Crypto

Is there any there there?

Crypto has been around for a while now but it has, at long last, gone mainstream. A-list celebrities are hawking crypto stuff, crypto outfits are buying stadium naming rights, and you can bet good money there will be crypto ads running during the Super Bowl. It has thus become time, once again, to ask: is there anything to it, or is it all a huge scam? Will Wilkinson, who has been writing positive things about crypto, writes here that it is real and it’s spectacular. Tom Lee responds with a very good post explaining that actually crypto is bad. These viewpoints are not inconsistent; one of the recurring lessons of the internet age is that something can be not particularly useful and maybe actually destructive and yet still become massive and enduring if enough people jump on the bandwagon.

But I’d like to add a few skeptical thoughts to Tom’s. I don’t think crypto is going away, to be clear—not, at least, in the absence of a major regulatory crackdown. But I think there are some good reasons to doubt the enthusiasts.

One is that cryptophiles seem to view what they’re involved in as fundamentally about Technology rather than Finance, in such a way that all the things we think we know about finance don’t apply. As a consequence, they seem fated to repeat all the mistakes that people in finance have made, then forgotten and painfully remade, over the past half millennium or so: about hidden leverage and bank runs and bubbles and so on and so forth. A lot of the things about finance that seem to annoy the crypto folks aren’t there because the technology doesn’t exist to do without them; they’re there because at some point in the past their absence resulted in some very bad thing or things happening. The technological “solutions” to getting around these things are often just mechanisms which enable people to get themselves into a lot of financial trouble.

(The history of finance gives us a pretty clear idea how this period of crypto mainstreaming will end, as it happens. The bull case for a crypto investment is that it—the platform, money, store of value, etc—will become a thing that lots of people use because lots of people use it. Crypto world, then, is a place where over the long run, some bets will pay off spectacularly while most become worthless. The potential spectacular payoff has sucked in a lot of money, and with crypto becoming mainstream that lot of money is turning into a LOT of money. That kind of money ends up attracting all sorts of opportunists—people offering new currencies and exchanges and ancillary services and so on. 

Some of these things are at least potentially legit, others are half-baked and many will turn out to be outright scams. The more half-baked stuff there is out there absorbing money, the more fragile the whole boom is, and eventually it will not be able to sustain itself any longer. Maybe there’s a trigger—a regulatory change or a collapsed Ponzi scheme or even just an increase in interest rates—or maybe not. But eventually the market will turn, a lot of the new money will run, and at the end of the day there will be a pile of smoking rubble. What survives the crash may turn out to be a lucrative long-term bet, but there will be a lot of hurt between now and then. If I had to guess, I’d say the end is months rather than years away, but who knows.)

What’s really troubling about crypto, though, is what seems to me (though obviously not to enthusiasts) to be the very misguided underlying worldview. This shows up, for example, in the mantra that crypto is an antidote to centralization, which is good because centralization is bad. Centralization of stuff certainly can be bad, but above all it just is. Centralization happens because there are often enormous advantages to it, economies of scale and scope, which enable us to do things we couldn’t do before, or things we could do before but better. Markets are great, for example, but it happens that bigger markets tend to be better: because they allow for greater specialization and better-quality matches between buying and seller, for example. And as great as markets are, there are such enormous returns to doing some things through centralized hierarchies that most of what happens within market economies is done through big bureaucracies called companies. 

Of course centralization presents problems, and distributing power widely can be a way to mitigate some of those problems. A big central government has a lot of room to abuse its authority, for instance, and so many of us think, among other things, that distributing the power to hold it accountable to individual voters rather than a tiny politburo is a good idea. But to idealize the destruction of centralized institutions is unrealistic in many ways, as Tom points out, but also counterproductive. Because we benefit so much from centralization it’s a problem when a lot of effort and innovation is poured into projects which seek to tear things apart rather than improve their operation.

There is also an odd inconsistency between some enthusiasts’ disdain for centralized authority and others’ excitement about the ways that blockchains can be used to, effectively, engineer society. On the more serious side of the crypto world stand the people who are passionate about smart contracts and the like, which can be used to introduce a certain automaticity into financial transactions of all types and whose programmability can be exploited to develop complex incentive structures. You can get a sense of some of the more utopian ideas in this very interesting post by Vitalik Buterin. 

One doesn’t want to be reflexively opposed to this kind of thing, and it is certainly possible that aggressive regulation of crypto could kill very promising institutional innovations before they have an opportunity to blossom. At the same time, many of these ideas deserve a far harder look than they’re getting. Proposals to build ideal communities based on clever blockchain systems are presented using the language of inclusion and democracy. But to think that we understand how society works well enough to have the confidence to hard-code complex incentive structures into the most fundamental political and economic institutions we have betrays what one might label a fatal conceit. People should be free to opt in to experiments—to move to some new-fangled crypto-town in Wyoming—if they wish. But enthusiasm for utopian schemes among serious and respected people lends legitimacy to a much broader phenomenon that will, in practice, be imposed upon people against their will. If you doubt that, talk to a Salvadoran.

But what bothers me most, I think, is the notion at the very center of the whole enterprise: that society would be better if we didn’t need to rely on interpersonal trust. It is true that a trust is difficult to establish and that constructing a complex, prosperous society is basically impossible in a low-trust environment. The conclusion one should draw from these facts is not, “hey, maybe it would be good to use technology to do away with trust”. It is, rather, that constructing a complex, prosperous society is basically impossible in a low-trust environment. Trust is precious and fragile, and we should nurture it however we can. We should not make the critical error of thinking that we’re clever enough to engineer ourselves a better world than this one by using technology in place of ethics and good will. We most certainly are not. Indeed, it is telling that many people are very keen to make this error even as the social consequences of technology-enabled erosion of trust unfold all around us.

I’m often cranky, but I try not to be a knee-jerk crank about new technology. There’s a lot of technological progress around to be excited about: more than I’ve ever before experienced in my lifetime. But crypto I’ve got a bad feeling about.