Crypto has Lost Its Way – The Past, Present, and Future by@futuristiclawyer

Crypto has Lost Its Way – The Past, Present, and Future

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In November 2021, the crypto market will hit an ATH market cap of USD 3 trillion USD. As of this month, the total market cap hovers below USD 1 trillion USD. The crash was of course expected. But regardless of the current price, I think now is a good time to look beyond the charts and ask a deeper question. In my opinion, the industry will either repurpose itself or become irrelevant. Or if not, the only true Merge will be a merge with the existing finance system.

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In November 2021, the crypto market hit an ATH market cap of USD 3 trillion USD.  As of this month, the total market cap hovers below USD 1 trillion USD. The crash was of course expected. Around the same time four years ago, the total market cap of crypto was below USD 200 billion.

The price swings are indeed wild. But regardless of the current price, I think now is a good time to look beyond the charts and ask a deeper question. During the latest bull run, what did the crypto market really produce?

Most of all, a gigantic waste of resources in energy and money.

For now, I join the ranks of critics who see “cryptocurrencies”, at best, as get-rich-quick-schemes based on inflated value.

(Credits: Tom Toro)

(Credits: Tom Toro)

In my opinion, the crypto industry will either repurpose itself or become irrelevant. Either the industry is going through a paradigm shift and will make a lasting impact before the next bull run in 2024 or 2025. Or if not, the only true Merge will be a merge with the existing finance system.

Let’s take a look at the past, present, and future of crypto to put things in perspective.

The Past

The Cypherpunks and Bitcoin

The crypto movement arguably started in the early 90s when three computer scientists from the San Francisco Bay Area launched a mailing list to discuss cryptography, mathematics, politics, and philosophy.[1] Members of the mailing list became known as “cypherpunks”.

In the earliest days of the internet, cypherpunks already foresaw the privacy and security challenges humanity would face in the digital age. They suggested strong cryptography as a key measure to avoid censorship, government surveillance, and privacy intrusion.

 In The Crypto Anarchist Manifesto (1988), one of “the three original cypherpunks”, Timothy May, says that:

The State will of course try to slow or halt the spread of this technology, citing national security concerns, use of the technology by drug dealers and tax evaders, and fears of societal disintegration. Many of these concerns will be valid (..) But this will not halt the spread of crypto anarchy.

As we saw early on, one of Bitcoin’s major use cases was indeed money laundering and trading on the dark web.  However, Bitcoin’s early reputation as a currency for black market stuff (drugs, guns, child porn, etc.), did not halt the crypto movement – far from it.

Timothy May also believed that “crypto” would fundamentally alter society:

“Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions. “

Whether he was right or not remains to be seen.

Here is another quote by one of the “three founding cypherpunks”, Eric Hughes, from A Cypherpunk's Manifesto (1993):

Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn't want the whole world to know, but a secret matter is something one doesn't want anybody to know. Privacy is the power to selectively reveal oneself to the world.

Since we desire privacy, we must ensure that each party to a transaction have knowledge only of that which is directly necessary for that transaction. Since any information can be spoken of, we must ensure that we reveal as little as possible. In most cases personal identity is not salient. When I purchase a magazine at a store and hand cash to the clerk, there is no need to know who I am. (..)

Therefore, privacy in an open society requires anonymous transaction systems. Until now, cash has been the primary such system. An anonymous transaction system is not a secret transaction system. An anonymous system empowers individuals to reveal their identity when desired and only when desired; this is the essence of privacy.

Looking at Eric Hughes’ quote above, Bitcoin would fit his description of an anonymous transaction system.

Bitcoin is not completely “anonymous” since all transactions are public. However, as Satoshi Nakamoto suggested in the Bitcoin whitepaper, privacy can be maintained by keeping public keys anonymous and by using a new key pair for each transaction. Bitcoin was designed to be a type of “digital cash” that “reveals as little as possible” but without being a secret transaction system.  Here’s a quote from the Introduction to Bitcoin’s whitepaper.

Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party”

Bitcoin and DeFi

The cypherpunk’s body of thought inspired and span off a ton of innovation. The whistleblower website Wikileaks, the software for anonymous browsing and communicating Tor Network, the peer-to-peer file sharing platform BitTorrent, and of course, most importantly, Bitcoin.

Bitcoin did not come out of a void but was the culmination of 20 years of public research and experimentation to create a digital currency. Here’s a list of 94 digital currency projects before Bitcoin:[2]

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Bitcoin was made as a public good, the first DAO,  independent from state control, honoring user privacy, while opening the creative doors for DeFi, a wider ecosystem of finance built on blockchain technology.

Bitcoin is a comparatively slow network, only able to process up to 7 transactions per second. There is no version of 2022 where BTC can be seen as a convenient currency for grocery shopping or the like since the Bitcoin community has decided to favor decentralization and security over scalability. There is a chance that this could change in the future with Lightening Network and other Layer 2 solutions.

Until then, DeFi on other networks such as Ethereum are responsible for more advanced blockchain functionality which could scale digital currencies to an alternative, global, finance system.  DeFi could be an excellent tool for providing security in an unstable world, a funding mechanism for public-good projects, support collaborations and partnerships around the globe, giving people from broken and corrupt jurisdictions a chance to be financially free, and even narrowing the generational wealth gap.

DeFi is simply a more flexible, transparent, fair, and open financial system, carrying on the philosophy and mission of Bitcoin which was encoded into the Genesis block by Satoshi Nakamoto:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

The cryptic message is a reference to a front-page article by The Times published on the same day as Bitcoin launched. And a clear middle finger to the banks.

image

Over the last couple of years, banks and financial institutions have become major buyers of crypto. I see nothing wrong with that in itself, to the contrary, I think it’s a positive sign. The fear is that control-seeking behavior coupled with aggressive government regulations will swallow up DeFi until the value base and cultural heritage of cypherpunks and Bitcoin is lost. For longevity, DeFi protocols need to choose decentralization over growth at every crossroad in the future.

The Present

Crypto and TradFi

On Instagram, we see early crypto investors flaunt their houses and yachts in Dubai. Billionaire celebrities have spent hair-raising amounts of money on NFT avatars for Twitter. Adds for financial services on YouTube - typically narrated in a thick American accent – constantly tries to lure in new traders by advertising for crypto and NFTs. Meanwhile, Ponzi schemes such as TerraLUNA and Celsius have robbed many average taxpayers of their livelihoods.

Overall, crypto is a disguised form of capitalism. But worse. Exit schemes go unpunished, price swings are more extreme, and even though most crypto projects are promoted as "decentralized", it is the whales who make or break the market. More importantly, crypto has not made a meaningful impact in a time when climate change and geopolitical instability are profoundly challenging human civilization.

People always talk about the potential of crypto – which is indeed great – but the potential has proven to be hopium. When push comes to shove, 0.01% sits on the majority of wealth and controls the industry, most investors “have fun staying poor”, and most people are either mildly curious or skeptical about the industry, but would never dare to get involved. Does this sound similar to TradFi?

Unfortunately, the philosophical heritage of the cypherpunks along with DeFi’s potential have been overshadowed by an obscene, narrow focus on price movements. This trend is not crypto-specific, but a product of TradFi. Just look at how many cooperations are single-mindedly focused on maximizing shareholder value above all else. Or how GDP is the most common measurement stick for the wealth of countries.

The “shareholders first” dogma was famously expressed in a paper from 1976 by Michael Jensen and William Meckling[3], who describes that shareholders of a company are "principals" who hire corporate directors and executives to act as shareholders' "agents". In this view, responsibilities towards customers, employees, and the wider community are less important than shareholder value maximization. Whether you look at it from a legal, ethical, or business strategic point of view, the dogma is deeply flawed and counterproductive.[4] Yet, even in 2022, some business scholars stubbornly claim that the main, or even the only purpose of a corporation, is to maximize shareholder value.

