I'm a huge fan of Noah. However, this newsletter contains unwarranted hope for cryptocurrency, especially for what can be built on the Blockchain. Noah has always maintained he's an optimist and is a huge fan of technology. Sometimes, optimists are right. This, in my considered opinion, is not one of those times.
My experiences with the quality of the content and discussion on this newsletter convinces me that I would be wasting my and others' time by making the case for why cryptocurrency ironically cannot function as currency.
However, there's something more insidious going on. People untethered to the crypto ideology can already see that they can't work as currencies. Instead, they hold that the Blockchain is the thing with real utility here. Or, in other words, the tokens are worthless but the game board is valuable.
Part of this is due to how many people dismissed the internet and had to eat their words. But the Blockchain and the dot-com boom of the nineties are as far away as Timbuktu and Tarawa.
The internet enabled anyone to send any kind of information at scale within seconds. People just failed to see how that would be useful. It was the same with the car. The mobile car was faster and more efficient than the horse with the advantage of no possibility of fatigue. People just failed to see how that would be useful. They were failures of conservatism for conservatism's sake.
On the other hand, we've had the Blockchain now for thirteen years. The crucial question is not what can it do( people get blindsided here). It is what can it do better than non-blockchain alter natives. The answer is nothing unless you are a criminal, a speculator, or someone in a financial system so broken that anything at all is an improvement.
This is because the Blockchain is a clever solution to a problem that introduces a hundred more. It's like burning the mansion to save the shed. The reason the electricity consumption is so wasteful is because the Blockchain is not secured by cryptography. Some of the only meaningful contributions of cryptography to the Blockchain are the public keys and private keys which we've had since 1976. Marlinspike grasped this in January.
It's so wasteful because the Blockchain is secured by electricity consumption. You can't take control of the system because you would bankrupt yourself doing so. They are mostly financial barriers, not technological.
The reason its transaction rate is so pathetic is because it can't scale. The mining process is not based on knowledge. Making things is based on knowledge and knowledge improves, so efficiency scales. A fancy name for this is Wright's law. But randomness can't scale. You can't get better at guessing lottery numbers. You can only buy more and more lottery tickets. So mining has predictably consolidated in a few hands. The centralization they sought to avoid re-entered through the backdoor.
Of course, miners can't waste expensive electricity and equipment for nothing unless they know someone is on the other side making these transactions. And so, you can't have these blockchains without the speculation. You can't slice the thorn away from the 'rose'.
And then we have smart contracts. My area of specialization is law and the level of meaningful adoption here is around zero.
A smart contract is based on the conceit that the most important things are what goes into the contract. But the most important things are what's outside the contract- the trust and identities of the parties, the regulatory framework, a legal system available for retribution.
No code is perfect. Unlike normal code in which you can just fix your bugs in peace, smart contracts must be perfect from scratch. If a bug is found and exploited, it's over. This happened to the Ethereum founders who then all forgot about their lovely ideals of decentralization. The point is if it can happen to them, why can't it happen to the average programmer.
And it doesn't remove trust. You still have to trust the programmers writing the code, the oracles feeding the data, the stability of the overall platform. Trust is inevitable so why not just start with building more trustworthy systems rather than creating long, dangerous, and unnecessary hoops that will still require trust anyway.
The Blockchain is also irreversible. People complain constantly that Twitter has no edit button so unless you delete the tweet, your mistake is permanent. Well, how about putting your medical records, financial transactions, on a permanently irreversible Blockchain. Your entire life is like one long twitter thread that you can never edit or delete.
Everything the Blockchain sought to eliminate - audits, central banks, centralization - has simply returned. Only this time, far more inefficiently.
If this is what now passes for innovation, we might as well begin an innovation award in the honour of Charles Ponzi. After all, he did start the whole damn thing
Thank you. This is the contextual level of commentary I needed as the introduction to crypto. First time I’ve not felt intimidated against looking into it.
Personally, I'm a Bitcoin minimalist. I follow Warren Buffet's rule of not investing in things I don't understand. I'm also put off by the creepy libertarian conspiracism of many Bitcoin evangelists.
