The Token Disconnect
stephendiehl.com
stephendiehl.com
I'm not sure why he's constantly re-iterating his opinions with new blog posts... he hasn't seemed to update his knowledge at all since 2019, and his opinions haven't changed.
He seemingly has no concern for the state of the economy and public institutions, nor any awareness of the cryptocurrency scene beyond the cryptobros.
For anyone trying to understand why so many people are supportive of crypto, first you have to understand why they are against centralization. The whole cryptocurrency "movement" is about solving political and economic problems through technological means, with the main target being centralized power.
For most, centralization isn't such a bad thing and seems to be working quite well. These are generally the people who, for example, don't think Google is doing anything particularly wrong. For others, decentralization is the only path to simultaneously progress society and untether it (lol) from legacy institutions. Blockchain is the technology that can enable that and usher in more fair and resilient community systems. That's the "use case" that Stephen Diehl is incapable of finding.
On your argument about centralization, do you think that the momentum fueling its popularity is grounded in centralization vs decentralization? Because most of the interest I see boils down to making money via speculation.
I don't blame the cryptobros for doing it, the same way I understand people drowning in rivers while searching for gold, and it's a problem that did not originate with the push for decentralization. Exchanges and financial institutions have created an environment that reinforces the worst aspects of modern capitalism, and crypto as a technology is the scapegoat that has been gleefully jumped on by the existing ruling class.
* Money laundering (create a fake NFT and “sell” it to yourself to clean your money).
* Illegal Activities (no more money trail for your drug trades!)
* Billionaries Transfering Money outside of the bank system (no more pesky gift taxes!)
* Pump and Dump Schemes (securities without regulation!)
* Bribing Politicians (again, no money trail)
* …
I worry that what 2008 didn’t destroy, crypto will finish off, especially amongst the under 40 crowd.
Rather than do an investigation or analysis of some of the broader trends and successful applications of crypto, this article proceeds to make sweeping accusations devoid of earnest research.
Here's what I would suggest to the skeptics, to research and understand this space better and why it continues to keep on ticking in spite of the snarky commentary:
Uniswap (xy = k) https://docs.uniswap.org/
the constant product model that Uniswap introduced made automated money markets practical. It's an elegant solution to the problem of creating an on-chain marketplace with a sub-1000 line smart contract. Uniswap has since improved and introduced concentrated liquidity for better capital efficiency. The exchange does multiple billions in volume each day and the best part is: it's immutable.
Curve (https://curve.readthedocs.io/exchange-overview.html)
While Uniswap is optimal for a long tail of asset swaps, Curve allowed for higher capital efficiency among stable base pairs (such as swaps between two stable coins like USDC and USDT). It achieves high capital efficiency for deeper trades with low slippage. It is decentralized and powered by a DAO.
Gnosis Safe (https://gnosis-safe.io/)
Gnosis is one of the most battle tested asset management and multisig smart contract platforms. Each Gnosis Safe is highly configurable, allowing participants to set up any m of n multisig arrangement and even reinvest treasury funds. A multisig can be seen as a light DAO and allows for participants to manage funds in a transparent way across distances and jurisdictions. This helps with coordination and development. The whole world of DAOs is interesting in and of itself, with many different organizational structures being tested and iterated on.
Aave https://aave.com/
Aave is a lending and borrowing platform that allows users to deposit and lend out their assets. The platform is kept solvent by oracles, which watch the price of the collateral backing the loans to liquidate them if they approach a danger zone. Currently holding nearly $30B in assets.
Chainlink (https://chain.link/)
An oracle platform that allows for off-chain data to be integrated with smart contracts in a maximally (but not entirely) decentralized way. This allows for anything from stock prices to weather reports to credit checks to verifiably random numbers to be integrated with smart contracts to influence their execution and state in a maximally autonomous and tamper-proof way.
If you interact with the above protocols, you'll learn more than reading any op-ed thinkpiece. There really is something there there, the decentralized finance movement is burgeoning and it is qualitatively better than what options exist today. It's more powerful, more universal, more programmable, even more antifragile than the systems in place today. It will win in the long run.