GDP is the sum of all services and products a country produces, but it does not take into account community services, volunteer work, knowledge advancements, inequality, crime rates, mental health statistics, or climate impacts.[5] According to Rutger Bregman, the ideal “GDP citizen” “would be a compulsive gambler with cancer who goes through a drawn-out divorce that he copes with by popping fistfuls of Prozac and going berserk on Black Friday.” [6]

Crypto and Capitalism

Many thoughtful people with deep knowledge about the modern global economy say that it is incapable of providing well-being for the majority of humanity.[7]

The narrow focus on short-term economic extraction – also called the greediness of capitalism – has done irreplicable damage to human’s natural habitat, and is the main driver of human-made climate change. Capitalism is also the cause of the Matthew Effect.

“For to every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.”

— Matthew 25:29, RSV.

The Matthew Effect means that the richer get richer, while the poorer get poorer.  For such are the rules of capitalism.

Crypto is now a vehicle for capitalism, much more than a movement seeking freedom from digital surveillance and oppression. Crypto is providing material pleasures to a very small minority while contributing to environmental damage and inequality. If something does not change soon, the future looks bleak.

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The Future

Web 3.0 and DeFi

While most cryptocurrencies are heading for the crematorium, Web 3.0 and DeFi will live.

The Web 3.0 concept will survive as a more vibrant, more alive version of the internet than the one we use today. Web 3.0 is incentivized and economically powered by DeFi.

The DeFi concept emphasizes the function of digital currencies, rather than their mere existence. Bitcoin is the only worthy competitor to “fiat money” since the network is likely too decentralized to be shut down by government regulation, and likely too secure to be broken down by a hacking attack.

All other digital currencies work de facto like centralized companies. Even Ethereum. Just think of the 2016 DAO attack where Ethereum rewrote its history to “bail out” victims of a hacking attack. A noble act that begs questions about blockchain’s immutability and censorship resistance.

Thousands of digital currencies have little real-world value in themselves but may have significant value in the larger DeFi ecosystem because of their individual functions. Similar to how companies are valuable because they provide some services or products to society. A company that takes up an office space, but does not have a clear mission or sells a valuable product or service, will not have its lights on for long.

ImpactDAOs

In the intersection of DeFi and Web 3.0 we have ImpactDAOs, probably the clearest example of how crypto can bring good to the world.  In Kevin Owocki’s and Alejandra Borda’s book about ImpactDAOs__[8]__  the concept is defined as “any web3 project that is using crypto to create positive externalities for the world.

Here are four examples of ImpactDAOs very briefly summarized:

-          Proof of humanity: A registry of "verified humans" that anyone can sign up for with a video submission. As a registrant, you also need someone to “vouch” for you. People who are registered can prove to other people that they are a human and not a bot. They also receive periodic portions of the Universal Basic Income token ($UBI) just by being registered.

-          Celo:  A proof-of-stake blockchain with smart contract capabilities. Celo’s mission is in part to make crypto payments as simple as sending a text. And in part to help the world’s unbanked population to access financial services via their mobile phones. Celo users can make and receive almost instantaneous payments with low fees using their phone number as their wallet’s public key.

-          Gitcoin: Supports the development of open-source software and Web 3.0 infrastructure from start to finish and via different funding mechanisms such as crowdfunding, bounties, and hackathons. Gitcoin is governed by its community via the GitcoinDAO (see my introduction to DAOs here). So far, Gitcoin has contributed with USD 69 Million to open-source software and stands behind major DeFi projects such as Uniswap, Yearn Finance, and 1inch Exchange.

-          Toucan: Helps to tokenize carbon credits by putting them on a public blockchain with all relevant metadata about the specific project attached. A carbon credit represents a measurable and verifiable removal, reduction, or avoidance of a greenhouse gas emissions equivalent to one tonne of CO2.[9] With Toucan, the carbon credits can be used as a commodity in DeFi, or be exchanged for NFTs or gaming experiences.

ImpactDAOs are a new way of thinking about value creation. They apply the game theory and incentive structures from Bitcoin and crypto, and the values of DeFi, namely its “composability” element, to support, built, and monetize public goods such as scientific research, open-source software, or carbon offsets. ImpactDAOs operate under the framework of regenerative economics, not under the hard laws of capitalism.