Cryptocurrency has one thing going for it. Anyone who owns it is biologically committed to advocating for it, because its value is nothing more than the collective confidence that others have in it. So, unless you are self-immolating, if you own crypto, you're a huge fan of crypto.
Thank you for writing this! I suspected most of this except for the last point about Bitcoin as the gateway drug. I've been wanting to get involved for three years now but I'm really afraid of making a mistake. Thank you for being the people's economist! Now, I just need to figure out a way to get involved without the pesky regulators in Hong Kong or China finding out, ha.
Do you know what kind of role transaction fees play in El Salvador citizens unwillingness to use bitcoin to make payments? How much is the transaction fee on, say, a $30 transaction using the Chivo app?
I'm sure blockchains i.e. distributed databases have a future. But I'm skeptical that crypto currencies have any future, and I'm certain that Bitcoin and similar asset-less pseudo-assets will go to zero, sooner or later.
The idea that Bitcoin should try to function as currency was rejected by Bitcoin owners themselves. The initial design obviously couldn't, as it's extremely transaction-inefficient. So plans were floated to reform the design, but most owners were reluctant. So there was a split, and then another, creating two spawns-of-Bitcoin that were technologically better suited to function as currencies. Relatively few people cared. The Bitcoin community preferred to keep Bitcoin what it is: a pseudo-asset.
Sure, this and the other retailer will accept Bitcoins, but it's a silly, decorous exercise. It makes far more sense to first sell Bitcoin then pay with currency. A growing proportion of transactions among Bitcoin investors are conducted through exchanges, avoiding Bitcoin's inefficient transaction system.
So what you have is a kind of digital collector's item. Why should you collect it? Because other people are collecting it. Does it, like a financial asset, include a claim against some income-earning property, business or government? No. Does it, like a currency, have a central bank or any central body, of any credibility level, that manages its value in any way, by intervening in the market to buy or sell it? No. Does it, like precious metal, have inherent jewelry or industrial value? No. Its value derives exclusively from people thinking other people will want it in future.
I'll give this to the Bitcoin community, they did an amazing job of propagandizing an entirely worthless pseudo-asset. But the problem with "going mainstream" is that mainstream investors expect returns, and Bitcoin has significant costs and no income. It can only go up to the extent entries exceed exits-plus-costs. Now that most mainstream investors are down, I don't see what's going to revive the momentum.
Bitcoin (and other popular cryptos) is not good at the things its supposed to do. It's not more convenient way to send digital payments. It's more traceable than cash. It's not a stable asset. It has no theft or liquidity protections. Moreover its inherent to the technology so the next crypto thing is not likely to "get there". It only seems to be good for gambling and pulling scams on other crypto users.
I don't think I have many Luddite tendencies, but I am still extremely skeptical about the inherent value in this stuff.
It has value because some number of people just kind of arbitrarily agree that it has value. Which is no different from gold or fiat currencies, but those things are least backed up by something 'real'.
(Gold by itself, as a durable metal, and fiat currencies by governments and the lands/populations they represent.)
Crypto just seems like a castle made of sand. And if people want to use it for speculation (or a pyramid scheme), go for it I guess.
The post ignored the cost of Bitcoin mining. I can remember back in the early days (a decade ago) when people were running computers 24/7 to get Bitcoins. It was easy at that time as the algorithm released lots of coins early on, decreasing as time went on. This put an upward pressure on GPU prices as more people started mining. It also led to "mining farms" that consumed vast amounts of electricity. Do a Google search on GPU Mining Rigs and you quickly see how much wasted technology has been diverted to this 'get rich' scheme. Those of us who need fast GPUs for photography and video rendering are now overpaying because of this.
Digital currency only works when it has stable value and this past week points to failures in this regard. 'Stable coin' remains an oxymoron until proven otherwise.
I think the comparison to gold here is missing an important factor. Irrespective of the fact that whether gold has uses and whether it has $12T worth of use, GOLD EXISTS IN THE PHYSICAL WORLD.
