot of Austrian economics valuable, but still erred on the side of monetarism.
On the topic of your key point in this column, I agree. They want to have their cake and eat it too.
Austrian theory didn't start stupid. When Van Moses steered it towards an anti-inflation focus he was reacting to Weimar Germany, and describing the fiscally driven nature of it quite accurately. Hayek was also mainly harping on fiscal, and ultimately wrong about welfare states inevitably sliding into authoritarianism, but not stupid. It was their American followers who turned it into a crank hard-money quasi-religion.
I've read your articles but I still genuinely don't understand what problem all this is meant to be solving. Integration into 'TradFi' just sounds like a way for the early adopters to keep the bottom from falling out of assets that will run out of buyers by entangling them so heavily in the regulated financial system that the government will be forced to buy digital currencies to protect regular citizens who have made ill-advised purchases. The 'anarchy' seems absolutely horrible for everyone except early adopters.
Maybe! I will offer my own thoughts on this in a bit...I think an underrated element of this is tech people trying to nab the excess profits of the finance people...
I think its a set of tech people trying to nab all the fraud opportunities of the finance people. Most DeFi and Crypto projects are scams based on avoiding regulation. https://www.youtube.com/watch?v=YQ_xWvX1n9g happened to come out today and provides a more reasonable overview of defi.
There is no problem being solved. This article fails to mention that Defi, and crypto broadly, cannot actually integrate with anything outside of the crypto ecosystem, except by falling back to a trusted authority, which therefore recreates the problems of the traditional financial system.
It’s all hype layered on hype. Increasingly complex derivatives, but you can’t actually *do* anything at the end of the day, because again, any time crypto connects with the non-crypto world, it has to fall back on centralized trust.
I had been a big believer in crypto for awhile. I wanted to believe we could build fantastic new cooperation mechanisms on blockchains. But increasingly, I think blockchains have no real place outside the limited use of bitcoin as digital gold.
The thing is, the finance industry has a LOT of B.S. in it. Even if crypto doesn't "solve" a single problem, there's lots of room for crypto to cannibalize existing finance profits. I'm going to write a post about that idea soon...
That’s an interesting point. My view on the current crypto cycle is that it’s an exercise in the power of memes to coordinate a lot of money towards a target from a lot of people.
As an example — there is currently MoonDAO, a project to crowdfund enough money to (literally) send a participant to the moon. This is built on blockchains. However, at the end of the end of the day, there is no API for a spaceship — someone is going to have to take the money, presumably set up an LLC, and buy a ticket aboard a commercial space flight. Furthermore, Ethereum transaction fees are so high that this is way less efficient than simply doing the crowdfunding via a web2 platform like Kickstarter. Nevertheless, MoonDAO is awesome, and nobody ever attempted something this awesome on Kickstarter.
So, the real revolution in crypto is that of memes coordinating tons of strangers, + lots of money. Perhaps in some sense this is cannibalizing the profits of the finance industry (rather than people paying 1% fees to a fund manager, they pay 1% fees to Ethereum)?
I'd be very interested in hearing this – fully agree that there's a lot of BS with money sloshing around in it and that different BS can capture it. There are also a lot of use cases that finance does terribly (I recently had to send USD from a Canadian bank to a US one and it took a phone call and six days) that some crypto app might do better without actually needing the crypto part.
But overall, it seems like introducing chaos for little benefit at an enormous resource cost, with money essentially just shifting among wealthy people. How many Bitcoin 'billionaires' have been able to cash out of their crypto assets anyway?
You don't need a crypto app, a normal app can work better e.g. transferwise (not a recommendation although I have used it for a few international payments).
Finance should be disrupted by tech without scamming a massive amount of unsuspecting innocent people out of their money and without relying on fraud and money laundering. What a psychopathic approach. Some tech companies like Stripe are going for it the legitimate, non world destroying way.
I'll be very interested to read that post, because after reading Ming Zhao's post, I am convinced this whole thing is moving toward the exact same people having the exact same profound structural advantage in defi as they have in trad fi. I, a retail trader, do not have a hope of competing against a highly capitalized crypto fund and its army of quants that it's hired away from trad fi - or the trad fi fund that turns its army of quants on crypto, either natively, or because it's been acquired by crypto barons flush with cash. It also sounds like the big money is to be made on derivatives of derivatives of derivatives - or more generally on complex financial arrangements that are completely inscrutable to all but the most savvy/predatory of insiders - and we're supposed to believe this is sustainable and the music won't stop, a la 2008?
