The prospect that there exists a system of networked computers that preserves some quantity of state information out there
somewhere (the details of precisely where don't matter by design), in a fashion that is cryptographically immutable, that is addressable and globally available such that with any internet connection anywhere in the world, you can go and fetch that information, and no entity (short of the actual physical network carrier itself) can prevent you from doing so, is a genuinely useful thing. The problem that immediately arises with such a scheme, however, is that keeping said computers online, preserving this state information in storage, and maintaining a network connection such that said information can be fetched, costs real pecuniary resources, or at the very least, attention. So the question that arises is how do you motivate everybody out there
to coordinate the bare minimum amount required to keep this system going? The answer—or at least an answer—is really quite clever: you make the system excrete money.
The problem with a system that poops out money in exchange for keeping it alive is, for one, all the problems of perverse incentives. The original cryptocurrency, Bitcoin, was designed around what is called a proof-of-work integrity model, which encourages people to run as many computers as they can afford, to effectively gamble for the release of new Bitcoin, which amounts to a lottery drawn every ten minutes or so—and more computation equals more lottery tickets. This in turn drives demand on power grids for more electricity, which invariably means more fossil fuels get burnt than otherwise would have been, and power plants slated to be decomissioned remain online. There are even cases of Bitcoin miners just buying entire power plants specifically for mining Bitcoin. Against a backdrop of ostensibly ineluctable climate catastrophe, this seems like a bad situation that isn't showing signs of ameliorating.
The next issue with cryptocurrency is something I'm going to call criminal finance. Satoshi Nakamoto
, the pseudonymous author of Bitcoin—again, the first viable cryptocurrency—is on record expressing heaps of anarcho-capitalist sentiment, and was unambiguous that the stated mission of his (at least we assume it's a he) project was to be able to store and exchange money without nation-states being involved. This proposition turns out to be very attractive to people who can't have nation-states involved in their financial transactions, because their financial transactions are illicit. This is to say that cryptocurrency brings all the gangsters, drug dealers, arms brokers, child molesters and terrorists to the yard. Cryptocurrency also uniquely affords a brand new species of antagonist: the ransomware hacker. Without cryptocurrency to convey the funds, to put any effort into deploying ransomware, let alone writing it, would be almost universally pointless. Ransomware is a novel, sui generis class of global threat that would not exist otherwise.
The third strike against cryptocurrency is what I'll dub—though I'll concede I picked the term up elsewhere—the grifter-industrial complex. Here the overt criminality is a little bit murkier, at least some of the time. Also, unlike the other two categories where cryptocurrency is at least one degree removed from the harms people incur, people get hurt as a result of their direct interactions with it. In further contrast to both the poorly-apprehended ecological damage in far-flung places, as well as the lamentable and viscerally-felt depredations of Bad Men With Guns, the harms in this category are limited in scope to financial loss—which of course can still be wildly varying degrees of bad. It also affects—at least in a way that is unambiguously attributable—the largest number of people.
The grifter-industrial complex takes advantage of the cupidity of its victims with its central narrative of number go up. Since bare-naked cryptocurrency (that is, without mining or staking or helping run the infrastructure or whatever) has no yield (that is, no interest or dividends), its dynamics are very similar to stashing gold bullion under your mattress. The only way the value of this stuff appreciates is if demand continually outpaces supply. Now, if people were buying a particular cryptocurrency in order to spend it—like you buy a wad of Euros on the way to the airport—then it would be fulfilling its putative function, and its exchange rate would be at least somewhat reflective of its utility. However, since cryptocurrency remains actually pretty hard to use relative to the ordinary money everybody's used to, the tendency is just to hoard it. This means the only way number go up is if there is a steady stream of suckers buying in.
The grifter-industrial complex encapsulates all manner of hucksters, flim-flammers and conmen. Severity ranges from rug-pullers, who set up Rube Goldberg contraptions for the express purpose of ripping people off, to the more mundane Ponzi-schemers, to pump-and-dumpers, to the everyday cheerleaders, who may in fact be acting in earnest. Their shared task is to get as many other people as they can to buy their selected brand of cryptocurrency, so number ultimately go up.
One tried-and-true method of getting people excited to buy a thing is to just give some of it away. This is the phenomenon known as the airdrop. The gist of it is you (the uh, coin operator) get a bunch of people into a chat room begging for coins, which you then sprinkle liberally upon them. For added flair, you call this a community
—and in a way it kind of is. These people all hang out together and move in a herd from one chat room to the next, collecting free pretend internet money of one type or another. In return, or rather, incidentally, these people will do a significant chunk of your promotional legwork for you, and—of critical importance—get your tokens circulating.
