19 Comments

You certainly might be right! But this is not a very convincing piece because you don't actually address the damning technical problems that well-informed critics of blockchain technology point to, perhaps because- as you candidly admit- this is a subject that's well outside your own area of expertise.

But the technical details are kind of the point. If you start from the assumption that "blockchain incentives, consensus mechanisms, and smart contracts can do it all in a fundamentally different, more decentralized way" then yes, obviously that's a big deal. But the question is whether that's true! And there's very good reason to think it isn't.

If we take the example of Bitcoin specifically, people have been making all of the exact same promises about radical decentralization and mass adoption for more than a decade now, but- at least in the narrow case of Bitcoin- it's all complete horseshit.

Economies of scale meant that mining became extremely centralized early on, and a handful of men (I believe they're all men) now control the overwhelming majority of all mining power, meaning that Bitcoin is not actually "trustless" in any real sense. So, uh, why not just have those same guys run a database that keeps track of who owns which Bitcoins and save us all ~180TWh of electricity every year?

Meanwhile mass adoption is a practical impossibility because the whole system has a *hard theoretical limit* of ten transactions per second (it's about half that in actual practice). For comparison, the Visa network does about 1,700 transactions per second and could hypothetically do many more. Bitcoin boosters are generally either not aware of this inconvenient fact, or will gesture wildly in the direction of some piece of vaporware (like the much-hyped and utterly harebrained Lightning Network) that's always just a few years away. And this is not some hypothetical future problem! The network *already* ground to halt in 2017, with hundreds of thousands of unconfirmed transactions getting stuck in limbo, and has largely ceased to function as an actual payment system since then.

And the truly wild thing is that none of this mattered for the price of Bitcoin! The price just kept going up even as it became clear that the network is fundamentally broken! It was almost as though the technology was never really the point, anymore than the specific qualities of the tulips or the Beanie Babies were the point in past speculative manias.

So I don't know, maybe some of these Ethereum apps are actually different, and not just efforts to spark their own little bubbles. (After all, the Ethereum network can handle a whopping 30 transactions per second. Look out VISA!) But this stuff sounds *exactly* like the hype I've been hearing from Bitcoiners for a decade now, so you'll have to forgive me for being skeptical.

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Excellent points. Do you mean that a handful of men own most of the computers used for Bitcoin mining, or is this a reference to mining "pools", which I've never looked into. Any links appreciated.

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One rather dramatic illustration of how mining is centralized is that back in April of this year a flood in a single coal mine in China reduced Bitcoin's hashrate by about a third(!): https://fortune.com/2021/04/20/bitcoin-mining-coal-china-environment-pollution/amp/

In 2014 a single mining pool was briefly in a position to launch a 51% attack on Bitcoin: https://www.theguardian.com/technology/2014/jun/16/bitcoin-currency-destroyed-51-attack-ghash-io

That pool was promptly split up in order to keep the charade of decentralization intact, but it's still the case that a handful of pools control the majority of Bitcoin's hashrate: https://blockchain.info/pools

My favorite source for critical analysis of blockchain stuff is David Gerard, the author of 'Attack of the 50ft Blockchain'. These two posts of his do a good job of laying out some of the problems with the technology:

https://davidgerard.co.uk/blockchain/2018/05/22/bitcoins-stupendous-power-waste-is-green-apparently-bad-excuses-for-proof-of-work/

https://davidgerard.co.uk/blockchain/2021/06/27/bitcoin-myths-immutability-decentralisation-and-the-cult-of-21-million/

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I just discovered Gerard. Great stuff!

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Like Will I have dabbled a little bit in crypto (I'm "frankhecker.eth"), and like Will I have thoughts:

1. Cryptocurrencies, along with the “metaverse” and half of the present-day TV line-up, can be thought of as one aspect of a general yearning for magic to (re)enter our ordinary lives: wave a wand and change the world or build a new one (like in Minecraft), conjure riches from base elements like earth and fire (use electricity and silicon to mint currencies), bind others to your will through spells that cannot be broken (smart contracts). And as with traditional magic there's a catch: like a wizard or demon you have a “true name” (your private key) which if discovered by others will enable them to seize all your powers and possessions.