No, crypto cannot eliminate centralized authority when it interacts with the real world. But there is a decent hope that it can create better tools to help interested parties and communities reduce the scope and cost of that trust by keeping records of what's happened on a (mostly) immutable ledger.
I think I read every word in this article, but I'm not sure that I understood any more than a sentence or two here or there. I'm not sure what definition of "normie" was in use in the title...
I am a fairly high functioning normie and I am having a nearly impossible time deciphering the insider lingo and reference points in this piece. I am also having trouble disentangling the ironic observations from those made in earnest. I don't believe I have a good handle on what is legitimate evangelism and what is mocking evangelism here. This whole piece is probably covered by Poe's Law.
> traditional markets rigged the game, giving hedge funds and banks hidden privileges and special access totally unknown to retail traders
I think what I am supposed to take away from this piece is that defi promises to decentralize the gains of financialization away from the insiders of traditional finance and toward the unwashed mashes. What I actually take away from this is the exact opposite. Allowing for the fact I am almost certainly oblivious to some of the irony in this piece, it appears that most of the sincere optimism expressed by this piece relates to the liquidity/distribution channels that institutional investors have brought to the crypto market and the future probability of crypto exchanges acquiring traditional brokers. This does not scream "financialization for the masses!" at me. This screams insiders gaming the system, just like they always have.
There was maybe a small hint of the composition of insiders slightly changing, but then this whole piece - just like the crypto market as whole, at seems - drifts toward defi ultimately ending up indistinguishable from trad fi. The gravity well of trad fi is enormous. It sounds like it's going to be the exact same people who are best positioned to exploit the markets due to their superior access and knowledge. How in the world are "retail traders" supposed to compete with highly capitalized funds that can employ an army of quants that have moved offices from trad fi to defi in order to analyze all of the opportunities that exist to exploit this new financialization space?
If anything, my big takeaway from this whole piece is that crypto financialization is the exact same game as trad fi. It's trad fi and all its complex derivatives and collateralized whatnots and esoteric abstract financial mechanisms on crack. It sounds like replacing the house of cards that led to the 2008 financial crisis with an even more obfuscated house of cards. This time designed to be even more immune to oversight and regulation than the 2008 financial system, which itself was clearly not under adequate oversight at the time. We're supposed to believe that this won't end in disaster, and that the retail traders are going to end up the winners? Is this satire?
One nit: "Like the fact that non-accredited investors <$1M net worth can’t invest in startups ..."
Still true for many startups. But in recent years, at least some startups have been able to accept modest investments from non-accredited investors? The SEC facilitated that in 2015 by issuing final implementation rules under Title III (aka Regulation CF) of the 2012 JOBS Act, followed by an ecosystem of funding portals (Wefunder, Republic, StartEngine, SeedInvest, Netcapital, et al.) that host such startups' crowdfunding campaigns.
And as someone who's been doing Wefunder since the start, I have to point out it's extremely risky and I have not yet realized any profit - as expected, since 5 years isn't long enough for liquidity events to happen. So if you're not accredited, you better almost be.
Great point, and thanks for this first-hand observation, Alex! Hoping some of your investments on Wefunder eventually pay off. And at least a few, big-time!
We who aren't "well heeled" – that quaint old expression – and wish to recoup at least some of our investments in startups under Reg. CF would probably be advised to spread our investments across as many companies as we possibly can, and keep those investments to a minimum? Along with having an extremely long time horizon.
Another analogy: for those obtaining income by making crowdfunded loans to "house flippers" on Groundfloor, the folks on that platform found that people who invested minimums ($10 or somewhat higher) in scores or hundreds of opportunities managed to fare well overall, even where some loans went into default.
One other aspect of investing in startups on crowdfunding platforms like Wefunder and their like: some of these companies are targeting important problems, and it can be at least psychologically rewarding to help fund their survival and growth, in the hopes that they succeed at addressing them?
