Part 1 of 2: Crypto is Dead
Luna, Celsius, Three Arrows and FTX have all imploded. Bitcoin has fallen almost 75% from its peak, and NFT trading is down 97%.
The Crypto Winter isn’t just coming. It’s here, and it’s shaping up to be a deep freeze.
Everything crypto now appears to be part of a large, toxic waste dump. Crypto naysayers are saying a combination of:
“See, I told you so.”
“Crypto has no underlying value.“
“Even Warren Buffet says he wouldn’t buy all the Bitcoins in the world for $25.”
I say this:
Crypto is dead. Long live Web3.
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Up until this year, I’ve been a crypto skeptic. Crypto pundits have been saying for some time that crypto is going to change the world. But, as far as I can tell, only 5 mainstream applications of crypto have emerged thus far:
- Illegal transactions: see Silk Road.
- Speculative trading: see the run-up of Bitcoin to $65,000. Also see Dogecoin and other meme coins.
- Speculative trading of NFTs: see Yuga Labs’ Bored Ape Yacht Club
- Questionable ______-to-earn schemes: play-to-earn, walk-to-earn, sleep-to-earn, etc.
- An endless number of scams, rug pulls, and hacks via security vulnerabilities: see web3isgoinggreat.com.
Most of the crypto media focuses on the fluctuating prices (and traders’ associated gains and losses) of Bitcoin, Ethereum, and other cryptocurrencies, as well as trying to predict what will happen to those prices in the future. Every new cryptocurrency — however silly the name or the icon — is an opportunity to “get in early” and potentially make millions as it “goes to the moon.”
What most people have seemingly forgotten is this: cryptocurrencies are not an end unto themselves. Blockchain is an enabling technology. Cryptocurrencies are derived from blockchains, so cryptocurrencies are enabling technologies as well.
Enabling technologies are hows. Enabling technologies are used to create solutions and solve meaningful problems.
Let’s look at two important inferences here:
- Blockchains and cryptocurrencies that are tied to solutions that solve meaningful problems can create intrinsic value; and
- Blockchains and cryptocurrencies that are simply a currency — and are not tied to a solution that solves a problem of meaningful value — are of no value, and are simply vehicles for speculation, i.e., a greater fools market.
So what problem do blockchains and cryptocurrencies solve? It may seem like there’s practically a blockchain/crypto/Web3 start-up focused on solving every problem imaginable. But, fundamentally, blockchains and cryptocurrencies solve one key problem: centralization. The blockchain is all about transferring control and decision-making authority from a centralized entity and distributing it to multiple parties who don’t necessarily know or trust one another.
Centralization is the source of many — but not all — problems. And there are many blockchain/crypto companies out there that are focused on creating real-world solutions to real-world problems.
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What happens when a blockchain/crypto company creates and operates a centralized (or partially centralized) solution?
Perhaps the blockchain/crypto company wasn’t trying to solve a problem created by centralization. But the fact that their solution is centralized (or partially centralized) means that the solution will be subject to all the systemic problems of centralization, e.g.:
- Technical bottlenecks and single points of failure/attack
- Lack of transparency and poor decisions
Take, for example, FTX, the implosion du jour. FTX was a centralized crypto exchange. FTX gave its investors’ funds to Alameda Research, and Alameda Research — in the words of Matt Levine at Bloomberg “traded it for a pile of magic beans, and now the beans are worthless.” There was a bank run on FTX, and now FTX is no more.
It’s important to recognize that FTX was a centralized crypto exchange, not DeFi (Decentralized Finance). If FTX had be completely decentralized, FTX customers’ funds would have been residing in their own crypto-wallets, and not in an FTX account which is now worthless.
I’ll say it again:
Crypto is dead.
Specifically, crypto (solely) for crypto’s sake is dead. And centralized crypto is dead as well.