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.

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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.

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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.

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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.

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Jan 22, 2022Liked by Noah Smith

The kinds of people with the enormous amount of knowledge in finance, crypto, and CS needed to follow this post already know this history.

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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...

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Jan 23, 2022·edited Jan 23, 2022

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?

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It would be nice to get a crypto explainer from someone whose entire career isn't dependent upon more people buying into crypto...

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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.

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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.

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What if Ponzi schemes and speculative bubbles...only DECENTRALIZED?!?!??*

* Decentralization may not apply to actually cashing out your 69420% gains.

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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:


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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.

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"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.

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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.

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