Regenerative Economics

The concept of "Regenerative Capitalism” was defined by the retired Managing Director for JP Morgan, John Fullerton, in a booklet from 2015.[10] After having spent 20 years as a “Wall Street bro” Fullerton decided to move his life in a new direction. According to his own statement:

“Disillusioned about the direction Wall Street was headed and the loss of the culture I so admired, I decided to walk away without a clear plan for my future. Then, not long after resigning, I experienced 9/11 first-hand. My disillusionment merged with despair.

What followed was years of searching. I was searching for how to make sense of a world that I could no longer explain to my children. At some level, I was also searching for my own purpose in it all.

This search first opened my eyes to the profound, interlocking crises we are now facing – ecological, economic, and social – including the shocking prospect that we are destroying the planet’s ability to support life as we know it. My most startling discovery, however, was that the modern scheme of economics and finance – what Wall Street “geniuses” (like me) practiced so well – formed the root cause of these systemic crises. This realization occurred before the 2008 financial crisis and exists independent from it. However, that egregious display of irresponsibility, greed, and fraud further confirmed the reality that Wall Street had lost its way. “

Crypto has lost its way too…

A “regenerative economy” is based on a holistic world view where the financial system is not seen as an isolated entity from the rest of society or the earth’s biosphere. Instead, values and wealth are defined in terms of the well-being of the whole, including all forms of capital: intellectual, experiential, social, cultural, living, even spiritual, as well as financial and material.[11]  In short, the financial system is seen almost like a living organism, or like an ecosystem in nature with living components, and as part of a greater whole.

It is beyond the scope of this post, to provide a more detailed summary of how regenerative economics work. It should be sufficient to say for now that DeFi’s qualities and crypto’s incentive-driven, self-regulating structure, could create a thriving, more sustainable, interconnected financial system that would benefit the majority of citizens, instead of the few.

Conclusion

I believe in Bitcoin long-term. However, the public debate surrounding crypto is too focused on short-term price movements. DeFi and Web 3.0 have enormous potential to change civilization in a positive way with values rooted in the cypherpunks movement and Bitcoin. However, most people are busy watching numbers and graphs on a screen and when prices fall, as they do, and more and more people get scammed, as they will (there is a correlation between desperation in the market and the number of scams), governments start to pay attention. Attention which most networks do not want and cannot handle.

In my mind, the equation looks like this:

Crypto not contributing with much value + falling prices and scams = government regulation

Government regulation + lack of decentralization = TradFi.

TradFi = Capitalism

Capitalism = A rich minority, negative climate impacts, and global inequality

I sincerely hope that ImpactDAOs makes progress and that DeFi, as well as TradFi, moves towards a framework of regenerative economics.

In this post, I have given my honest take on crypto anno 2022 and thought about what the future might hold. If you have read or skimmed this far, please drop me a comment!

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[1] Hasseb Qureshi (Dec 2019), The Cypherpunks -> https://nakamoto.com/the-cypherpunks/

[2]Arvind Narayanan et. al (2016), Bitcoin and Cryptocurrency Technologies Princeton University Press, pg. 3.

[3] Michael Jensen & William H. Meckling (1976), Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.

[4] See Lynn Stout (2012), The Shareholder Value Myth.

[5] Rutger Bregman (2017), Utopia for Realists and How We Can Get There, pg. 103-106.

[6] Ibid.

[7] John Fullerton (2015), Regenerative Capitalism: How Universal Patterns and Principles Will Shape the New Economy, pg. 14.

[8] Kevin Owocki & Alejandra Borda, Gitcoin Public Goods Funding Workstream (2022), ImpactDAO -> https://store.gitcoin.co/products/impactdao-book-digital-edition.

[9] Toucan Introduction, Carbon Market -> https://docs.toucan.earth/toucan/introduction/carbon-markets (28-09-2022).

[10] John Fullerton (2015), Regenerative Capitalism: How Universal Patterns and Principles Will Shape the New Economy.

[11] Ibid., pg. 52.

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