Human beings love physical things that they can touch and feel. That is why owning the house you live in cannot always be purely thought of as a financial asset. There is no price you can put on painting your own walls, showing the house to your friends and family etc.
People love Apple a lot more than other tech companies because Apple puts a physical device in their hands that they can touch, feel and use. Even though other products like Instagram or Google Maps adds value to their lives, the iPhone that you can touch and feel always feels like a real product over other "apps" and "services" that is just software that runs on the cloud.
Bitcoin is similar to an app or a service while gold is similar to the iPhone here. Even though they both have value only because everyone thinks they have value, Gold is a physical thing that is shiny and pretty and worn as ornaments. Bitcoin can never live up to that.
To paraphrase a previous commenter, it’s a solution that causes a hundred new problems. And the original problem wasn’t actually a problem in practice, and the new problems can’t be solved without abandoning the solution.
David Rosenthal, an early innovator behind some of the decentralized algorithms that crypto would later use, gave a more technical talk last fall explaining additional layers of insoluble flaws in the core concept: https://blog.dshr.org/2022/02/ee380-talk.html
None of this is to say that people won’t continue to trade and prop up crypto assets, at least in the medium term. Decentralized transaction systems will be useful for as long as people take on and pay off illegal debts. If ransomware operators can sell bitcoins to exchanges, that can sell bitcoins to ransomware victims, who must buy bitcoins from exchanges to pay to the ransomware operators, the circle is complete. But if that’s the only basis of value, there’s no reason that governments should tolerate it.
I'm a huge fan of Noah. However, this newsletter contains unwarranted hope for cryptocurrency, especially for what can be built on the Blockchain. Noah has always maintained he's an optimist and is a huge fan of technology. Sometimes, optimists are right. This, in my considered opinion, is not one of those times.
My experiences with the quality of the content and discussion on this newsletter convinces me that I would be wasting my and others' time by making the case for why cryptocurrency ironically cannot function as currency.
However, there's something more insidious going on. People untethered to the crypto ideology can already see that they can't work as currencies. Instead, they hold that the Blockchain is the thing with real utility here. Or, in other words, the tokens are worthless but the game board is valuable.
Part of this is due to how many people dismissed the internet and had to eat their words. But the Blockchain and the dot-com boom of the nineties are as far away as Timbuktu and Tarawa.
The internet enabled anyone to send any kind of information at scale within seconds. People just failed to see how that would be useful. It was the same with the car. The mobile car was faster and more efficient than the horse with the advantage of no possibility of fatigue. People just failed to see how that would be useful. They were failures of conservatism for conservatism's sake.
On the other hand, we've had the Blockchain now for thirteen years. The crucial question is not what can it do( people get blindsided here). It is what can it do better than non-blockchain alter natives. The answer is nothing unless you are a criminal, a speculator, or someone in a financial system so broken that anything at all is an improvement.
This is because the Blockchain is a clever solution to a problem that introduces a hundred more. It's like burning the mansion to save the shed. The reason the electricity consumption is so wasteful is because the Blockchain is not secured by cryptography. Some of the only meaningful contributions of cryptography to the Blockchain are the public keys and private keys which we've had since 1976. Marlinspike grasped this in January.
It's so wasteful because the Blockchain is secured by electricity consumption. You can't take control of the system because you would bankrupt yourself doing so. They are mostly financial barriers, not technological.
The reason its transaction rate is so pathetic is because it can't scale. The mining process is not based on knowledge. Making things is based on knowledge and knowledge improves, so efficiency scales. A fancy name for this is Wright's law. But randomness can't scale. You can't get better at guessing lottery numbers. You can only buy more and more lottery tickets. So mining has predictably consolidated in a few hands. The centralization they sought to avoid re-entered through the backdoor.
Of course, miners can't waste expensive electricity and equipment for nothing unless they know someone is on the other side making these transactions. And so, you can't have these blockchains without the speculation. You can't slice the thorn away from the 'rose'.
And then we have smart contracts. My area of specialization is law and the level of meaningful adoption here is around zero.