A couple of representative examples, both with 2021 crowdfunding campaigns:
- Whooshh Innovations, "disrupting the world of fish passage [particularly around dams] with solutions [which they claim are superior to conventional fish ladders] that enable selective fish passage, restore natural habitat, and limit CO2." https://www.startengine.com/whooshh
- Phoenix PharmaLabs, with a goal of "addressing the opioid crisis by developing potent, safe, non-addictive painkillers." https://netcapital.com/companies/phoenix
This was remarkably well written and clear for a DeFi explainer. The whole section on memes could have been killed, since no one outside the crypto community remotely cares. If you are doing an explainer to a general audience, you might want to spend some time explaining your jargon. Your audience is probably not up to speed on weird conspiracy theories around Jay Clayton, so no one is going to understand your references to the “Clayton Administration”.
That said, it is good to see that a lot of problems are being solved. It is not entirely impossible that some useful tech might actually come out of all this.
But there is still no reason for anyone to invest any money in any of this.
If you think of a cryptocurrency as a bond, then all the pre-2018 tokens are just bonds with no payout at all. Plugging that into your bond pricing model gives a $0 long term value. It is nice that some of the tokens now have yields, but $COMP is just another no yield token, so the coupon value is still $0.
As a thought experiment, imagine that the FED creates a cryptocurrency version of a 30-year Treasury bond. It functions exactly like any other cryptocurrency, except you get a check every year for holding in. Why would you buy BTC which pays nothing?
It is nice that you acknowledge that BTC and the original stablecoins were “useless”. But you can’t just build an “algorithmic central bank” that maintains an USD exchange rate without 1-1 USD currency reserves. If you run out of reserves, then you have no way to maintain your peg.
But still, it is not impossible that some crypto company out there is actually going to create something of value. But there is no point in investing that that company either. The whole point of DeFi is that no single company is able to create a choke point and extract rents. It is hard to see how anyone can create something decentralized and useful that can’t be immediately repurposed.
It is really hard to look at crypto and remain confident that it is eventually going to collapse. The numbers look really big (BTC has $4B USD traded each day!), and it keeps not collapsing. It is impossible to ignore that crypto’s understanding of how the economy works is, in some ways, absolutely incorrect. But it is hard to stick with what you know to be true when people you trust (Noah) give ideas they know to be false credence. It is hard not to buy into the groupthink, just a little.
But these numbers are absolutely miniscule compared to the economy as a whole. Bubbles always seem to take longer than we expect to collapse. In the end a vast number of people are going to end up loosing money, and a tiny number of people will luck out.
I found the following to be a fantastic primer on NFTs and the various issues surrounding them. The video is dense and fast paced, and yet clear throughout, despite a running time of over two hours:
Another theory: banksters realized in late 2019 that they could short Grayscale bitcoin and buy actual bitcoin, and make 20% every 6 months risk free.
Then in late 2020, the other banksters realized Bitcoin was outperforming all other asset classes and started to buy in, with Musk jumping in on January 2021.
The story now is that there are no more realistic large pools of money to tap into, and a potential Fed fight against inflation is crashing all of the speculative markets from SPACs to EVs to money-losing tech to crypto.
"For normies." Sure. The "crypto community" is a massive cult that has been remarkably good at extracting cash for a handful of lucky gamblers in the last couple of years. A few of its wealthiest backers are spending a ton on advertisements and celebrity endorsements to add legitimacy. They're hoping to jack up the value again so they can unload everything at a profit. It's a massive, unregulated pump-and-dump scheme, and hundreds of thousands are buying into it. It will crash hard soon, lots of people will go broke, there will be massive political incentive to ban it or regulate it. Then that'll be that. No more "DeFi" or fucking whatever.
I'm a big believer in crypto because when governments fall, anarchy reigns and there is chaos everywhere, I will be living high on the hog due to my ability to go onto the Internet to access my crypto currency wallet and use it to pay for Doordash deliveries and my Netflix subscription.
I'm afraid this is too jargon ridden for someone who has followed crypto only casually to fully comprehend. At minimum a glossary of terms and abbreviations ought to be provided.
The jargon may be the feature, not the bug.
https://www.youtube.com/watch?v=RXJKdh1KZ0w
Agree. Relatedly, the memes are fun for those on the inside but actually harms crypto’s spread by making it seem more inscrutable.
