I get asked a lot about what I think about cryptocurrency. It’s a hard question to answer, nobody really knows what it is exactly. It’s different things to different people, and it’s not helping that it’s at least somewhat complicated to understand the underlying technology.
Part of why these discussions are hard to have is that there’s many ways of looking at cryptocurrency. You have financial analysts and governments looking at it as a regulatory nightmare with no oversight, and you have hardcore programmers looking at it philosophically as a tool against oversight.
Roughly, cryptocurrency can be split into two parts: the core underlying technology (in this case, blockchain), and what people are building with that technology (the cryptocurrencies themselves). Before we get into any of that though, I have to discuss the idea of trust and control.
Fundamentally, a lot of society works on trust. You ‘trust’ people to not just randomly attack you on the street. You ‘trust’ that restaurants will have adequate sanitary practices and not serve bad food. You also ‘trust’ that if the bank says you have $100 in your account, and that you can go and withdraw $100, and that they won’t make any accounting errors. You ‘trust’ that when you pay netflix a subscription fee that they’ll let you login and watch their content.
In these scenarios, you can safely have that trust. It’s in Netflixs best interest to not screw you over, because otherwise people would get mad and they’d make less money. It’s the banks best interest to honor your amount, otherwise nobody would ever trust them with their money again. If the restaurant is unsanitary, they get closed down. If people attack you randomly on the street, they get into legal trouble.
Problems could potentially appear when all the trust is with a single party. Take Google, who has a phenomenal amount of personal information about just about everyone. Everyone trusts Google to not be evil, and for the most part, Google doesn’t want to be evil either, as that would be terrible press. It’s not hard to see that they could be, and that very fact gives them a lot of power and control.
Back to blockchain. Blockchain, at its core, is a way to create trust where there is none. That’s really it, that’s what it does differently. Any number of people could not trust each other, but if they all used blockchain, they’d all have trust that what is on the blockchain is true and not tampered or altered. Blockchain uses a number of clever tricks in game theory and cryptography to make this happen, but fundamentally that’s the result. A system where nobody has to trust anybody, where everybody acts greedily in their best interest, and yet everyone can safely agree on what’s what. There’s no need for a central authority that everyone just has to implicitly trust.
Blockchain technology is often called ‘a slow distributed database’, and while that’s true, it’s just half of the truth. There are plenty of distributed databases out there, all of them plenty faster than the blockchain, but they all rely on trusting a central authority.
This brings us to crypto that people know, the cryptocurrencies/tokens/digital assets themselves. It’s just an accounting system built on top of blockchain. Any financial transaction today is mediated by the bank, which means both parties have to trust the bank to be correct/accurate/execute the transaction properly. Because cryptos are built on the blockchain, there’s no need for such a central authority of trust, and so no need for a bank. For any given cryptocurrency transaction, you can trust that it is correct.
At this point, you might be thinking “I mean sure, but, like, banks are pretty trustworthy?”. You’d be correct. Most banks in developed countries can be trusted, because the whole financial system is built on trusting banks. If you can’t trust banks, we’ve got far larger issues than your TFSA holdings. For all their greed, banks work very well at what they do.
If I were asked about what I think cryptocurrency is good for today, I wouldn’t have a single legit use-case. Crypto is slow and expensive because it has to assume that nobody can be trusted, and I haven’t heard of a situation where the extra trust is worth the extra costs. Trust emerges naturally in any sort of iterated prisoner's dilemma situation, and the genius of many large systems (democracy, capitalism) is that they’re based entirely on that exact type of situation. Trust is already there, there’s not much need for more of it. When Nassim Taleb talks about “skin in the game”, he’s saying you can trust entities with skin in the game exactly because the system is designed to reject those that you can’t trust.
Given that the core premise of blockchain is trust, and that trust already exists in abundance in today’s society (we actually just keep getting more of it), then why is blockchain still here over 10 years later? Well, they still have a bit of an edge in some ways.
Fundamentally, the technology is cool. Computer science geeks, game theorist nerds, and code junkies all love the ideas that are present in such a system. Blockchain occupies a space that intersects cryptography, game theory, distributed systems, and fiscal policy. It’s new, it’s cool, and most importantly I don’t have to leave my computer chair to learn and interact with it. Despite being here for over a decade there is still plenty left to figure out; there are dozens of interesting blockchain experiments being created and iterated on as you read this.
You can’t talk about cryptocurrency without discussing its illicit uses. The crypto space is a financial playground free from government oversight. It took banks and governments hundreds of years to figure out how to implement and maintain a stable financial system, removing all the illegal pyramid schemes and fraud setups as they were figured out. Just about every type of financial fraud scheme ever created has been implemented on the blockchain, and without any type of government oversight it runs rampant. Pyramid schemes, pump-and-dump schemes, it’s all there. The space is fraught with scams, a lot of them successful. There’s plenty of gullible people looking to get rich quick, and plenty of of snake-oil salesman to cater to them.
Lastly, crypto today can be viewed as programmable money. There are hoards of developers out there who love and build on this idea. Fractional ownership of assets, peer to peer lending, prediction markets, and even collectable cats. Fundamentally the banks could have entered the 21rst century and provided programmable hooks for people to build on, but they didn’t, they continue to not do so, and that leaves a gap in the market that crypto happens to satisfy.
So where does that leave us? I think of crypto as being very much in its infancy. It’s still in its “research and development” phase. I’m confident that people will keep researching, building, and improving the underlying technology.
I also don’t expect it to disappear anytime soon. It’s useful to many people, even if only for illicit reasons. It was also designed at the core to be extremely difficult to remove; any governing authority that tried to prevent motivated people from using the technology would be facing a nearly impossible task.
I’d say the space as it is right now is akin to a third grade recess with no supervising teacher. You got your bullies, your sandcastle builders, and your average Joe’s just tryna have a good time. It’s mostly chaotic, and nobody knows what they’re doing, but if you wait a decade or so they’ll grow up and hopefully contribute to society and finally start paying taxes.
Cryptocurrency gives you trust where none exists. Hardcore blockchain enthusiasts talk of a world of government collapse, an every-person-for-themselves culture, and a society maintained and built on the blockchain and it’s distributed trust. Until such a time that such a high level of trust can’t be built from relationships or other forces, cryptocurrencies face an uphill battle. Until then, it’ll always be there, improving, growing, and waiting.