Rebels With a Cause: A Case for Crypto
Rebels With a Cause: A Case for Crypto
Shortly before New Year's Eve, Bloomberg dropped a high-profile crypto story: “How Not to Play the Game” – putting crypto on trial. I ask: What game? Let's go back to reality.
In October 2022, Bloomberg’s Matt Levine published “The Crypto Story”. It was, in my opinion, the most refined and extensive take on crypto across all mainstream media in the last two years.1
Just before New Year’s Eve, Matt Levine published a postscript to his first story: “How Not to Play the Game”.
Backtracking from his original take, he puts crypto on trial and turns from a curious optimist to a cynic, like a flag in the wind.
Here’s how that looks like. From (original article):
“Give it time. The crypto system has attracted a lot of smart people who want to solve these problems, in part because they’re intellectually interesting problems and in part because solving them will make these people rich.” or
“Modern life is lived in databases. And crypto is about a new way of keeping databases (on the blockchain).” or
“Worth a shot, no?”
To (postscript):
“[Crypto] is just a thing someone made up”
“Crypto is, now, less necessary. Nobody has to have anything to do with crypto: You don’t need it to pay your mortgage or buy groceries, and if you want to ignore it, you just can.”
“It only works if people believe in it. There is no external source of value.”
“A cleverly designed exchange for trading magic beans will never get around the basic problem that the magic beans don’t work, and people might stop believing in them.”
Ups.
Two things:
I don’t agree with the statements in his postscript. More on that below.
It shows how people (and mainstream media) are swayed by the latest hype cycles, ignoring the actual progress happening within the industry.
As we enter 2023, I want to spare you yet another 100-page crypto report on what has and will happen. Plenty of good ones have been written already (a compiled list of the best reports here).
Enough of that.
Let’s focus on why crypto isn’t a “game”, what it has done for the world and why we’re here in the first place.
A real game with purpose
It's easy for the privileged elite (aka. Matt Levine) to argue that “nobody has to have anything to do with crypto”, except for speculation. But that ignores the fact that it's already a lifeline for millions of people.
Let’s step back for a minute and recognize some of the impact crypto has today:
Peer-to-peer payments, especially remittance payments in the billions: Intermediaries, such as Western Union, currently extract on average 6%, banks around 10% for an average $200 retail transaction. Estimating that 2026 the total value of remittances sent globally will reach roughly $930bn, that’s about $55bn that is extracted from the people who need it most. Bitcoin transactions are instant and virtually free.2
Protection of wealth against inflation, theft, and corruption for millions of people in Venezuela, Zimbabwe, Argentinia and other places. History is full of failed currencies and fooled citizens who lost their money. Many people much more knowledgeable than me have already written extensively about that. I won't repeat myself.
Financial inclusion: Banking the unbanked or helping people accessing the financial market in countries where regimes control access; 1.7bn people still don’t have bank account. e.g. most Venezuelans don’t have enough U.S. dollars to open a U.S. bank account.
Donations: Russia’s invasion of Ukraine triggers a flood of crypto donations aimed at supporting Kyiv’s war efforts; Ukraine received at least a fifth of total donations of $261m in crypto.
Data ownership and monetization: Thousands of web3 creators can now monetize their content to much fairer economic terms.
Stabilization of the renewable energy grid with Bitcoin mining facilities o advance the global energy transition.3
And we’re just getting started. The potential of this technology is far greater. It's already being realized.
Progress
“The reason crypto is cool is because of what we’re building.”
We’re early. Building a fairer, more efficient financial system is a complex and difficult endeavour. So is building a new computing protocol – an ownership layer for the next internet.
Many challenges lie ahead, such as:
Technological: Interoperability, scalability, UX.
What Layer 1s and Layer 2 do we use, how do we scale them, how do we make web3 platforms interoperable? How do we create devices, wallets and apps that make interacting with web3 easy and fun? Huge progress is being made on that. More below.
Political & Regulatory: Regulatory frameworks and standards.
How do we classify cryptocurrencies (commodity vs security, at least in the US)? How do we regulate DeFi? How do we classify NFTs? How are IP rights protected, how does licensing work, how does copyright work, how do we enforce ownership? Industry leaders such as Brian Armstrong, Co-Founder and CEO of Coinbase, are pushing the discussion forward. 45
Education: Showing people the value of digital ownership and privacy.
According to 24% of Americans said they don’t understand how cryptocurrency works, let alone a Bitcoin wallet. Active education by creating actionable content on crypto (e.g. Bankless); and passive education through use-cases that enlighten mass market (e.g. NFT integration by Instagram; Starbucks Odyssey, etc.)
With the current speed of progress on those topics, most of those challenges will be solved. The infrastructure and experiments we see today, like DeFi, bridges, Apes, and Crypto Punks, will appear primitive in ten years.
What’s most important: Innovation is a steady drumbeat that isn’t a function of the capital markets.
5-15k developers are actively building for crypto every month. Infrastructure is being built and tested today.