Another way to spur demand for cryptocurrency is to invent something that can only be bought using it. Enter the non-fungible token. NFTs are native to Ethereum, though in principle could be cloned to another blockchain that has similar-enough properties. An NFT reduces pretty much exactly to what I described in the first sentence of this document: a quantity of state information that is cryptographically immutable, guaranteed to stick around as long as the underlying network does. What this particular strain of state information contains is typically a link to an image file, along with a smidge of concomitant metadata. The idea was, you would collect these things and they would appreciate in value, just like real art. There were just two problems:
Those actually aren't all the problems, but they are conspicuous ones that are peculiar to NFTs. There is also the problem that you can't hide the fact that you own a given NFT, and this can lead to you being targeted for one unpleasant end or another. Indeed, most cryptocurrencies operate fully in public, so it's like walking around with your bank balance stapled to your chest.
There is another, more pertinent problem, also not strictly NFT-specific, but manifests there. This has to do with the fact that it costs something to affect the Ethereum blockchain (or many others) in any way—including just sending somebody a quantity of crypto (which is the cheapest meaningful thing you can do). The real operating cost goes up and down, both with the load on the network, and the exchange rate of ETH relative to the money you use to buy food and pay taxes. Minting an NFT—a surprisingly good metaphor—is a relatively expensive operation. At the peak of the bubble, it cost around a hundred bucks, denominated of course in ETH. A good portion of this was fees, levied by those posing as gallerists and/or auctioneers, and rest went to the network for actually computing the transaction. During the bubble, a number of real (i.e., non-NFT) artists paid their own dollars that they could have used elsewhere, under the impression that this would be a viable way for them to monetize their work, only for their NFTs to go unsold. Once again, the story goes that the only people who make any money are the intermediaries.
A big contributing factor to why I have been lukewarm about cryptocurrency projects is that even once you've bracketed the environmental impact, the criminal finance, and the bulk of the grifter-industrial complex, there isn't a lot in the remainder that's especially interesting. The play is almost always for some kind of seignorage: create a money-printing press that you own and control, and sell its disgorgements to people for something of actual value. Those who have approached me over the years with their cryptocurrency-related ideas, they've almost always been pitching some derivation of that.
Indeed, if there's anybody acting in earnest in the cryptocurrency space, it's the people grinding out the core technology of the more mature ones. I want to be clear though that I don't think earnest necessarily means naïve. I can only speak for the Ethereum people because I've actually interacted with them (not Vitalik Buterin but others), and they treat the problem space like they're developing a network protocol that isn't under any one person's direct control. This is accurate, or at least it's accurate now. Furthermore, the work these people do is not a wealth transfer to some intermediary per se, unless you want to argue that improving the system for everybody is an implicit wealth transfer because it makes whatever whatever cryptocurrency somebody happens to be holding more valuable. The migration from proof-of-work to proof-of-stake is an example of a conscientious shift to be less wasteful.
There are people out there who assert that cryptocurrency as a technology has always been and will forever be one hundred percent toxic waste, and furthermore, since it is used to facilitate crime, having anything to do with it makes you a criminal. This is a position people use to bully others into alignment with their own moral and/or aesthetic proclivities. I recognize that cryptocurrency is instrumental in many harms—and some uniquely so—but I am not terribly sanguine about proclaiming it completely bad forever
. Rather, I give cryptocurrency in the large the much more ambivalent assessment of mostly bad so far
.
Despite his anarcho-capitalist pronouncements, the person✱ behind Satoshi Nakamoto was kind of like the dog who caught the car. There was no way to know if Bitcoin was going to work—where work
meant it wouldn't just be some nerdy curio that fizzled out due to lack of momentum—in advance of releasing it. Trying to apply the same conclusion to Ethereum is a bit more contestable. It would have been difficult for Vitalik Buterin to remain unaware of Silk Road, and ignorant of the first Bitcoin bubble. So he and his collaborators must have understood both that they were creating a dual-use technology, as well as how things would turn out for them if they were successful.
In contrast to Bitcoin, the development of Ethereum was manifestly a team effort, funded from outside sources. Cryptocurrency had been functioning both in principle and in practice for several years by the time Ethereum had been sketched out, although at the time, the seedier aspects of crypto would have looked more like a nuisance than a catastrophe. What wasn't proven was the smart contract aspect, a capability Bitcoin lacked. The success of Ethereum wasn't certain: there could have been a fatal flaw in the design that tanked the entire project. Heck, there may still even be.
If I seem particularly clement to Ethereum it's because those are the people I have had the most contact with. After all, their foundation gave me a USD $45,000 grant to develop what eventually became Intertwingler, which has otherwise nothing to do with Ethereum, or cryptocurrency in general. The path to this extraordinary opportunity was itself mundane: through my contacts I was invited to apply to the inaugural Summer of Protocols program, which dealt with the design and promulgation of protocols in general—one of my areas of expertise—and managed to win one of a dozen researcher slots.
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