“You Don't Own Web3”: A Coinbase Curse and How VCs Sell Crypto to Retail | Hacker News Reader

“You Don't Own Web3”: A Coinbase Curse and How VCs Sell Crypto to Retail

startupsandecon.substack.com

97 pointsmuzz61 comments

Anything I talk about below is not financial advice. Full disclosure: My crypto holdings consist of around 1 ETH and $5 worth of BTC on Coinbase.

Anyone remember Monero? A POW crypto using state of the art cryptography such as ring signatures and Bulletproofs to guarantee private, secure transactions? It's secure enough that almost half of all dark web transactions are done using it despite its market cap being a fraction that of BTC. So secure that the IRS put out a $675,000 bounty for anyone who could find critical vulns. There's RandomX which is Monero's POW algo which is designed to run best on general CPUs and actually run terribly on ASICs? And to top it off, it has transaction fees in the fraction of cents.

With all of the talk by many crypto hustlers about banking the unbanked, "digital freedom", etc., that Monero would be perfect! So, why aren't VCs pouring money into developing it like they are into new web3 stacks?

It's because it's old news. It doesn't get enough eyeballs like a listing on Coinbase. You can't build digital fiefdoms using Monero, no ICOs, no pump and dumps. You can't have middlemen like OpenSea skim off the top and gatekeep. There's no artificial scarcity of coins. Monero isn't "useful" for the vision of web3 that investors have.

Most people don't have the time to read through every single whitepaper put out. It's easier to join a Discord server waiting for an airdrop, to read a bunch of Tweets, and check what's on Coinbase. It's just more convenient.

True, Monero doesn't have smart contract support and there are things like Tornado Cash which can emulate what Monero offers. Monero is still a sizeable player in the space and a lot of developers behind it. On top of that are all the controversies around Monero such as certain bad actors abuse CI integration services to mine it. But as the article points implies, for the majority of crypto investors/whales it's mainly about making a quick buck before moving on to the next pump.

I'm optimistic for a crypto future. Smart contracts are a great idea (though there's polishing needed) and there are other decentralized technologies out there I'm excited for. The Ethereum Foundation, Starkware, and others have helped push new and exciting cryptography research. Hopefully when the next correction comes, all the noise dissipates from the space.

I won't comment about the gold rush aspects of crypto right now because they're pretty obvious but regarding the PoW algorithm of Monero, I think that's its fatal flaw long term. Any coin that doesn't have a huge moat of ASIC miners backing it up is vulnerable to attack. You can't attack bitcoin without coordinating existing miners but any coin that can be mined with general CPUs could be attacked by govts or corps which have access to large general compute resources.

Any government with large stockpiles of unused, general compute resources, could snap its fingers, and make large stockpiles of any compute resources appear.

The 'buy military gear' police budget of any medium sized US city, could be diverted for one year, and probably buy any specific compute resource you cite.

This just isn't a defense against governmental or corporate attack.

It's not even defense against a bored billionaire.

How long do you think it would take a government to develop ASICs that compete with what’s on the market, and build enough of them for an attack (would need to be >50 of the power of all existing ASICs!)?

How much do you think it would cost?

I think you massively underestimate what’s involved there..general compute resources are just not going to help.

Develop? Manufacture? They'd just buy them.

The cost is trivial.

That's easy to say in theory, in practice supply of these ASICs is much more limited than you might think. Maybe if they throw enough money at the problem they could buy from existing miners..

Even so, they would have to spend a very large sum of money on this, money which will simply be "burnt". If you would want to attack a coin that works on general compute then you can use that general compute for whatever you want thus that would be "free"

The supply doesn’t exist. Attempting to purchase large quantities would drive the price up, obviously not trivial..

Good grief. Outside of pandemic supply issues, eg, in normal times, a entity (gov, corp, billionaore), would go to a large producer, and place an order.

I assure you, they'd pay less per unit, in bulk, not more.

You think they'd buy off of ebay?! Amazon?

No! They'd bypass the little guy, and get a large run done themselves. And yes, it isn't a big deal.