2. The whole space is obviously soaked in libertarian ideas and ideals, not just distrust of fiat money and centralized governments, but the dream of a world in which rationality rules and from which “force and fraud” are banished, the former by moving to the digital realm, the latter by building that realm upon supposedly fool-proof algorithms designed to promote cooperation and deter defection.

3. Like other innovations before it (liberal democracy, limited liability corporations and the stock market, the Internet and the free software/open source movement), the promise of decentralization, individual empowerment, and shared prosperity is real but only partial, and elites will still rule, albeit refreshed with some new blood. As noted by others, “proof of work” schemes (Bitcoin, current Ethereum) are dominated by those able to deploy vast amounts of computing power. More efficient “proof of stake” schemes (proposed future Ethereum) and DAOs, like public companies, essentially run on the principle of “one dollar, one vote”, with influence disproportionately wielded by the rich and those who bought in early (often the same people). Power law dynamics will ensure that almost all participants in the NFT/crypto-driven “creator economy” will earn little or nothing, that only a few will earn middle class incomes (with chances much better for those in developing countries where the price of middle class status is lower, like the Filipinos who kicked Will's ass), and that the vast majority of economic rewards will be captured by the 0.1%. In the worst-case scenario an increasing fraction of global wealth held in deliberately deflationary cryptocurrencies will concentrate control of the world’s economy in the 0.0001% (10,000 people out of almost 8 billion hold one-third of all BTC), and a future William Jennings Bryan will decry the “cross of crypto”. (Recall that Bryan lost that election.)

4. In the end crypto will probably take its place along the other innovations I mentioned above: As with the early stock market, “pump and dump” schemes, other scams, and crypto-related criminality in general will be reduced (but not eliminated) over time (in large part through government regulations), with any dubiously-acquired fortunes becoming respectable as they pass down through inheritance and their origins are forgotten. As with the free software/open source movement, hierarchies will (re)establish themselves, albeit on a more inclusive basis, with most people participating in governance only on a cursory basis. And as with liberal democracy and limited liability corporations, new possibilities may arise for humanity to organize its affairs for the improvement of all, but realizing those possibilities will require more than unalloyed boosterism and a laissez-faire approach on the one hand, or a visceral refusal to engage with the topic on the other.

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I'm definitely in the "climate terrorism in the service of tulip mania" camp.

We've got a decade of experience to support this. When Bitcoin first emerged, the claim was that it would supplant fiat currencies in day-to-day transactions. That claim was maintained,in the face of initial failure, by the idea that modified blockchains such as Lightning would solve the problems. But AFAICT no one makes this claim anymore. Even El Salvador doesn't use blockchain, just an ordinary debit account with a notional balance in Bitcoin.

After that the suggestion was that it would help in international remittances. It seems clear by now that this isn't true except for extra-legal transfers, mostly bad but maybe good for people in countries with high inflation and exchange controls/

Next was the idea of blockchain as a major advance in database technology. It's clear by now that it is at best a niche application.

At a minimum, it seems reasonable to discount the views of any crypto enthusiasts who pushed these initial claims.

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It's never a great idea to judge something based on the craziest supporters. Bitcoin, with its fixed cap on the amount that can exist, is economically a lot like gold. Some people still think we should go back to the gold standard. They're wrong that it should be the basis of all our exchanges, but it's still a good bet that gold will maintain its value over time. And there are other tokens meant to be stable relative to other assets, making them better as day-to-day media of exchange, though I admittedly don't know much about them.

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I didn't pick out crazy supporters. The very term "cryptocurrency" indicated that the original idea was for a currency, not a financial asset.

Responding more directly to your point about the fixed cap, this isn't really applicable when anyone can create a new cryptocurrency, and many have done so. Even deliberate jokes like Dogecoin have boomed.

