Why I have zero faith in crypto venture capitalists

1) the traditional options with varying risk profiles are mostly legitimate. The ratio of scam to authentic project is much higher in crypto. Or if not "scam", products where the creators (as pointed out in this article) might be perfectly happy if the product turned out to be successful, but mostly don't care because they make their money up front: reward with very little risk. Retail customers take all the risk. Traditional financial products align incentives better because if no one want is, no one is making transaction or management fees either. They're (mostly) only successful if customers are successful

2) Financial products based on crypto have no real-world assets backing them, making their prices much more volatile. If you're investing in traditional high risk product that ultimately relies on a real-world commodity like oil, you can make reasoned predictions on where oil demand might be headed. Your might make a high risk bet that oil prices are going to bottom out from their current peak due to decreased demand after the Summer and a minor resurgence in COVID as more and more people go back to work and then kids stop distance learning and mostly go back to school in the fall, etc. You might be wrong, but you can see an actual underlying asset with real-world utility to make better reasoned decisions. It is much harder to do that with crypto when a tweet by some high profile billionaire (Elon comes to mind) or rumors of regulatory scrutiny could send prices soaring or plummeting. This is very rare in traditional financial products.

I also don't think crypto will ever ever ever replace government regulated markets. It may become part of them, but not replace. The government (at least in the US) is already regulating crypto. CTR's are already required, the SEC has stepped in pretty heavily to classify most crypto as securities, complete with the requirements that comes with that, etc. It can be decentralized but still regulated, and governments are simply not going to allow crypto to take away their ability to control their own monetary policy. Plenty of governments may wish to move on from the USD being the default world reserve currency, but that's because they want it to be something they have more control over. Crypto doesn't fill that role.

All the US would have to do is regulate how every US bank works with crypto, and require that US banks only work with foreign banks that follow similar requirements. Any foreign bank wanting to do business even remotely related to the US-- which is nearly all of them, would have no choice but to follow. Or the US could regulate how businesses are able to accept crypto as a currency. Businesses don't operate in a decentralized abstraction layer: They operate in physical locations. It might be difficult to seize their crypto assets if they violate the law (though not impossible) but still very easy to seize & shutdown their physical assets, throw people in jail, etc.

Sure, if crypto could somehow avoid all of that until it became the de facto medium of exchange, governments would have a much harder time doing this. But it's not like governments aren't aware of what's going on, and as I said the regulation has already begun.

Banks make money with money + effort. They provide loans and vet the recipients of those loans, because the banks are exposed to the risk of default (at least, ideally, obviously this failed in 2008). If you want a small business loan, then you typically have to have not only a good credit rating, but a business plan. Sounds like a real use case to me.

"crypto has the potential to be more efficient and secure" Sounds charmingly vague.

Except that's not clear at all.

It's currently less efficient than electronic bank ledgers by many orders of magnitude, in any way you measure -- energy consumption, cost, speed, etc.

And it's paradoxically less secure, as tons of successful hacks/thefts have proven. If my bank gets hacked, I'm still FDIC-insured. The courts will make me whole. Crypto is exactly the opposite.

And there is no indication any of this is changing. Crypto is inherently inefficient because of the need for proof, and for the average person it's far riskier so your money is far less secure in that sense -- and that's inherent too because illegal transactions like hacking and theft can't be undone, by design.

So the use cases of crypto are... not at all clear, except, really, for illegal transactions. Which is why the main real-world use cases, so far, have been... ransom payments, online recreational drug sales, and cross-border transactions. Not even remotely the "banks, financial instruments, and risk management" you're suggesting.

Nobody in the real economy uses crypto as a unit of account. Most tokens are too volatile to be very useful as media of exchange, and this use case has traditionally been limited to goods (drugs) and services (hitmen) you can’t legally buy in the dollar system. “Store of value” is in the eye of the beholder, of course, but generally speaking you don’t want your store of value to be something that can depreciate 40% against the dollar in two days.

Does crypto do that? I highly doubt that. Real-world economies based on crypto are none existent, or so small they are insignificant. I feel like what you are saying is a huge simplification and may not be true at all.

Your perspective is limited. Check out my general intro [1] and other articles [2].

TL;DR: at least one legitimate use case is to keep up with inflation.

[1] - https://danuker.go.ro/intro-to-cryptocurrencies.html

[2] - https://danuker.go.ro/tag/cryptocurrencies.html

It's as electronic as a stock, as purely abstract as a piece of gold, as resistant to inflation (theoretically) as anything having an intrinsic value that won't depend on currency.

Ofc, criminal transactions are also supposed to be eased but you know what, I think a bank made entirely to dodge annoying regulators will have a bit more success than an amateurish exchange: they'll give all your info, and therefore all your public transactions at the first little threat, while a big bank like Credit Suisse, would try to leverage lobbying power at first.

Your argument boils down to "Only criminals use Tor"... Not very useful.

1) https://kb.newegg.com/knowledge-base/using-crypto-on-newegg/

What are the true innovations in blockchain technology?

I don't know the root cause exactly, but it is a pretty annoying trend.

Just went to the homepage of McDonalds and guess what their title says:

Burgers Fries & More. Quality Ingredients.

…

Private Equity (PE) investors, of which Venture Capital (VC) firms are a subset, typically buy stakes in organizations that are different and better than what anyone else is able to own. Founders and employees in startups typically get common stock, VC firms typically get preferred stock, a completely separate class of shares that has more privileges than common stock. Even investors in the public markets after a stock market listing only get access to common stock. Not only do PE/VC get preferred stock, they often wind up with this exposure (whether it is via preferred stock or another instrument) at a price much lower than the current agreed upon or price derived valuation. Preferred stock further mitigate almost all risk by having covenants (contractual conditions) such "liquidity preferences", meaning that there are many events where a preferred stock holder gets paid first, meeting the amount of their initial investment or several multiples of their initial investment.