Volume, prices, general interest come and go in hype cycles. It’s always been like that. Meanwhile, the underlying tech develops linearly and in tandem with the community, the builders, the regulators. It doesn’t matter whether Bitcoin is at $60k or $15k, or whether SBF is in jail or flying home for Christmas. That’s just noise.
The real progress happens regardless of the headlines.
Let’s recognize some of the most significant technical milestones of the last months:
Bitcoin implemented Taproot to improve privacy and scalability and achieved 100% uptime in 2022. In November 2022, Bitcoin core 24.0 was released for more privacy, usability, and security.6
Ethereum successfully transitioned to proof-of-stake, increasing security, scalability and reducing energy consumption by 99.95%.
Alternative layer 1 chains went live or scaled; e.g. Polkadot established 33 parachains, after it had launched in December 2021.
Layer 2 adoption with Arbitrum and Optimism is exploding. ETH denominated TVL rose 220% from 1.55m to 3.4m. Net-of-prices, L2s, saw significant liquidity inflows in 2022.7 Arbitrum and Optimism now make up around 50% of total transaction volume on Ethereum.
Progress in zk-proof technology; zkEVM, combining Ethereums EVM environment with the scalability of zk-rollups, saw immense progress; In October 2022, zkSync launched their zkEVM as an baby alpha release; the Polygon team is in their final phases of testnet to make Polygon zkEVM compatible8; Scroll is currently on a pre-alpha testnet. We’re on the cusp of launching on mainnet.
Liquid staking more than doubled in 2022 to 6.975m ETH, with Lido as the leading protocol.
Web3 protocols, such as social or publishing, grew from 0 to 1 (cf. Lens).9
DAOs went from 0 to 1 and established themselves as a viable form of self-organizing groups with on-chain voting, delegation, and community treasury managmenet. Through DAOs, online communities and jointly-owned assets can be quickly created and disbanded across borders. DAO Treasury Assets Under Management increased to over $10bn in 2022.
The crypto wallet experience is improving rapidly and will become much better with account abstraction, making wallets much easier to use (cf. Argent, Rainbow, etc.).
Meanwhile, adoption is happening:10
About 5-10% of people around the world own crypto. Bitcoin records about 250k transactions per day.
Creative applications of NFTs exploded: More than a third of Interbrand’s top 100 global brands already entered Web3. Polygon, a Layer 2 for Ethereum, alone onboarded Reddit, Adidas, NFL, Starbucks, Adobe, Meta, etc. to Web3.
Institutions recognize crypto as an asset class: According to Fidelity, nearly six in ten institutional investors (58%) invested in digital assets globally. 81% of institutional investors believe digital assets should be part of a portfolio. More: JPMorgan’s Onyx platform and its efforts to launch institutional friendly DeFi (e.g. launch of Aave Arc); the Coinbase partnership with Blackrock to provide Aladdin clients access to crypto trading and custody; Investments in Bitcoin miners by BlackRock, Vanguard and Fidelity; Fidelity’s Bitcoin trading offering for retail and latest trademark applications for NFT marketplaces and metaverse services. And on, and on, and on.
Crypto VC investment is still very high, with $19.9bn across
616 deals through the first nine months in 2022. This is 41% higher than the amount raised through the first nine months of 2021.11
This are all important stepping stones on a long journey of building the next interconnected, decentralized financial and infrastructure layer.
All this happens on the backdrop of unstoppable global megatrends:
Erosion of consumer trust in governments, corporations and the news. According to OECD, just over four in ten people trust their national government.
Erosion of online privacy and continued rise of monopolistic tech platforms.
Significant parts of the world have become less free; According to Freedom House, a US-based NGO, the share of the world’s population living in environments categorized as “free” has fallen from 46% just 15 years ago to around 20% today; Authoritarian practices proliferate and democracies are failing.12
Ever more people will spend time online in virtual worlds, and will have a claim to own their data and the value they create; Developing immersive, engaging content is increasingly shifting toward individual content creators.
People increasingly raise their voices against injustice, gatekeepers, rent-extractors (e.g. the recent exodus from Twitter to Mastodon; uprisings in Iran and China thanks to online communication tools; similarly to the Arab Spring in 2011).
The buying power per unit of currency will continue to diminish.13
Crypto is well positioned to be a solution to that.
Facing reality
So, let’s go back to one of the statements of Matt Levine in his recent article:
“And it could all feel like a game; it could all feel unreal. It is unreal.”
To which I say:
No, it’s not a game. It’s real. It’s happening.
Our industry has come under pressure. Rightly so. In 2022, tides have changed, for CeFi and crypto alike. And when the tide goes out, you discover who’s been naked. Only serious endeavours remain.
We’ve all been caught by surprise by the amount of bad actors, greed, ignorance, lack of transparency and lack of decentralization that have creeped into the system over the last four years.
Now, we face a choice:
A ) We can give up building, believing, arguing, explaining, educating, envisioning. And move on.
B) Or we do build what we came here for in the first place: Build infrastructure that ensures privacy, freedom, financial inclusion, transparency, and efficiency in the digital (financial) space. Infrastructure that allow billions of people to create, transact, and own digital value – without being locked out, ripped off, or monetized by monopolistic platforms.