Umm what? I still have many questions. Like why do I want crypto? Is it just so I can buy hookers, drugs, and guns? Pay off ransom-ware attackers? Or can I use it to pay for my groceries at Safeway--for the same transaction cost as my debit card? Or buy stuff from Amazon? Or pay my taxes?
Essentially, I'm trying to figure out if I'm the guy who once asked an Enron accountant how they are so huge living off the margins of energy trades (he simply said, "it's complicated") or if I'm the guy who said, ok, that thing flying down the windy hill in Kitty Hawk is a novelty, but it can never be anything more than that.
> Like why do I want crypto? Is it just so I can buy hookers, drugs, and guns? Pay off ransom-ware attackers?
Yes, because 1. it doesn't have overhead for sending internationally 2. you can create a new bank account (wallet) without doing KYC and talking to anyone. No, because most coins are even less private than regular banks and Chainalysis will eventually find you.
> Or can I use it to pay for my groceries at Safeway--for the same transaction cost as my debit card? Or buy stuff from Amazon? Or pay my taxes?
No, because the point of taxes is that you have to pay them in the national currency. And having to pay sales taxes is just inconvenient enough that it keeps domestic transactions in the same currency as the tax. Well, that's the idea anyway - we here in the US are so good at financial imperialism we can pay in USD at places like amazon.jp and Canadian Starbucks.
re: "Initially people thought, “Let’s just peg some coin to the dollar! For every $1 in as collateral, we’ll issue 1 stablecoin out.” 👋Tether. 👋USDC. But this solution was not true to the OG ethos of decentralization because requiring reserve pools in dollars meant we’d be standing on the crutches of our broken existing system rather than ripping-and-replacing."
The first problem with this statement is that the crypto community is not nearly mature, pragmatic or earnest enough to do the Tether/USDC model properly, let alone do better. The second problem is the deluded or dishonest claim that the dollar system is "broken," which seems to refer to the usual Austrian-theory BS that "fiat" currencies are inherently doomed.
Done properly, a stablecoin is essentially substituting for a bank account, and so to be functional and competitive with the existing system it would need to credibly replace all the things that banks, bank-regulation and government crisis-management do, including:
- Reverse fraudulent transactions.
- Explicitly insure middle-class-scale deposits.
- Implicitly insure upper-class-scale deposits (bailed out in '08 via MMF bailouts).
The crypto world is currently acting as if it can have the cake (replace banks) and eat it too (escape all regulation). When boiled down to its essence, what this really means is the insiders are trying to make it possible for insiders to rip consumers off with zero accountability.
As for the dollar, it is not as Austrian-theorists claim some kind of paper chit, it is a financial instrument issued by the government of the United States of America, with a value based on the nation's productivity and the government's taxation power, stabilized by an inflation-targeting central bank with an established record of predictability. One can disagree with the 2% inflation target, or one can wish that the system wouldn't allow a spurt of significantly higher inflation during a massive pandemic for the sake of avoiding recession spiral and averaging out economic pain that would otherwise concentrate on specific groups of people. But as long as the crypto community shows no sign whatsoever of even thinking about how to create a financial instrument with value anywhere near as stable as the dollar, crypto clowns who call the dollar system "broken" are simply lying and suckering people into something much less reliable.
Speaking up for the Austrians, I do think that a lot of the bad rap comes from gold peddlers and Ron Paul purist types. My professor called himself an Austrian economist and found a lot of Austrian economics valuable, but still erred on the side of monetarism.
On the topic of your key point in this column, I agree. They want to have their cake and eat it too.
Austrian theory didn't start stupid. When Van Moses steered it towards an anti-inflation focus he was reacting to Weimar Germany, and describing the fiscally driven nature of it quite accurately. Hayek was also mainly harping on fiscal, and ultimately wrong about welfare states inevitably sliding into authoritarianism, but not stupid. It was their American followers who turned it into a crank hard-money quasi-religion.
I've read your articles but I still genuinely don't understand what problem all this is meant to be solving. Integration into 'TradFi' just sounds like a way for the early adopters to keep the bottom from falling out of assets that will run out of buyers by entangling them so heavily in the regulated financial system that the government will be forced to buy digital currencies to protect regular citizens who have made ill-advised purchases. The 'anarchy' seems absolutely horrible for everyone except early adopters.
