Now might be a good time to watch Daniel Day Lewis’ “There Will Be Blood”. It depicts the life of an independent oil man who rises to great wealth and power at the expense of his humanity. It is loosely based on a novel written by Upton Sinclair that satirizes the early days of the oil industry. The interaction between that character and a young pastor, whose own lust for power turns out to be just as great and corrupting, is what makes the movie, despite the character’s arc being predictable. Even though Lewis’ character is evil, he is at least aware of his own greed and selfishness. The pastor is not, and in some ways, he comes across as the more deplorable person.
Welcome to the thirteenth year of crypto, except that the avaricious businessman and the morally bankrupt spiritual leader in our story have turned out to be the same person. Sam Bankman-Fried, the founder of FTX, as well as Terra’s Do Kwon, Three Arrows Capital’s Su Zhu, Celsius’s Alex Mashinsky, and a few others. Everyone said they were working for the greater good. In the end, they ended up obscenely wealthy. All of them turned out to be scammers of the first order.
This is time for self-reflection, despite the temptation to channel all of our righteous anger towards these men. as both a business and a community. Millions of people from all over the world have been drawn to cryptocurrency, and the vast majority of them are good people who believe in this novel method of establishing trust. However, we only have ourselves to blame when leaders fail us because we are terrible at selecting them (with a few exceptions).
The fact that no one has to use these businesses is the great irony of the recent collapses. Cryptocurrency’s resistance to censorship frequently means that no one needs to use any service, in contrast to Wall Street, where consumer options are always limited (by design). DeFi could have been used by the majority of FTX clients, just as Dai could have been used by those seeking a more decentralized stablecoin.
However, numerous crypto users who sought to escape traditional systems found themselves in the hands of services run by inexperienced leaders who appear to be running cults. Why then?
Greed is the simplest response. All of the world’s KwonZhuMashFrieds promised their followers a quicker path to wealth. Greed’s effect is exponential. Despite the rapidly decreasing marginal utility of the subsequent dollar, people desire more as their wealth increases (paradoxically). Despite the fact that cryptocurrency has made a lot of people rich, it appears that for every user who withdraws, two more will do so. Some people are driven to suspend their disbelief and seek out con artists who make the most extravagant promises by this compulsion to always make more.
But it’s too easy to attribute everything to avarice. True self-reflection necessitates delving deeper into the story because there has to be more to it.
The chaotic birthing of a new industry is another explanation. There is a good reason why Paul Thomas Anderson, the film’s director, chose the early days of the oil industry as the setting for his story about human corruption. Certain individuals are drawn to transformative technologies and their early boom-bust cycles, and those individuals frequently harm many others. What is happening in crypto today in other industries has a lot of historical precedent. The Crédit Mobilier scandal occurred in the early days of the railroad industry, Worldcom in the early days of the web, and Lehman Brothers in the early days of securitization.
Ironically, a spectacular bubble that was orchestrated by a cult-like figure and ended up being a fraud existed even in the early days of central banking.
Early adopters who believed that the world could be a better place—a place where central banking could function, railroads could crisscross the land, and electronic communication could be everywhere—had to suspend their disbelief in each instance. They also needed to have faith in the face of a lot of doubt because every new idea had its critics. However, their openness also made it possible for liars with a messiah mentality to enter, take control, and almost destroy everything.
Almost, given that good ideas transcend the bad people who take them over. The crypto skeptics who are currently basking in their schadenfreude tend to overlook this aspect. Crypto didn’t become important because a mountebank tweeted about it or because a con artist testified to Congress about it. Because it can solve important problems, it became important, which helped people like SBF rise to prominence. In the same way that the demise of numerous railroad companies in the 1870s did not alter the utility of trains, FTX’s demise does not alter that promise.
Blockchain technology was developed to improve trust. Because trust is the foundation of civilization, it is even more important than oil, railroads, or telecommunications. This transformation was always going to be messy, with a lot of ups and downs, great moments of victory followed by equally difficult times of despair.
The fact that history is repeating itself holds us all accountable. We should and can do better. At the very least, I owe that much to my readers and students. It could be something that you owe your customers or investors. We all owe it to future generations and governments owe it to their citizens.
A brief, but by no means exhaustive, list of ways:
We must first get rid of personality cults. Despite everything that has occurred, there are still too many con artists. The world’s Michael Saylors and Max Keisers do nothing but harm to the cause. Working in an industry where people behave in this way makes me feel ashamed. An aside: Since Keiser’s declaration that “we are not selling,” the value of Bitcoin has decreased by half. These individuals are not only dishonest liars but also terrible investors.
Second, technology, not money, and certainly not hype, was, is, and will always be the key to success in this field. That technology has a lot to do with capital deployment, economic incentives, and money legos. However, doing good should only come to those who do it, and doing good means building something that can last. The KwonZhuMashFrieds’ tendency to focus on flowery nonsense like super cycles and altruism rather than technology was the most telling sign of their impending doom.
It is regrettable that, despite everything that has transpired, the lineup for the subsequent major Bitcoin conference consists almost entirely of hypemakers. In contrast, real leaders enjoy discussing this.
Thirdly, we must put an end to our incessant tribalism. The idea that your preferred project will only be successful if others fail is not healthy. It is telling that some of the insiders in the industry who just read my previous paragraph have already drawn incorrect conclusions about how I feel about Bitcoin and Ethereum, and they will now view the remainder of my comments through that lens. Serious people don’t act like this.