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I don't think your last point here is correct. Bitcoin's share of overall cryptocurrency market share has been fairly stable, and greater than 50 percent, for close to a decade now. Network effects mean the most popular currency is going to be a lot more valuable than the 5th or 20th or 100th most popular cryptocurrency. So yes anyone can create a new cryptocurrency, but there's no real reason to think that the creation of new cryptocurrencies will erode bitcoin's value over time.

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You've missed my point here. If Bitcoin's value were due to scarcity, as claimed by Justin above, new currencies which have no scarcity value (since anyone can create one) would be worthless

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While I'm no expert on the subject of crypto or NFTs, I did recently edit a forthcoming legal manuscript on the property law of tokens, or NFTs. The basic premise is that there are few legal protections in place right now for the owner of the NFT as well as the original artist, and that the smart contracts are not as protective as some might think. At the same time, the terms of agreement for most of the top minting companies are unclear, if not misleading, on NFT ownership rights and are often in direct conflict with what their marketing promises. It seems the legal field is gearing up for some unprecedented property lawsuits in this regard, and at this point, the value of an NFT is a bit nebulous, which I assume (as a non-economist) could ultimately affect the crypto market. But you are right - the blockchains use a ton of energy and are an environmental offender-

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The "decentralization" seems like it has pluses and minuses. One thing I recall from back when I was taking classes in history is that often the lot of the peasants improved when the King centralized power away from the nobles. I don't exactly know if Marx's theses about the relationship of the aristocracy, bourgeoisie, and proletariat are similar or opposite. But it's definitely not immediately obvious whether having an aristocracy of several thousand individuals control the system is better or worse for the billions of ordinary people than having an oligarchy of five big corporations controlling it.

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Could you link to the whitepapers? I'd like to do my own deep dive and would appreciate the leads.

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Here’s an area where I think NFTs will be massive: commercial real estate. It’s too boring and discursive to explain in a single comment, but it basically comes down to the fact that trillions of dollars are already invested in an asset class that is a) illiquid and b) almost 100% opaque.

Imagine if all that capital were as easy to trade as stocks, and that you could easily look up how much each one of them has earned to date, like earnings per share with public companies.

It won’t happen overnight, but the fundamental technology is already in place. The next few years will see massive improvements in the user experience, and once that happens it will seem obvious in retrospect.

To preemptively answer the common question of “why do you need crypto for this:” because centralized databases are less trustworthy (think Experian hacks), subject to lock-in risk (Facebook or LinkedIn) and subject to firm risk for whoever owns the database (what happens if the company goes bankrupt or tries to pull an Enron).

That said, the current NFT craze is 99% Ponzi schemes.

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I don't see why NFTs representing ownership in commercial real estate are a better idea than shares in a REIT, or some kind of tradable units in an MLP. Tradable MLPs are historically quite popular for energy projects. ( https://stockmarketmba.com/listofmlps.php ) In theory you could package commercial real estate pretty similarly.

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I’m a real estate syndicator. Without going into all the many details, one huge benefit of syndication is that you get the depreciation as a tax write off whereas REITs are functionally the same as a dividend stock. In other words, with a syndication I can pay out cash flow that’s shielded by depreciation.

REITs also have disadvantages if you’re GP unless you have billions in assets under management. NFTs make sense for small dollar deals of just a few million.

There are other advantages on the GP side that are too detailed to go into here.

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I appreciate your view. All that feels just like all the Web 1.0 netizen stuff that didn’t take into account how people actually behave.

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Here's what I don't get about "cryptocurrency" and "NFT's" and what not. I don't know what they are, and I don't know how to buy it or sell them or whatever it is you do with them. For example, how do you make actual money, like real dollars, etc. with "cryptocurrency"?

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You don't make real dollars with any currency. They are all just things that have value because other people believe they have value, so you can store and exchange with them. The same for dollars and gold. If you like, gold is made of metal, dollars are made of trust in the government, and crypto is made of math. Arguably, math is more real and trustworthy than the government.

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