There are other movements too, with DAOs and NFTs. DAOs will reinvent all sorts of organizations and will make internet native communities self-funded and self-sustainable.
If you want to show that blockchains are applicable to real world, you don't want to talk about implementation, but about UX. For example, you are a business and need money. Your choices are banks, VCs, and one of those distributed landing / borrowing platforms. For each, how many money can you expect to get? Under what (effective, averaged) interest rate? Whom do you need to conivince? Do you need to provide any documentation? Can you use your existing assets as collateral?
An answer to this question will make a much more convincing argument in the long term usefulness of DeFi.
Uncensorable. Permissionless. Democratic. 100% Availability (Ethereum has 100% uptime for 7 years). No $GME rug pulls like what we saw earlier this year. No Great Financial Crisis due to opaque liabilities (everything is traceable, auditable, open source, solvent, collateralized). Non-custodial. Yield generation. Programmable capital management.
It provides superior capital access and coordination mechanisms for not just first world humans, who also see a benefit, but for all of internet-connected humanity. It provides access to a $2.4 trillion and rapidly growing economy.
If you are a business and you need money in crypto and you don't live in a hostile jurisdiction like North Korea, Iran, or the United States, you can raise money on-chain. You can create a token with any emissions schedule, staking mechanics, profit sharing mechanisms, on-chain royalties, or whatever you can imagine as a programmer. And even if you're not a programmer, you can lean on tools that help to do that.
Not true. https://en.wikipedia.org/wiki/Ethereum#The_DAO_event
Just like $GME, we have a handful of well-connected actors overriding the rules that typically govern the system, in response to a valid but unusual outcome that they don't like personally.
There was a fork, which is a wonderful feature of blockchains. The original fork with the DAO hack still in place still exists: https://ethereumclassic.org/
Use that if you like. But clearly the community as a whole decided to repair the damage and move on. A fork like that would be too costly to pull off today. In addition, the maturity and growth of audit firms such as OpenZeppelin, have led to more secure DAOs, etc.
But by all means, use ETC if purism matters to you. Crypto is a free, open source movement.
There was a suspension of buys, which is a wonderful feature of retail brokerages. The security is still purchasable today, so no one was permanently harmed.
Clearly, the industry as a whole decided to repair the damage done by retail investors and move on. A naked short like that would be too costly to pull off today. In addition, many investors have learned from the experience.
But by all means, reject the comparison.
Also, I couldn't help to notice that you have ignored my questions -- how will the non-blockchain businesses use it? If a bakery needs some money to get a new bread machine because old one broke, do you really expect them to create a new token and adverize it all over the internet?
I ask because a lot of these things (exchanging one USD-pegged token for another, borrowing a token for another token) seem like problems that wouldn't exist to begin with, without blockchains.
There's no need to believe crypto has value. It has value. It trades 24/7 with a market cap approaching $3 trillion. The market isn't wrong about what has value, the market determines what has value. Deny that all you want, but it's not going anywhere, it will only evolve and grow from here. We've barely explored the design space for what is possible.
Because it's on Ethereum the contract is publicly auditable, and the rules are simple: insert currency into a pool, and have a chance of winning a %age of total interest earned once a week. No one owns the service. If the site goes down nothing changes. The developers can't just change the rules (backend) on you. They also have a DAO so the users can manage the service themselves.
A similar service is Compound, which recently was found to have a bug that gave away something like $90 million worth of currency to random users. That's the main danger with blockchain services: exploitable bugs.
Besides that, I've been thinking about something like a blockchain based Wikipedia (or Research Gate?), with monetary incentives for research teams to answer questions posed by the community (when they can't get funding by other means) and a codified scientific process for grading the quality of papers, as well as mechanisms to reliably cite related research papers to use as supporting evidence or jumping off points. Think of this: a debunked paper causing a cascade of debunked papers that cited it.
The point of using the blockchain would be to create a decentralized repository of research information with strict rules to maintain integrity of the information submitted (as opposed to relying on a centralized committee that might become corrupt through perverse incentives).