For me, the choice is clear.
It isn’t time to leave.
It’s time to build.
Going forward, what can guide us?
A healthy dose of self-criticism.
An openness to regulatory standards that prevent a second FTX, while enabling benefits of crypto.
And the responsibility to no longer compromise on the core principles this space was built on: Decentralization, openness, and transparency.
I still believe that Bitcoin, and what it enabled, was the most important invention of the last 15 years in the consumer tech space.
Back in 2016 when I first tinkered with crypto and 2018 when I started working in it full-time, people's reactions to my job was a mix between confusion to amazement.
Today, it feels like a mix of disgust and bewilderment. “Oh, you’re one of those guys”.
It’s time to change that and claim back our purpose.
For the sake of everyone.
Back to building. And Happy New Year!
– Marc
Further reading:
2023 crypto market outlook - coinbase.com. (n.d.). Retrieved January 3, 2023, from https://www.coinbase.com/institutional/research-insights/research/market-intelligence/2023-crypto-market-outlook
The Block Research. (1970, January 1). 2023 Digital Assets Outlook Report. The Block. Retrieved January 3, 2023, from https://www.theblockresearch.com/2023-digital-assets-outlook-report-197484
Dixon, C. (2022, August 4). Introducing the 2022 state of crypto report. a16z crypto. Retrieved January 3, 2023, from https://a16zcrypto.com/state-of-crypto-report-a16z-2022/
Rendon, M. (2021, May 27). How open and public cryptocurrencies can help Venezuelans. How Open and Public Cryptocurrencies Can Help Venezuelans | Center for Strategic and International Studies. Retrieved January 3, 2023, from https://www.csis.org/analysis/how-open-and-public-cryptocurrencies-can-help-venezuelans
Selkis, R. (n.d.). Crypto Theses for 2023. Messari Crypto News. Retrieved January 3, 2023, from https://messari.io/crypto-theses-for-2023
Apparently, such a cover-to-cover issue of Bloomberg Businessweek is something a single author has done only one other time in the magazine’s 93-year history.
The World Bank estimates that remittances – the money that migrants send back to family or friends in their countries of origin – can account for up to 20% and even as high as 40% of Gross Domestic Product (GDP) in many developing countries. In Haiti, 26% of its GDP comes from remittances sent by Haitians working abroad to their families back home. For workers sending money from the US, Canada, or the Dominican Republic, fees can be as high as 8-10%, adding up to $150 million in fees alone per year.
In a recent article, I wrote on misconceptions about Bitcoin.
I recommend you to read this paper by Square on how Bitcoin can enable a green energy future. Similar thoughts by PwC in this article here.
Here’s a great piece about copyright vulnerabilities in NFTs.
Bitcoin Taproot is a proposed upgrade to the Bitcoin protocol that aims to improve the privacy and scalability of the Bitcoin network. It does this by introducing a new type of transaction called a "Taproot" transaction, which allows multiple parties to create a single transaction that appears as if it were created by a single party.
One of the main benefits of Taproot is that it allows for more private transactions on the Bitcoin network. Currently, all transactions on the Bitcoin network are visible to everyone, which can make it difficult to maintain privacy. Taproot transactions allow multiple parties to create a single transaction that appears as if it were created by a single party, making it more difficult for outsiders to determine who was involved in the transaction.
Another benefit of Taproot is that it allows for more efficient use of the Bitcoin block space. Because Taproot transactions can be created by multiple parties, they can potentially reduce the number of transactions that are needed to accomplish the same goal. This can help to improve the scalability of the Bitcoin network by allowing more transactions to be processed per block.
Here’s a helpful article explaining the Bitcoin core 24.0 release.
Arbitrum transaction count, monthly:
Optimism transaction count, monthly:
https://dune.com/sixdegree/arbitrum-overview?
Because Polygon is interoperable with Ethereum and is designed to enhance the Ethereum ecosystem, it is often referred to as an Ethereum layer 2 solution. However, it is important to note that Polygon is a separate and independent blockchain with its own protocol, consensus mechanism, and native token (MATIC). That would change if Polygon becomes zkEVM compatible.
As these products open up to users and EVM-based applications, they might start taking market share from Arbitrum and Optimism. This is in addition to other general purpose zk-rollups that use different virtual machines for execution, such as StarkNet.
Here’s an overview of the Lens protocol ecosystem:
Here’s an overview of protocol VC deals in 2022, as of September 2022:
and top VC backed crypto companies:
Freedom House has tracked democracy and freedom around the world for decades. Its most recent global assessment, which covered 2021, found freedom had gone backwards in 60 nations and only improved in 25. It found only 20% of the world’s population lives in nations categorised as “free”.
Since 1900, U.S. inflation has averaged about 3.0% per year and the cumulative effect is remarkable:
Here’s another graph that shows the declining purchasing power of FIAT currencies over time:
From January 1, 1949, to the end of June 1995, even the best national currency of the postwar period, the German mark, lost 71% of its value. The U.S. dollar lost 84% of its value during the same period. This inflation was the equivalent of a tax on currency holders.