If they had to, they'd put out a RFP and get corps to submit quotes on qty whatever.

Here's a secret... people love money. If someone wants a large order of something, it happens.

Even in the pandemic, if govs want anything, gloves, masks, they get it well before you or I, before corps.

It’s not just “pandemic supply”..even in the more mature GPU market Nvidia isn’t even close to keeping up with demand. There is not a button you can push to spin up more fabs.

The fact that you’d compare gloves and masks to chips is telling.

Declare them illegal and confiscate them from the miners.

Not even China did that. You think it’s likely?

Not sure. This article [1] sounded plausible, when I first read it. It will be interesting to see how governments' stances will settle.

[1] https://joekelly100.medium.com/how-to-kill-bitcoin-part-1-is...

That's true, but then again usually the miners using ASICs do so in large warehouses that draw lots of power and are part of large mining pools (some of which are publicly traded I believe) i.e it's easy to target a large portion of mining capacity with certain POW coins.

On the flip side, RandomX optimizing for general CPUs does mean that it can be easier for certain actors to launch a 51% attack on the network. However, it also means the network is more robust in a way. IMO it's a marginally better situation.

> True, Monero doesn't have smart contract support...

This is way more central to why people aren't building on it than you seem to give credit to: people simply can't build on it... I mean, even Bitcoin is programmable (which is how people have been able to build stuff like Lightning and bridges to contract side chains like rsk). Not being programmable--which sadly is kind of a trade-off for their core premise of being "actually private" (not that I am saying that is insurmountable, but it hasn't been solved yet)--means you don't see an ecosystem built on it and thereby no software dependent on it and thereby no "investment" in the platform is really possible. What makes the smart contract platforms potentially interesting is that actually DO SOMETHING problem might be willing to pay for: provide a trustless transactional data store on which you can build other more complex behaviors.

I probably am massively understating it yes, but I see no reason why an ecosystem around Monero can't flourish that enables sort-of smart contract capabilities. But like you said, it would take a huge amount of effort to enable smart contracts on Monero while not compromising privacy guarantees.

It does seem to be a tradeoff. Solana has smart contract support with low fees, but its network is very centralized compared to other ones and even went down twice. Despite being relatively young, they have flashy PR events in Lisbon and high profile VS backers to hype it up, but again so far most applications built on Solana go back to some form of tokenomics/financial engineering and NFTs.

Writing smart contracts is getting easier and easier with the barrier of entry being how much you're willing to spend on gas really. Hopefully they start expanding into more interesting apps.

Solana has a company behind it, Monero has a couple foundations I think but it's mostly a bunch of independent devs behind it (some of which, like Fluffy Pony, definitely have enough money to spend on marketing if they wanted to). It's the difference between something that is pseudo-decentralized and actually decentralized.

I don't see how you can implement smart-contracts in general on Monero because it's not programmable. You can write small arbitrary messages via tx_extra and in theory some other chain that looks at the Monero chain could read that, but because tx_extra messages are direct-writes and aren't automatically encrypted using the wallet keys or anything, there is nothing special about them besides them being immutable. In fact in some ways tx_extras could contribute to deanonymizing the chain if it created correlations between ring signatures, and Monero devs have discussed removing it several times.

There's a question of whether Monero itself could be extended to be programmable and actually do things with those messages, but I'm guessing the answer is probably no because it would bloat the chain and have questionable value (right now Monero is "unixy" in that it does one thing and does it well), even if it were possible to do.

Monero isn't listed in lots of the most popular exchanges because, since it actually works and has a utility beyond speculation, regulators have threatened exchanges with retribution. See [0] in which Brian Armstrong (Coinbase CEO) does express passing interest in listing it.

If HN people are still interested in acquiring it, the most secure fiat onramp is through localmonero.co [1]. It's listed on some centralized exchanges [2] if you're ok with the really invasive checks they will run you through, and on some Dex's if you already have crypto [3].

[0] https://decrypt.co/36731/heres-why-coinbase-still-hasnt-list....