A smart contract is based on the conceit that the most important things are what goes into the contract. But the most important things are what's outside the contract- the trust and identities of the parties, the regulatory framework, a legal system available for retribution.
No code is perfect. Unlike normal code in which you can just fix your bugs in peace, smart contracts must be perfect from scratch. If a bug is found and exploited, it's over. This happened to the Ethereum founders who then all forgot about their lovely ideals of decentralization. The point is if it can happen to them, why can't it happen to the average programmer.
And it doesn't remove trust. You still have to trust the programmers writing the code, the oracles feeding the data, the stability of the overall platform. Trust is inevitable so why not just start with building more trustworthy systems rather than creating long, dangerous, and unnecessary hoops that will still require trust anyway.
The Blockchain is also irreversible. People complain constantly that Twitter has no edit button so unless you delete the tweet, your mistake is permanent. Well, how about putting your medical records, financial transactions, on a permanently irreversible Blockchain. Your entire life is like one long twitter thread that you can never edit or delete.
Everything the Blockchain sought to eliminate - audits, central banks, centralization - has simply returned. Only this time, far more inefficiently.
If this is what now passes for innovation, we might as well begin an innovation award in the honour of Charles Ponzi. After all, he did start the whole damn thing
Cryptocurrencies are to the real economy what fantasy sports are to the real sports.
And NFTs are like penny stocks.
Thank you. This is the contextual level of commentary I needed as the introduction to crypto. First time I’ve not felt intimidated against looking into it.
Personally, I'm a Bitcoin minimalist. I follow Warren Buffet's rule of not investing in things I don't understand. I'm also put off by the creepy libertarian conspiracism of many Bitcoin evangelists.
Cryptocurrency has one thing going for it. Anyone who owns it is biologically committed to advocating for it, because its value is nothing more than the collective confidence that others have in it. So, unless you are self-immolating, if you own crypto, you're a huge fan of crypto.
Thank you for writing this! I suspected most of this except for the last point about Bitcoin as the gateway drug. I've been wanting to get involved for three years now but I'm really afraid of making a mistake. Thank you for being the people's economist! Now, I just need to figure out a way to get involved without the pesky regulators in Hong Kong or China finding out, ha.
Do you know what kind of role transaction fees play in El Salvador citizens unwillingness to use bitcoin to make payments? How much is the transaction fee on, say, a $30 transaction using the Chivo app?
Vitalik Buterin's bitcoin maxi post was published on April 1--I don't think that's a coincidence.
There's an old saying about commodities that also applies to crypto.
You can make a small fortune trading commodities. First you start with a large fortune.
I'm sure blockchains i.e. distributed databases have a future. But I'm skeptical that crypto currencies have any future, and I'm certain that Bitcoin and similar asset-less pseudo-assets will go to zero, sooner or later.
The idea that Bitcoin should try to function as currency was rejected by Bitcoin owners themselves. The initial design obviously couldn't, as it's extremely transaction-inefficient. So plans were floated to reform the design, but most owners were reluctant. So there was a split, and then another, creating two spawns-of-Bitcoin that were technologically better suited to function as currencies. Relatively few people cared. The Bitcoin community preferred to keep Bitcoin what it is: a pseudo-asset.
Sure, this and the other retailer will accept Bitcoins, but it's a silly, decorous exercise. It makes far more sense to first sell Bitcoin then pay with currency. A growing proportion of transactions among Bitcoin investors are conducted through exchanges, avoiding Bitcoin's inefficient transaction system.
So what you have is a kind of digital collector's item. Why should you collect it? Because other people are collecting it. Does it, like a financial asset, include a claim against some income-earning property, business or government? No. Does it, like a currency, have a central bank or any central body, of any credibility level, that manages its value in any way, by intervening in the market to buy or sell it? No. Does it, like precious metal, have inherent jewelry or industrial value? No. Its value derives exclusively from people thinking other people will want it in future.
I'll give this to the Bitcoin community, they did an amazing job of propagandizing an entirely worthless pseudo-asset. But the problem with "going mainstream" is that mainstream investors expect returns, and Bitcoin has significant costs and no income. It can only go up to the extent entries exceed exits-plus-costs. Now that most mainstream investors are down, I don't see what's going to revive the momentum.