Maybe! I will offer my own thoughts on this in a bit...I think an underrated element of this is tech people trying to nab the excess profits of the finance people...
I think its a set of tech people trying to nab all the fraud opportunities of the finance people. Most DeFi and Crypto projects are scams based on avoiding regulation. https://www.youtube.com/watch?v=YQ_xWvX1n9g happened to come out today and provides a more reasonable overview of defi.
You might be right about trying to use tech to soak up finance profits. But they could just own bank stocks instead.
There is no problem being solved. This article fails to mention that Defi, and crypto broadly, cannot actually integrate with anything outside of the crypto ecosystem, except by falling back to a trusted authority, which therefore recreates the problems of the traditional financial system.
It’s all hype layered on hype. Increasingly complex derivatives, but you can’t actually *do* anything at the end of the day, because again, any time crypto connects with the non-crypto world, it has to fall back on centralized trust.
I had been a big believer in crypto for awhile. I wanted to believe we could build fantastic new cooperation mechanisms on blockchains. But increasingly, I think blockchains have no real place outside the limited use of bitcoin as digital gold.
The thing is, the finance industry has a LOT of B.S. in it. Even if crypto doesn't "solve" a single problem, there's lots of room for crypto to cannibalize existing finance profits. I'm going to write a post about that idea soon...
That’s an interesting point. My view on the current crypto cycle is that it’s an exercise in the power of memes to coordinate a lot of money towards a target from a lot of people.
As an example — there is currently MoonDAO, a project to crowdfund enough money to (literally) send a participant to the moon. This is built on blockchains. However, at the end of the end of the day, there is no API for a spaceship — someone is going to have to take the money, presumably set up an LLC, and buy a ticket aboard a commercial space flight. Furthermore, Ethereum transaction fees are so high that this is way less efficient than simply doing the crowdfunding via a web2 platform like Kickstarter. Nevertheless, MoonDAO is awesome, and nobody ever attempted something this awesome on Kickstarter.
So, the real revolution in crypto is that of memes coordinating tons of strangers, + lots of money. Perhaps in some sense this is cannibalizing the profits of the finance industry (rather than people paying 1% fees to a fund manager, they pay 1% fees to Ethereum)?
I'd be very interested in hearing this – fully agree that there's a lot of BS with money sloshing around in it and that different BS can capture it. There are also a lot of use cases that finance does terribly (I recently had to send USD from a Canadian bank to a US one and it took a phone call and six days) that some crypto app might do better without actually needing the crypto part.
But overall, it seems like introducing chaos for little benefit at an enormous resource cost, with money essentially just shifting among wealthy people. How many Bitcoin 'billionaires' have been able to cash out of their crypto assets anyway?
You don't need a crypto app, a normal app can work better e.g. transferwise (not a recommendation although I have used it for a few international payments).
Finance should be disrupted by tech without scamming a massive amount of unsuspecting innocent people out of their money and without relying on fraud and money laundering. What a psychopathic approach. Some tech companies like Stripe are going for it the legitimate, non world destroying way.
I'll be very interested to read that post, because after reading Ming Zhao's post, I am convinced this whole thing is moving toward the exact same people having the exact same profound structural advantage in defi as they have in trad fi. I, a retail trader, do not have a hope of competing against a highly capitalized crypto fund and its army of quants that it's hired away from trad fi - or the trad fi fund that turns its army of quants on crypto, either natively, or because it's been acquired by crypto barons flush with cash. It also sounds like the big money is to be made on derivatives of derivatives of derivatives - or more generally on complex financial arrangements that are completely inscrutable to all but the most savvy/predatory of insiders - and we're supposed to believe this is sustainable and the music won't stop, a la 2008?
No, crypto cannot eliminate centralized authority when it interacts with the real world. But there is a decent hope that it can create better tools to help interested parties and communities reduce the scope and cost of that trust by keeping records of what's happened on a (mostly) immutable ledger.
It's frightening how easily you can be locked out of key parts of the current financial system, and never given a reason.
The kinds of people with the enormous amount of knowledge in finance, crypto, and CS needed to follow this post already know this history.