Our insecurity is directly responsible for our tribalism. You should welcome the competition if you are absolutely certain that your project is the best.
Fourthly, we require a more effective method for VC. I’ve worked in venture capital and have a lot of friends who work in crypto VC. However, the most knowledgeable investors have somehow fallen for the biggest scams. I don’t know what the solution is, but it probably starts with more patience and more perspectives from the venture community. The fact that your fund is able to deploy a billion dollars does not imply that you should.
As a follow-on, we must also address the influx of so much “biased capital” into our domain. Why do otherwise conservative institutions like pension funds, which would never put a penny into Bitcoin, invest hundreds of millions of dollars in businesses like Celsius and FTX that say they can do things with Bitcoin? Instead of investing in startups run by inexperienced boys with poor hygiene, anyone interested in gaining capital exposure to cryptocurrencies should directly invest in crypto.
Fifth, our infrastructure must be improved. Custody is one reason major financial institutions favor indirect equity exposure over direct ownership. Therefore, we require improved custody in all its forms, including safer self-custody and regulated centralized custodians. The fact that so many funds and protocols, who must have known better, continued to hold all of their coins at FTX is telling, to me. That was easier for them to do.
The crypto-originalist idea of a world in which everyone strictly adheres to self-custody was never going to work. People have always desired the assistance of a reputable organization to safeguard their valuables. This was true in ancient times when bearer assets like gold were used, and it will be true in the future when digital bearer assets like Bitcoin are used.
Sixth, superior regulators are required. The industry isn’t the only place where people with a messiah complex display unrestrained ambition under the guise of “doing good.” Additionally, it infects some of those who oversee it. One good example is Gary Gensler. He talks a big game, but he has a terrible record of actually stopping bad things from happening. His agency looked directly at Terra and BlockFi and dealt directly with Sam, but it did nothing to protect the victims of those organizations. It is counterproductive to obsess over classifying tokens as securities.
The ultimate evidence that this is more about Gary than protecting investors is the SEC’s refusal to approve garbage like the BITI short Bitcoin fund while simultaneously approving a basic Bitcoin ETF. BITI is bad because it is bad at being short Bitcoin, not because it shorts Bitcoin. Since its launch, the BTC is down more than 20%, but the ETF is up less than half as much.)
Gensler is one of a family of regulators and government officials who appear to believe that businesses exist to meet their requirements rather than the other way around. When YouTube first launched, they would have imposed fines on children who uploaded cartoon clips and demanded that each YouTube channel obtain a broadcast license from the federal government. A new industry suffers almost as much from bad entrepreneurs as from bad regulators.
However, the crypto industry must shed its childish views on regulations. Like any other intermediary, crypto’s fully centralized parts should be regulated. Traditional regulations and innovative ones that take advantage of the underlying technology, such as proof of reserves, should be used to regulate the parts in the middle, as FTX did. We won’t be able to make a convincing case for why DeFi should only be regulated through code and financial incentives until we acknowledge these points.
Seventh, we need to start distinguishing between innovative ideas that work and those that just make money fast. Ethereum was a good innovation, even though it only ever raised $16 million. Not the fifth smart contract platform, which has already raised a billion dollars and is built on the Move programming language. A useful innovation was the application of digital scarcity to collectibles and art. Most BYAC clones are not.
As a corollary, we must refocus tokenomics on establishing long-term economic adoption and security. This was done by Bitcoin, but numerous subsequent projects have not. If your project gives insiders and early investors more tokens than users will ever receive, your priorities are not right. If launching your project requires a hundred million dollars, you are not in the right industry. In crypto, projects that have raised a lot of money and those that have failed spectacularly are highly correlated.
Eighth, there is a spectrum of decentralization, not a single type. Arguments about extremes in the abstract consume a lot of time and effort, but reality is always gray. One of those areas where a little nuance can make a big difference is this one. Although Bitcoin is decentralized, neither mining nor trading are. And that’s fine because the underlying protocol is resistant to censorship, so competition will always exist.
As a corollary, we must improve our ability to communicate with our skeptics, and this can only be accomplished by adopting a balanced approach. For instance, we must acknowledge that DeFi suffers from hacking. Only then can we demonstrate that DeFi is hacked for one reason: everything is transparent, making vulnerabilities easy to find. The way our legal system works is similar, but we don’t always try to end due process when a criminal gets away with something.)
Ninth, we must slow down our enthusiasm for the next trend. Even though I believe in the DeFi model, I would never invest all of my money in a brand-new protocol based on an untested economic model.
It’s good that our industry likes to try new production methods. However, we must acknowledge that experiments can and do fail.
Tenth, we must cease relearning difficult lessons from history. Financial institutions must manage risk, systems tend toward hierarchies, direct democracy fails, and excessive leverage is fatal. The only way to change the old ways is to be aware of them, not ignorant of them. You won’t be able to make an informed assessment of Bitcoin if you don’t investigate the circumstances that led to the creation of fiat currencies. Also, you shouldn’t build in DeFi if you don’t know much about banking.
We will all make it to eleventh. Well, at least most of us. My tenth year in crypto will be next year, and this is my fourth bear market. Because my thesis is based on history and a deep understanding of the technology, rather than prices and prophets, none of them have shaken my belief that crypto will eventually re-architect the global economy. Each one has its low points, but none have shaken my belief that crypto will do so.
Although it is true that scandals like FTX now occur on a larger scale, this is only due to the industry’s expansion. Even if it does so at a different rate, it will continue to do so.