A Crypto Hypothesis

I don’t write much about crypto on this blog. While I’ve worked and lived through some of the formulative years of FinTech, I admit I don’t fully understand the crypto space—a space that only has accelerated during the COVID era, making it even harder to keep up with.

It was therefore fun to see this article that digs into the technical underpinnings underlying what’s now known as web31:

My first impressions of web3

The author shows that, for the ideals of web3 in decentralizing the web via this new style of finance, the actual implementations are remarkably centralized. Jack, of Twitter and Square/Block fame, has been making the same point in trollish fashion on Twitter2. The central insight is that there continues to be strong incentives to rely on singular service providers, and actually not much incentive to actually move away from them—even if the underlying technology starts out decentralized and theoretically distributed.

So if the cryptoverse is largely centralized in practice, it’s likely technically inferior to rely on decentralized protocols and mechanisms to run these services. Certainly, this is one of the main arguments against crypto: there’s little that it provides in practice that’s faster, cheaper, or easier to use than what the traditional financial system already provides. Instead, this may be an instance of the “technology fallacy,” assuming that technically superior products win the market when history has shown plenty of examples otherwise.

In a weird roundabout way, the explosion of meme finance and crypto is also a somewhat decentralized movement to push at the boundaries of our traditional financial systems. For all the talk about replacing the corrupt status quo, crypto’s impact is still primarily felt in its intersection with the established: be it money denominated still in US dollars, or ownership enforced by copyright and intellectual patent laws. It has acted as a chaos monkey to financial structure and regulations, wrecking havoc but forcing those regulatory bodies to respond and evolve.

I think what crypto has inadvertently captured is attention and celebrity, and has become a rather effective mechanism at monetizing both. Whereas the emergence of meme finance touches on a similar idea—to create financial value out of social status—it’s effectively constrained within the traditional financial frameworks, and more importantly beholden to familiar bureaucracies that provide oversight. In retrospect, it’s perhaps not so surprising that there was a wave of celebrity SPAC sponsors when they were the hot new thing on Wall Street, only to see the hype fade after subpar returns and regulatory scrutiny.

The thing is, while the mechanisms of finance are mostly well-understood and even somewhat boring, the dynamics of social attention are still mysterious. Something or someone goes viral on social media seemingly randomly, and their success is noted after the fact; the reporting on the latest memecoin or crypto technology spiking in valuation follow the same pattern, often accompanied with the same sense of incredulity. That there can be real money made quickly by promoting these schemes murks the waters a bit, since there is now plenty of direct incentive to promote crypto products with little effort, but much less motivation to keep it sustained after the promoters cash out at the top. If pop culture has had a history of one-hit wonders, most of the crypto universe today aspires for the same opportunities.

If crypto is actually a financialization of popularity, it’s both an encouraging and damning revelation. It’s encouraging, because humanity is inherently social, and there will always be celebrities and famous people and demand to translate fame into fortune. It’s damning, because this reaffirms many of crypto’s technological criticisms today—that goals of decentralization and trustless computing are decoupled from its actual utility. The monetary incentives built into the system add another layer of obfuscation that make it hard to determine either way.