[1] https://localmonero.co/

[2] https://www.kraken.com

[3] Haveno, but not sure how production-ready it is. Probably others.

I would say AVOID fiat meetups.

The centralized exchange issue with Monero is over now because you can access Monero through bridges.

Secret Network has wrapped Monero, full defi functionality and and a bridge to the Monero network and vice versa. These are autonomous and permissionless, so the trusted swappers and goodwill of exchanges is no longer needed. Regulators were playing whack a mole with their relationships to exchanges that listed Monero and now the technology improved to make that approach irrelevant: Antifragile in action.

Localmonero doesn't just use fiat meetups, though that's one option.

Agreed that atomic swaps/crypto:crypto are the way to go for the best UX though in general the fiat->crypto ramp will still be invasive.

Speculation drives innovation in every economy.

The privacy play is a supercycle aspect of crypto worth checking into every 4 or 5 years.

State level actions are hindered because even the state knows they can only make a move once before the anti fragility of crypto kicks in. Crypto becomes more resilient under pressure because there is no financial incentive to improve these kinds of boring technologies, and so the pressure galvanizes people to develop the boring thing they already knew needed to be done.

So you are not inaccurate, but it will come.

Check out SECRET network, its hide smart contract states which effectively means token privacy. They have a trustless enough bridge to and from Monero, and bridges to the broader defi ecosystem.

Monero is also probably big enough with a $4bn marketcap. It is liquid enough for the problem it solves for people.

Some use it as a payment conduit, some use it as a store of value, both of those particular private-by-default use cases are solved in other ecosystems good enough, for now.

There is $500mm in Tornado Cash at the moment

> Those insiders include venture capital firms like a16z and, incredibly, Coinbase’s own venture arm, which has a number of investments listed on Coinbase.

As someone who is not as familiar with the day-to-day machinations of this field, this really surprised me. Does anyone at Coinbase care that there might be this massive conflict of interest? How can this be legal/ethical?

At a more basic level, don't they at least feel kinda slimy about it? I thought there would at least be some kind of hamfisted "we keep these departments separate" statement w.r.t who gets listed, but I don't even think they claim that. In fact at the launch for Coinbase Ventures, they said "You can expect that we’ll enthusiastically invest in ideas from our own alumni network."

I would imagine that slimy-ness feeling might wash away, at least a little bit, after you buy your $133 million (cash deal) Bel Air mansion: https://archive.fo/UugwG

Basically all of crypto is strategems that would be illegal in conventional finance, but all participants pretend they’re legal due to crypto

I can't keep standing by as this continues to be parroted here.

You see the same machinations by some percentage of bad actors to take advantage of regulation not existing yet in any and every industry, from fruit, to paper manufacturing.

Yes, in many cases Coinbase doesn't list coins they don't like, and rushes to list ones it does.

This just further highlights the important of knowing, to every depth possible, whose code you're running and who you're doing business with, because the buck stops with you,

and governments can only continue to try to protect from an after-the-fact, further-harm-reduction viewpoint.

Many industries, including the fruit and financial industries, are regulated to try to prevent this sort of abuse. The parent is merely pointing out that, absent regulation, abuse and corruption are inevitable.

And regulation creates burden for 3rd party actors who were not part of the abuse so they are forced to cryto.

Frontrunning is a common practice wherever it is not explictly banned. most exchanges, opensea etc all have significant amount of insider activity.

The comment is about the financial industry. And it's right. What happens in the fruit industry isn't relevant. The financial industry is heavily regulated (many say for good reason), and much of crypto seems to be created to avoid this regulation, or to claim that the thing created isn't subject to regulation.

Crypto is just a fancy distributed linked list and people get tied up over it for no reason (gross oversimplification, I know).

The issue is the lack of regulation in the intersection of fiat/traditional finance.

EVERY time there's been a gap like this, it's it's exploited.

That seems to be the whole point of “crypto” (I.e. selling facsimile securities to avoid regulation)

Usually during a bull market no one squeals. When the party ends, everyone looks for someone to blame.

Coinbase got a slap on the wrist for their Litecoin adventure so there's no reason to stop now.