As for the rest of your comment, I think your diagnosis is wrong. This is purely political action, which is why so many people can't see the benefits. They think blockchain tech was supposed to clearly change what's possible - but it doesn't: instead it decentralizes it and removes the requirement of trust, which indirectly enables new possibilities. There is no current system that doesn't degrade over time due to various influences, or is immune from corruption. Blockchain based solutions don't solve the physical aspect of trust, and so would require the buy-in and cooperation of society through politics. What blockchains do is solve digital corruption and codifying rules, which changes the way people interact with systems.
Back to my original question, though, I don't see what real-world problem it solves to add stochastic variability to interest payments.
And "blockchain based wikipedia" sounds interesting but has a lot of real-world interaction, and so is substantially harder than existing examples which purely interact with blockchain.
Overall, this whole conversation reminds me of the the new programming languages:
- "My new language is very great! Look, it can do HTTP requests!"
- "But existing languages could do HTTP requests as well?"
- "Yes, but my language automatically deserializes the request using Mozart-Rachmaninoff type system, which eliminates the whole classes of the bugs. No other language can do that! I am going to write a new OS in this language now!"
Filecoin (https://filecoin.io/); an incentive layer on top of IPFS to create a decentralized long-term object storage system.
Tradelens (https://www.tradelens.com/); in development, AP Moller Maersk's enterprise container logistics/coordination blockchain.
Anytime someone says "blockchains don't do anything which centralized systems can't do", I mentally interpret that as someone in 1995 saying "email can't do anything fax machines can't do". In the sense that: its kind of true, in that they accomplish a similar goal of sending a document from one person to another over wire, but it discounts as irrelevant the most critical, foundational thrust of why this new technology is interesting. For email: that it is all-digital. For blockchain: that it is decentralized.
In the 90s, the people who still clung to fax machines didn't understand why an all-digital future was important or would matter. They had spent their entire lives living in physicality, working with paper and file cabinets, and it was fine. The fax machine made sense. Email didn't.
Sure, centralized systems can do many of these things better. But they do so with the sacrifice of being centralized! Some critics inexplicably gloss over this like its an irrelevant, minor part of the argument. They've spent their entire lives among big tech billion dollar centralized multinational conglomerates, and its been fine. More centralization makes sense; email, I mean, decentralization, doesn't.
The point is not to make a better system, in every way; the point is making a functional system that is decentralized, so it can operate in a trustless, geo-distributed, multi-party way.
At some point if you're a rich-enough party you can just take over these networks with enough money and resources. There aren't that many mining pools for BTC, and the distribution of ownership of most coins still follows a power law. These systems don't really do anything to discourage that.
Also you talk about the benefits of decentralization as if they were more important than the gains you get from centralized systems. They're generally not, except for fringe cases. For the most part I want a centralized system with someone to blame/sue who can use one big database to make my transactions flow fast.
I won't deny that there's value at the fringes to decentralized, robust systems, but that value is at best 2% of what crypto defenders claim.
[1] https://www.bloomberg.com/news/features/2018-05-17/china-s-c...
This is such a concern levied against cryptocurrency; why does no one levy the same concern against traditional publicly traded companies? That someone who is rich and powerful enough could simply take control of Apple, or Walmart (assuming they make >50% of their outstanding shares available for trade on the public markets, which some public companies do)?
The reality is: It is a concern. But its a vanishingly small one. To do so would be, in many cases, suicide; and it would be even more-so with cryptocurrencies. It would take an obscene amount of money and resources, converted into assets which held value under the societal context of the status quo. The status quo doesn't like changing; the assets would probably lose all their value as everyone in the 49% abandons their investment. What would this hostile takeover gain? A few billion in revenue? They'd lose far more in the attempt.
For most newer cryptocurrencies (not Bitcoin), this attack is not a matter of owning 51% of the mining power, but rather 51% of the currency itself (proof of stake). To do so, for any reasonably successful and valuable currency, would be crazy. Its just not a concern, period.