Bitcoin (and other popular cryptos) is not good at the things its supposed to do. It's not more convenient way to send digital payments. It's more traceable than cash. It's not a stable asset. It has no theft or liquidity protections. Moreover its inherent to the technology so the next crypto thing is not likely to "get there". It only seems to be good for gambling and pulling scams on other crypto users.
Would recommend Dan Olson's Line goes up:
https://www.youtube.com/watch?v=YQ_xWvX1n9g&t=2s
Or at least Ezra Klein's interview with Dan Olson:
https://www.stitcher.com/show/the-ezra-klein-show-2/episode/the-most-thorough-case-against-crypto-ive-heard-202061742
This helpful infographic has accurately summarized my feelings for the duration of Bitcoin's existence, and yes, now more than ever:
http://www.buttcoinfoundation.org/wp-content/uploads/2011/06/buttcoin-infograph.png
A good explanation, and very enjoyable.
I don't think I have many Luddite tendencies, but I am still extremely skeptical about the inherent value in this stuff.
It has value because some number of people just kind of arbitrarily agree that it has value. Which is no different from gold or fiat currencies, but those things are least backed up by something 'real'.
(Gold by itself, as a durable metal, and fiat currencies by governments and the lands/populations they represent.)
Crypto just seems like a castle made of sand. And if people want to use it for speculation (or a pyramid scheme), go for it I guess.
The post ignored the cost of Bitcoin mining. I can remember back in the early days (a decade ago) when people were running computers 24/7 to get Bitcoins. It was easy at that time as the algorithm released lots of coins early on, decreasing as time went on. This put an upward pressure on GPU prices as more people started mining. It also led to "mining farms" that consumed vast amounts of electricity. Do a Google search on GPU Mining Rigs and you quickly see how much wasted technology has been diverted to this 'get rich' scheme. Those of us who need fast GPUs for photography and video rendering are now overpaying because of this.
Digital currency only works when it has stable value and this past week points to failures in this regard. 'Stable coin' remains an oxymoron until proven otherwise.
I think the comparison to gold here is missing an important factor. Irrespective of the fact that whether gold has uses and whether it has $12T worth of use, GOLD EXISTS IN THE PHYSICAL WORLD.
Human beings love physical things that they can touch and feel. That is why owning the house you live in cannot always be purely thought of as a financial asset. There is no price you can put on painting your own walls, showing the house to your friends and family etc.
People love Apple a lot more than other tech companies because Apple puts a physical device in their hands that they can touch, feel and use. Even though other products like Instagram or Google Maps adds value to their lives, the iPhone that you can touch and feel always feels like a real product over other "apps" and "services" that is just software that runs on the cloud.
Bitcoin is similar to an app or a service while gold is similar to the iPhone here. Even though they both have value only because everyone thinks they have value, Gold is a physical thing that is shiny and pretty and worn as ornaments. Bitcoin can never live up to that.
Bruce Schneier wrote a good article in 2018 explaining the central flaw in the concept of crypto (as in, permissionless blockchains): https://www.schneier.com/blog/archives/2019/02/blockchain_and_.html
To paraphrase a previous commenter, it’s a solution that causes a hundred new problems. And the original problem wasn’t actually a problem in practice, and the new problems can’t be solved without abandoning the solution.
David Rosenthal, an early innovator behind some of the decentralized algorithms that crypto would later use, gave a more technical talk last fall explaining additional layers of insoluble flaws in the core concept: https://blog.dshr.org/2022/02/ee380-talk.html
None of this is to say that people won’t continue to trade and prop up crypto assets, at least in the medium term. Decentralized transaction systems will be useful for as long as people take on and pay off illegal debts. If ransomware operators can sell bitcoins to exchanges, that can sell bitcoins to ransomware victims, who must buy bitcoins from exchanges to pay to the ransomware operators, the circle is complete. But if that’s the only basis of value, there’s no reason that governments should tolerate it.