Even if exposure via preferred stock is not initially arranged, similar outcomes are entered into via convertible notes. This is a form of lending to an organization, giving them capital with no initial change to the cap table or share structure, which then converts at a later date to shares at almost any price. This is a way to circumvent buying in at market price as the convertible note acts like an options contract negotiated sometimes years in advance.

Analogous to a loan shark, almost any arrangement can be pledged and it can be very lucrative such that the loan shark almost never loses.

Now, these same concepts translate into the crypto market. The speculators are taking up all the spotlight but are playing a very different game, just like in the equities and bond markets the speculators are only providing liquidity for the funds to dump on them. And occasionally complaining the few times they notice, such as when a founder sells. The founder takes all the heat, while the VC/PE and Hedge funds get none and only profits. (None of them should get any heat or attention, or it should be evenly applied or the speculators should have considered the possibility of that and chosen not to trade that asset)

> - perpetual block [rewards]?

This is a concept somewhat unique to crypto currencies. Although it exists in currencies and equities under different names. It mostly means perpetual issuance, where more of the asset is created and this is exchangeable for cash as long as the market continues to post liquidity - or as long as the market keeps putting up cash to buy more of the asset.

But for a concrete example lets look at Helium. Google Ventures invested in crypto asset project Helium. Their private equity deal gives them the right to the block reward.

Like the Bitcoin network, the Helium network is a blockchain that appends new blocks to the chain, not dissimilar to additional nodes in a linked list. Like, Bitcoin, new Helium network uses the addition of blocks to also distribute new Helium tokens to the people that helped validate the existence of the new block. This is called the block reward. Like Bitcoin, Helium network participants are competing for the block reward and this competitive process decreases how much of the block reward any single participant receives.

Unlike Bitcoin, the block reward is also split with the private equity investors. The organization needed capital after pivoting several times before creating the Helium blockchain network, and nobody else would give them the time of day. So there are two portions of the block reward, one that people compete for and split amongst themselves, and a separate portion that is simply given to the private equity investors who maintain the same split forever (well till the year 2070 in this specific case), as there are no more private equity investors. Deals like this exist across the entire space.

> - the entire last sentence?

This was hard for me to articulate. But let's say you run across a VC / PE firm pitch deck, it might say "we've returned 500% in capital over X years" with a nice line chart showing how it beats the S&P500 and even Bitcoin price over the same time period. This might be their only way of showing broad relative accounting across the whole fund, but any particular investor in the fund actually might have much higher returns. 8,000% perhaps? This is due to the nature of the accounting. If a fund invested in Facebook in 2010, and you knew their IPO was going to happen in 2012 and make the fund billions of dollars, there is no way for you to invest into the fund in 2011 and earn that appreciation. If you invested in 2011 you would only get exposure to things the fund invested into after 2011, you wouldn't have exposure to the 2010 positions. The fund itself will have your capital and report a greater amount of assets under management (AUM), and by 2013, after the Facebook IPO, this greater AUM reduces what the whole fund can report as "performance". So you really need to understand the nature of the deal flow to determine if it is a good place to park your capital. You are more so hiring people to make deals, which is very different than hoping for some "trading genius" to analyze publicly traded markets full time. In a liquid fund, all the money is pooled into the same strategy that is ultimately priced at the whim of the market, so in those kinds of funds the performance is more easily seen in a pitch deck.

These venues can be distinguished from a Ponzi scheme because the participants are traders in a market, not investors in a company or managed financial product.

The state (us government) has made it clear that there is no distinction it can stand behind anymore

sometimes earlier investors get paid out by newer investors

whether it’s a high yield investment program, a poorly run hedge fund, or the entire corporate bond market, or social security, or herbalife, or defi

The debate over the name of the payout system is no longer productive, as ponzi scheme - as a pejorative term - doesn’t tell you anything

And they already do that. The third party is states backing traditional banking systems.

[edit] Just try and leverage some NBA Top Shots on your own website and let me know how that goes.

> But the point being I do believe theoretically there are "legitimate" applications where the decentralization of assets is useful.

It's been 14 years, it's not still early, there's just no "there" there.

They're very different because the blockchain is public. Getting access to a bank's database touches a lot more systems and algorithms. Even something less interesting like intercepting web traffic to (or between) banks isn't interesting because you need physical access to the medium and you'd need a hole in TLS. Like Bitcoin, TLS uses SHA-256, but breaking it probably doesn't give you access to any plaintext, and you could force a downgrade to TLS 1.2 to use MD5-SHA-1. This is only per-connection; the Bitcoin ledger is set in stone.

Bank account are not protected by cryptography, they're protected by law. What you want is bitcoin to have the same, not say that since a banks' https website could be hacked, let's do nothing about the main weakness of crypto.

But anyway the point is moot: it's certain developers would upgrade the network with time as new events unfold.

There was even a time, believe it or not, where electricity didn't exist and people/society still kinda worked...

When classical crypto is reverse (when, not if), then we'll simply have all our past secrets revealed. What you want is gradual increase in complexity so that the decyphered past only impact dead people.

Crypto currency will ofc do that too, don't forget bitcoin can change everything, even its 21M limit, as long as the majority of the network follows.

Which was obvious Coinbase was going to do and did in their own stock market listing, to me

You sell into liquidity, liquidity comes from people wanting financial exposure, people wanting financial exposure comes from buzz and marketing

When things are actually under SEC purview, the only difference between fraud and not fraud is disclosure. If you tell people and they only watch youtubers instead of reading, you are fine

No, tokens typically are not under SEC purview and they’ve gotten better at ensuring that