It may be worth elucidating this, but: bitcoin is on the way out. The crypto community has absolutely striated into two groups; the bitcoin traditionalists who build ten acre data centers next to volcanos to farm their digital gold, and those more forward thinking who are actually interested in solving the bigger, more tactile problems with cryptocurrency like real use cases, environmental impact, etc. So, many of the concerns surrounding bitcoin, which evolved in the '10s when it was the fastest growing player on the block, are simply no longer relevant.
However, with traditional companies, we are protected by contract law -- if we are paying a company for service, they should at least refund the money (this is not ideal, see Nest Smart home shutdown, but at least something). And banks/investment firms have even more protection for users' accounts. This is possible because the company owners are operating within the law framework, and this framework, being very old and battle-tested, handles acquisitions properly.
No such things exists for crypto. If someone takes over BTC tomorrow, they can secretly siphon as much money as they can before driving the network to ground.
This confuses the real-world benefit with the means of achieving that benefit. The benefit of email wasn't that it is digital, but that it is near-instant, accessible from anywhere, etc. It's able to do those things because it's digital, but the fact that it's digital is an implementation detail, not the thing driving people to use it.
It seems the issue facing blockchain is that it's stuck on the “it's decentralized” message without having a good story for why that matters (and matters enough to be worth the other trade-offs) to something like file storage or an ISP.
Let me preface this by saying that I think it's deranged how ad-driven and surveillance-driven modern centralized tech has become.
Why is what you are saying good for me and others?
I can see some value in a currency that isn't specific to a government, so that I can more freely exchange it for good and services anywhere in the world. But I don't live everywhere, I mostly just live in one country. If I wave my hands and imagine a future that doesn't exist yet, maybe if much of my life is stuck in the "metaverse" then that could have benefits. But none of these things require decentralization or trustlessness (in fact, the "metaverse" looks to be headed towards more of the same centralization we see today).
Please don't say "you just don't get it" or whatever that so many crypto people do today. That isn't convincing.
This is a sea change akin to the discovery of double-entry bookkeeping or the common stock corporation. You may reside in one jurisdiction your entire life, but the whole point of the internet is to connect humanity. You have no doubt interacted with hundreds or thousands of people in your lifetime online that reside in other states or countries than yourself.
If you want to coordinate with people across jurisdictions to create a venture or a charity or a political movement or a software start up or a video game project or create an artistic franchise, traditionally you need a pre-established relationship to do so. Because one person ultimately has to be in charge of finances if capital is involved. This creates a touchy situation. What happens if your partner in China or Argentina or Zimbabwe wants to custody the funds? You need to not only trust the person to be the treasurer and not run off with the money, but also the local banking laws and rules guarding those bank accounts. This makes coordination across distances difficult and unpredictable and fraught with risk.
Contrast that with placing those funds in a multisig, where you and your 3 teammates (from 3 different countries) all must sign-off on every expenditure from that multisig smart contract. Maybe you're ok with 3 out of 4 signing off on expenditures, that's fully customizable, since it's all code. You can also effortlessly swap between different currency pairs, whether that be Ether, or Bitcoin, or USDC, or Japanese Yen, and reinvest the treasury into yield generating strategies (since there is demand for on-chain loans and there does exist permissionless 24/7 on-chain money markets).
Now, don't lose sight of the big picture, because there's 7-8 billion human beings on this planet, and currently it is nearly impossible to coordinate, raise, and manage capital in a meaningful way for the vast majority of these humans. This is unlocking the capital availability of Silicon Valley for the whole world.
But I guess where I'm not seeing it is here:
> The point is not to make a better system, in every way; the point is making a functional system that is decentralized, so it can operate in a trustless, geo-distributed, multi-party way.
A way to raise capital with less restrictions would support this statement. But that's just one application. And I'm not in the business of raising capital.
It bothers me when people talk about (de)centralization because I think it's more ambiguous than appears at first and the definition needs to be examined more closely.
Things "on the blockchain" may be physically decentralized, and may not be controlled by one entity, but aren't they usually logically more centralized?
Consider real estate, which sometimes people fantasize about moving it to a blockchain registry. It probably seems natural to many people especially if they live in a country where that's how it works now, only the national government keeps the land registry.