Tracking performance relative to ETH and BTC seems flawed to me. Tokens/Coins can have investment properties that are more or less speculative so the relative price to other cryptos may be irrelevant. As an example FileCoin is a storage token and more of a utility coin rather than a value store.

I think the point around conflicts of interest is sound. A16Z should probably step down from the board.

i think the point is to benchmark the “what if i did invest in FileCoin” v.s. the “what of i didn’t invest in FileCoin” case. where would your $ be if you didn’t invest in FileCoin? for a lot of people actually making that decision, the default place that money would be is one of Eth/Btc/stablecoins with yield (debt based)/S&P 500 (totally different regulatory area). so if you want to look at the “what if i don’t invest” scenario, without radically changing the other preferences of where that money goes, Eth/Btc comparisons seem pretty reasonable.

FileCoin is a storage token and more of a utility coin rather than a value store.

It's really not in practice. 99% of the value is from speculation.

> Is the game rigged.

In a way, yes. the VCs know it is a scam, which is why they are doing it.

> The never listed coin is the best; the listed, non-VC coin is better; and the listed, VC-backed coin is the worst.

Precisely.

It is exactly what happened to Internet Computer when that launched on Coinbase and Binance, as the author in this article describes, as well as I did [0][1]. The same happened especially with ENS [2][3][4] and the same happened with DESO. [5] These tokens listed out of no where on Coinbase or Binance, so that means that insiders who bought in at private token sales are using these exchanges to unload their holdings on to the retail buyers on the exchanges when they list.

By the time that has happened, it is too late and expect a pump and dump on the token price, hence why all these tokens are 'under performing'. As for the ENS token, they are doing it all over again via another airdrop [6], just look at how much ENS they can 'airdrop' and gift just to pump the price again.

That is the hype of 'web3' illusion and scam.

[0] https://news.ycombinator.com/item?id=27492858

[1] https://www.binance.com/en/support/announcement/33b6e8116ce5...

[2] https://coinmarketcap.com/currencies/ethereum-name-service/

[3] https://www.binance.com/en/support/announcement/6dcf651bba03...

[4] https://twitter.com/coinbase/status/1457857919068737543?lang...

[5] https://coinmarketcap.com/currencies/deso/

[6] https://decrypt.co/87505/coinbase-votes-favor-another-ethere...

In what way does an airdrop pump the price? If anything it should be the opposite. Now Coinbase voting at all and showing involvement with a project might pump it but that wouldn't be because there's an airdrop.

It happens before doing the actual airdrop. It creates another FOMO effect for late adopters who missed out to meet the airdrop requirements or to buy in before snapshotting the blockchain. That will pump the price.

After the actual airdrop happens, a mass sell off from many long term holders will happen to take advantage of the FOMO. Everyone knows that another airdrop will happen so I will expect the ENS price to initially to go up for a short while and then go down again.

That is a clear pump and dump.

Curious if rising interest rates put an end to the party.

Had an interesting debate with a friend yesterday, he thinks the money laundering value is so high the NFT market will never collapse; I opined that the appetite for any single get-rich-quick scheme is bounded by the number of peers one has who lose out; and that personal experience of that kind is weighted higher than the irrational exuberance; at that when the bit flips and the latter begins to be viewed through a soured lens of failing to Get Rich, things decay quickly, and the next fad takes hold.

At which point the "market" for NFTs implodes as can fully be anticipated, because while the money laundering would love it not to, it needs noise and chaos to get away with its own targeted grift.

Reminded, I need to order more popcorn. Gonna be a great show.

Seems like a pretty reasonable analysis of what is going on. I'd be interested in hearing any rebuttals.

He’s comparing a very narrow range after listing but you can buy crypto at anytime using DEXs. He compares it to an IPO but it’s easy to buy crypto before it’s listed on a centralized exchange and much harder to buy equity in a private company.

So yes, retail had its shot before a major CEX listing.

If you bought Solana or Cardano in the bear market you are outperforming Bitcoin.

Solana was a few bucks in 2020 and close to $260 in 2021.