I think I read every word in this article, but I'm not sure that I understood any more than a sentence or two here or there. I'm not sure what definition of "normie" was in use in the title...
I am a fairly high functioning normie and I am having a nearly impossible time deciphering the insider lingo and reference points in this piece. I am also having trouble disentangling the ironic observations from those made in earnest. I don't believe I have a good handle on what is legitimate evangelism and what is mocking evangelism here. This whole piece is probably covered by Poe's Law.
> traditional markets rigged the game, giving hedge funds and banks hidden privileges and special access totally unknown to retail traders
I think what I am supposed to take away from this piece is that defi promises to decentralize the gains of financialization away from the insiders of traditional finance and toward the unwashed mashes. What I actually take away from this is the exact opposite. Allowing for the fact I am almost certainly oblivious to some of the irony in this piece, it appears that most of the sincere optimism expressed by this piece relates to the liquidity/distribution channels that institutional investors have brought to the crypto market and the future probability of crypto exchanges acquiring traditional brokers. This does not scream "financialization for the masses!" at me. This screams insiders gaming the system, just like they always have.
There was maybe a small hint of the composition of insiders slightly changing, but then this whole piece - just like the crypto market as whole, at seems - drifts toward defi ultimately ending up indistinguishable from trad fi. The gravity well of trad fi is enormous. It sounds like it's going to be the exact same people who are best positioned to exploit the markets due to their superior access and knowledge. How in the world are "retail traders" supposed to compete with highly capitalized funds that can employ an army of quants that have moved offices from trad fi to defi in order to analyze all of the opportunities that exist to exploit this new financialization space?
If anything, my big takeaway from this whole piece is that crypto financialization is the exact same game as trad fi. It's trad fi and all its complex derivatives and collateralized whatnots and esoteric abstract financial mechanisms on crack. It sounds like replacing the house of cards that led to the 2008 financial crisis with an even more obfuscated house of cards. This time designed to be even more immune to oversight and regulation than the 2008 financial system, which itself was clearly not under adequate oversight at the time. We're supposed to believe that this won't end in disaster, and that the retail traders are going to end up the winners? Is this satire?
What he said.
It would be nice to get a crypto explainer from someone whose entire career isn't dependent upon more people buying into crypto...
Enjoyed Ming's piece - thanks to you both!
One nit: "Like the fact that non-accredited investors <$1M net worth can’t invest in startups ..."
Still true for many startups. But in recent years, at least some startups have been able to accept modest investments from non-accredited investors? The SEC facilitated that in 2015 by issuing final implementation rules under Title III (aka Regulation CF) of the 2012 JOBS Act, followed by an ecosystem of funding portals (Wefunder, Republic, StartEngine, SeedInvest, Netcapital, et al.) that host such startups' crowdfunding campaigns.
And as someone who's been doing Wefunder since the start, I have to point out it's extremely risky and I have not yet realized any profit - as expected, since 5 years isn't long enough for liquidity events to happen. So if you're not accredited, you better almost be.
Great point, and thanks for this first-hand observation, Alex! Hoping some of your investments on Wefunder eventually pay off. And at least a few, big-time!
We who aren't "well heeled" – that quaint old expression – and wish to recoup at least some of our investments in startups under Reg. CF would probably be advised to spread our investments across as many companies as we possibly can, and keep those investments to a minimum? Along with having an extremely long time horizon.
This Twitter thread about venture capital firms, regarding extreme diversification, seems at least analogous. https://twitter.com/lennysan/status/1486021238753431553
Another analogy: for those obtaining income by making crowdfunded loans to "house flippers" on Groundfloor, the folks on that platform found that people who invested minimums ($10 or somewhat higher) in scores or hundreds of opportunities managed to fare well overall, even where some loans went into default.
One other aspect of investing in startups on crowdfunding platforms like Wefunder and their like: some of these companies are targeting important problems, and it can be at least psychologically rewarding to help fund their survival and growth, in the hopes that they succeed at addressing them?