But in the US, there isn't a national registry that determines who owns what. It's an oddity kind of like the absence of a proper national ID card or gun registry.
If we switched to a system that utilized crypto, it would be definitely marketed as "decentralized", but it would be a profound move towards centralization in a different sense. If the code had a flaw then everybody would be screwed, whereas currently we have this inefficient system with title insurance and so on, but if something goes wrong it's a local issue.
I can't be a true believer when I feel like the language has been corrupted and there isn't terminology to express things correctly so maybe people can't even think the thoughts they need to.
Sometimes these memberships are in the forms of NFT(s)/tokens for access & that is interesting. DAOs trying to pool money for causes, that are interesting. It's early, yes.
The problems you write about - specifically the Token swapping id done because there was a problem (taxes).
A token can be used as an authentication mechanic for a piece of software. It can be used as a voting mechanic in a DAO, for example. You might argue that voting is the purpose of stock certificates, but in practice, it's quite impractical to participate in corporate politics. You generally have to attend an annual stockholder's meeting and put you vote forward there, and even then, you only get to vote on the Board of Directors (and this is rarely used in practice).
In DAOs, it's far more similar to open source software development. People create an improvement proposal and pitch the idea in the forums and chat rooms for the project, and try to drum up enough support, and then it will go to a vote, and depending on how the DAO is set up, either you do an initial temperature check vote followed by a final implementation by the core team, or someone actually submits a PR to merge into the DAO source code and users vote on that code directly.
The transparency of the treasury mechanics is also far more superior to anything else in the corporate world. With a DAO, I know at all times, precisely how much is in the treasury, how they've spent their funds in the past, what mechanics and rules guard that treasury, etc. It's all inspectable and visible on-chain. That makes a qualitative difference in the amount of trust you can generate among a group of dispersed strangers from potentially all corners of the earth, and it allows them to proceed in a productive manner in such a way that was not possible except for largely through groups of close-knit people working within a single jurisdiction (for the most part).
Open source does work this way (which has also had a monetization problem), but pair open source ideals with open source money and open source treasury management, and you get something that is powerful in the same way that Linux is powerful for computing. Except it unlocks this type of coordination for things beyond software development. It encompasses everything, from art, entertainment, charity, politics, business, etc. It's a sea change in the ability to coordinate human beings and capital across distances and to incentivize people to participate in a more sustainable way.
But stable coins of course, also solve a problem in and of themselves, because they make dollar-denominated token mechanics possible. If you want to program a smart contract in such a way that the terms and conditions and programmed rules depend on dollars as a base pair, you need stable coins. Programmable money is powerful for all the reasons above (it can be held in a smart contract, governed by a DAO, controlled by a multisig or by DAO votes or by certain boolean conditions being met) and more. It's also borderless, it's as easy to use in Argentina as it is in Kentucky.
And slippage and liquidity are very real problems that do exist in traditional markets, such as stock markets. We've seen the traditional system mechanics breakdown, like what happened with GameStop earlier this year, when trading was halted due to liquidity issues. At any rate, powerful stuff here, it's here to stay, and it will change everything.
You might argue stablecoins are that connection but in that case you have to deal with both the fact that you could then do all these things in the traditional way more efficiently and that the stable coin situation itself is looking dodgy as hell.
But what about decentralized stablecoins such as Dai?
Just like ConstitutionDAO, right? https://www.theverge.com/2021/11/24/22800995/constitutiondao...
The PEOPLE token also shot up 2000% over the past few days, so anyone that held their tokens has more than made up for gas costs as the remaining community members will likely spin up a new DAO for a different purpose.
Other similar DAOs, like Pleasr, have been successful at bidding for works of art, such as the unreleased Wu-Tang Album (https://duckduckgo.com/?q=pleasrdao+wutang&t=brave&ia=web) and the Edward Snowden Stay Free NFT (https://www.theverge.com/2021/4/16/22388548/edward-snowden-n...).
Stay tuned, my friend. You might miss the whole revolution if you blink.