The average Coinbase retail investor is not going to use a DEX. In fact I would be surprised if over 50% of their users have ever transmitted coins away from Coinbase a single time. Sure the first users were obtaining BTC for productive purposes like buying from darknet markets, but the majority of their users have come during the investment booms. From their S1 they are holding $90 billion in cash and fiat. $44 billion of that is for institutions, but the rest is from retail investors who are buying what Coinbase makes available to them and letting it sit in the app while they wait for it to go up.

> You’re a nocoiner. Nope, I’m long BTC, ETH, and NEAR, with March ‘22 $26 puts on BITO to hedge some of the recent volatility.

Do people do this to feel smart? You’re already speculating by buying the actual asset. What’s the point of doing more?

> for the last few years, Coinbase put out the names of coins they were thinking to list, but never did. I analyzed those coins - and found they did even better than the ones that made it, and the VC-backed ones didn’t show any of the same underperformance.

This is implying a causal relationship that may be misleading. Is it that coins invested in by VCs underperform? Or is it that fraudulent or scammy coins are more likely to seek out VC investment?

Or worse, is it that rug-pulling scammers are both more likely to seek out VC and list on Coinbase to take as much money as they can and run?

I largely agree with the writer’s skepticism, both of the coins and of the VCs, but shouldn’t it be straightforward if time-consuming to confirm insider selling? If these are public blockchains, one ought to be able to notice and correlate big outflows from addresses with large holdings, no?

> The “hits” in VC are supposed to be “100x” returns to make up for dozens of failures, but of a16z’s listings only one (Solana) managed to at least double in BTC terms.

The return on Solana from bear market to bull market is far in excess of 100x.

The only reason Jack Dorsey is "calling out" VC-funded crypto-scams is that he is in pre-marketing/marketing stages of his own crypto-scam.

It is interesting, that most crypto businesses have investment from Digital Currency Group and DCG belongs mostly to Mastercard.

Is it also interesting that most of facebook competitors get bought by facebook?

Yes

I've lost respect for VCs that peddles web3 hard, just add sheen to random coins and get a sizable % of the float, easy money. In the past VC used to fund companies that created valuable products (mostly), this contrasts against hedge funds or HFTs who make money off arbitrage, legitimate imo but are characterised as vultures by some.

Retirees sharing altcoins tips in WhatsApp groups is going to be that scene in the Big Short where the stripper has 3 mortgages

I can beat that scene in Big Short. I was recently at Petra (in Jordan) and hired a tour guide. He told me he grew up in the caves of Petra before the government forcefully moved them out and put them in a small poor town next to it. Providing tours was how he supported his wife and 4 kids. About 30 mins into the tour he asked me if I wanted to see his crypto portfolio and showed me on his phone about 10 coins I had never heard of before.

Good story. Another one is how my friend's dad pokes fun at his BTC and ETH portfolio gains because he's in a private discord and has had the privilege of buying an NFT for 5 digits than is supposedly worth a few hundred K because there are listing on opensea for that much

That's what you get for investing in alt coins, their garbage.

Compare the lows and highs of Solana and Cardano.

That's like saying stocks are garbage.

Well written article. Eventually regulation will catch on but by then Marc Andressen, Chamath, Balaji and the many other grifters of the Valley would have made their extra billions and launch their new funds promoting their next grift.

Moxie Marlinspike had a good take on this, specifically about NFTs being a blockchain with a web link to the “asset”. Whoever controls the server (or DNS) controls the “asset”. If I was to seriously entertain the notion of NFTs I’d at least want my token to be a hash of the “asset” in question (or hashes, computed with differing algos, in case of collisions). Anything else is a non starter. We’re one hilarious hack away from some $50m NFT being turned into a collage of dicks.

I might be wrong but I believe if the NFT metadata links to a protocol like IPFS and the NFT contract does not allow the metadata URL to be updated, it is not possible for the link or linked content to be altered.

"NFT" by itself doesn't tell you enough to know how the metadata is constrained. NFTs pointing to regular URLs are just particular examples of terrible usage.

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