A couple of representative examples, both with 2021 crowdfunding campaigns:
- Whooshh Innovations, "disrupting the world of fish passage [particularly around dams] with solutions [which they claim are superior to conventional fish ladders] that enable selective fish passage, restore natural habitat, and limit CO2." https://www.startengine.com/whooshh
- Phoenix PharmaLabs, with a goal of "addressing the opioid crisis by developing potent, safe, non-addictive painkillers." https://netcapital.com/companies/phoenix
This was remarkably well written and clear for a DeFi explainer. The whole section on memes could have been killed, since no one outside the crypto community remotely cares. If you are doing an explainer to a general audience, you might want to spend some time explaining your jargon. Your audience is probably not up to speed on weird conspiracy theories around Jay Clayton, so no one is going to understand your references to the “Clayton Administration”.
That said, it is good to see that a lot of problems are being solved. It is not entirely impossible that some useful tech might actually come out of all this.
But there is still no reason for anyone to invest any money in any of this.
If you think of a cryptocurrency as a bond, then all the pre-2018 tokens are just bonds with no payout at all. Plugging that into your bond pricing model gives a $0 long term value. It is nice that some of the tokens now have yields, but $COMP is just another no yield token, so the coupon value is still $0.
As a thought experiment, imagine that the FED creates a cryptocurrency version of a 30-year Treasury bond. It functions exactly like any other cryptocurrency, except you get a check every year for holding in. Why would you buy BTC which pays nothing?
It is nice that you acknowledge that BTC and the original stablecoins were “useless”. But you can’t just build an “algorithmic central bank” that maintains an USD exchange rate without 1-1 USD currency reserves. If you run out of reserves, then you have no way to maintain your peg.
But still, it is not impossible that some crypto company out there is actually going to create something of value. But there is no point in investing that that company either. The whole point of DeFi is that no single company is able to create a choke point and extract rents. It is hard to see how anyone can create something decentralized and useful that can’t be immediately repurposed.
It is really hard to look at crypto and remain confident that it is eventually going to collapse. The numbers look really big (BTC has $4B USD traded each day!), and it keeps not collapsing. It is impossible to ignore that crypto’s understanding of how the economy works is, in some ways, absolutely incorrect. But it is hard to stick with what you know to be true when people you trust (Noah) give ideas they know to be false credence. It is hard not to buy into the groupthink, just a little.
But these numbers are absolutely miniscule compared to the economy as a whole. Bubbles always seem to take longer than we expect to collapse. In the end a vast number of people are going to end up loosing money, and a tiny number of people will luck out.
What if Ponzi schemes and speculative bubbles...only DECENTRALIZED?!?!??*
* Decentralization may not apply to actually cashing out your 69420% gains.
I found the following to be a fantastic primer on NFTs and the various issues surrounding them. The video is dense and fast paced, and yet clear throughout, despite a running time of over two hours:
https://youtu.be/YQ_xWvX1n9g
Funnily enough, I watched this video yesterday after reading this post and the video made me understand waaaay more of what was mentioned here.
The perspective of the video had none of the optimism though.
The Onion predicted cryptocurrency in 2008:
https://www.theonion.com/recession-plagued-nation-demands-new-bubble-to-invest-i-1819569940
Ming's is one theory: DeFi.
Another theory: banksters realized in late 2019 that they could short Grayscale bitcoin and buy actual bitcoin, and make 20% every 6 months risk free.
Then in late 2020, the other banksters realized Bitcoin was outperforming all other asset classes and started to buy in, with Musk jumping in on January 2021.
The story now is that there are no more realistic large pools of money to tap into, and a potential Fed fight against inflation is crashing all of the speculative markets from SPACs to EVs to money-losing tech to crypto.
"For normies." Sure. The "crypto community" is a massive cult that has been remarkably good at extracting cash for a handful of lucky gamblers in the last couple of years. A few of its wealthiest backers are spending a ton on advertisements and celebrity endorsements to add legitimacy. They're hoping to jack up the value again so they can unload everything at a profit. It's a massive, unregulated pump-and-dump scheme, and hundreds of thousands are buying into it. It will crash hard soon, lots of people will go broke, there will be massive political incentive to ban it or regulate it. Then that'll be that. No more "DeFi" or fucking whatever.
I'm a big believer in crypto because when governments fall, anarchy reigns and there is chaos everywhere, I will be living high on the hog due to my ability to go onto the Internet to access my crypto currency wallet and use it to pay for Doordash deliveries and my Netflix subscription.