Governance, Part 2: Plutocracy Is Still Bad
vitalik.ca
vitalik.ca
This article is part of a curious subgenre of cryptocurrency literature, that of an advocate of one cryptocurrency (Ethereum) holding forth against a different cryptocurrency (EOS). Do the words have any meaning beyond the confines of the beautifully elaborate internal world in which they reside? Perhaps, in a strictly metaphysical sense. I can't appreciate it, or even comprehend it, but I can sit back an delight that such a thing exists at all.
Vitalik is the benevolent dictator for life of Ethereum, and EOS is a radically different model than proof of work blockchains like Ethereum and Bitcoin. However Vitalik and the ETH community recognizes there is some value in proof of stake and is working on their own implementation which is different than EOS’ model.
Cryptocurrencies make us question why money has value, what makes an asset, and all sorts of interesting philosophical and economic questions. I wouldn’t write off the entire industry and technology. It has been attacked by intelligent people for a decade and it keeps moving forwards.
For example, the market cap of Tether is a couple billion dollars. This doesn't mean that Tether as an abstract concept is worth a couple billion dollars, or even that market participants think it is. It just means that there are a couple billion Tether tokens floating around, and people are confident that they'll get $1 for their Tether if they want.
I guess the question is, does it matter if it’s “not really worth it”?
The fact that people have been willing to pay so much for US dollars or British pounds or Japanese yen has meant a lot in this world.
Isn’t it justified to awe at the power of a decentralized currency? Certainly it’s in the realm of heady ideas.
No, it's not. Stocks are priced at the present value of future cash flows generated by the underlying assets.
Fiat currency has no value in and of itself. Foreign exchange is essentially determined by the difference in interest rates between countries (and investors' beliefs as to which way those interest rates will go in the future). Those interest rates are (indirectly) related to what is produced by each country.
Bitcoin is just plain make-believe.
> The fact that people have been willing to pay so much for US dollars or British pounds or Japanese yen has meant a lot in this world.
People also gave Bernie Madoff ~$65 billion dollars and it was all make-believe as well.
> Isn’t it justified to awe at the power of a decentralized currency?
Decentralization for decentralization's sake isn't inherently valuable. Or at least I wouldn't argue that to be an axiomatic truth. The burden of proof is on the bitcoin bulls.
Markets aren't perfect but they are efficient; feel free to believe in the strength of that efficiency as you see fit, but in any case there is an underlying asset that generates cash flows.
You can nitpick arguments in my response, and I'll be happy to clarify any omissions, but my whole point is that crypto has no similar underlying asset and is therefore an entirely different beast.
For what it's worth, this is my field of expertise. I work at a top bank in Wall Street and assure you discounted cash flows isn't a "useless mental model". Just ask the Court of Chancery in Delaware.
DCF models aside, the notion of the "present value of future cash flows" (and the time-value of money concept that drives it) underpins all of corporate finance. It is the most fundamental building block of modern finance and it's in everything from Finance 101 courses to derivatives trading. Clearly the market utilizes it to value assets and stocks are no exception.
I'm not saying the entirety of valuation is predicated on DCF models -- feel free to re-read any of my comments.
Honestly these questions have all been considered before, answered, and codified into law, and the crypto communities are full of people who have no idea what is going on around them. The banking systems we have are the result of us considering these questions, deciding politically we want something very different, and then building the technical systems that match that design.
The classic example is investor accreditation laws, and why, as far as I can tell, there isn't a single ICO that doesn't violate them. It's not that no one considered whether or not you should be able to raise money from many different people, and it's not been logistically complicated to do that for at least three decades. The reason is that the political will does not exist.
Crypto is saying that because of the evolution of institutions surrounding banking and politics there are many inefficiencies(and malevolent actors) that have become ingrained in the poli-fi complex. Many of these projects(the 20% that are legit) aim to solve various issues that have been identified in the "free market" - whether it's reducing settlement time of cross-border payments or efficiently pricing what a unit of cloud compute and storage can be, blockchain is a novel excuse to revisit many problems with lazy answers.
You have clearly made up your mind and I won’t attempt to change it. But for anyone reading, an asset, created out of nowhere, that has no control from any authority and cannot have any control, is worth $100 billion in a decade. This is an amazing feat, and is indeed very interesting.
One reason cryptocurrency "wont work" (admittedly vague term, but I'm happy to shoot down any definition of "work" you have because I think they are truly useless outside of a tiny portion of people with very specific needs) is simple specialization of labor: people do not want to be engaged in the process of running a currency or a government, which is why, among many other reasons, banks and representative governments exist. And you see this pattern already repeated with crypto where any meaningfully large currency has extremely concentrated ownership. This is just swapping one set of large, monolithic bankers for another one.
Another reason cryptocurrency "wont work" is that everything it depends on is completely derivative of political and technical systems that are designed to prevent decentralized control. The internet exists on networks owned by companies like Verizon, on computers owned by Amazon, and is regulated by the US government. If cryptocurrency was going to be truly revolutionary in anyway the US federal government (and others) already have multiple built in kill switches for it. Sure you can cold store your hashes (even though we all know most people just have Coinbase wallets), but the utility of the network is trivial to compromise or destroy for a state level actor. And as an aside: most crypto is actually regressive from a privacy/personal liberty standpoint when compared with cash, or even the current banking system in many ways.
One more reason crypto "wont work" is that I just haven't heard a single use case for it. The classic "remittances" use case makes no sense because you still have to change the crypto for real currency, which is where the cost is, (yes, only until the currency is meaningfully bootstrapped, let me know when that happens). You don't pay Western Union 15% to flip bits in their servers, you pay them 15% because they put a guy with a gun next to the actual money in the relatively less safe country you are sending money to.
I will remind you that Lehman Brothers was worth about $70B at its peak, in a highly regulated market. $100B is big but far stranger things have happened than an unregulated public market being wrong about things this size. The incentives to pump something like this up are massive, and the market is irrational in the short and medium term. There are a LOT of really rich people out there who feel like if they hadn't missed "the internet" they could be even richer, and we managed to convince them crypto might be the next internet. To your point: that in and of itself, from a sociological perspective, is fascinating.
I do have strong opinions, but they are held loosely and they are ones I hope to be wrong about, so I'm open to discussion.
But casual users can choose to store their crypto assets with a bank/custodian/exchange. Granted, it defeats some of the benefits, but not all. E.g. most crypto has low inflation compared to USD. Even though CPI inflation is ~2%, the money supply inflates around ~10% per year, whereas most crypto will inflate <1% long term.
> the utility of the network is trivial to compromise or destroy for a state level actor
For smaller PoW currencies, absolutely -- a state level actor could acquire majority hash power, then build their own fork which contained no transactions. For Bitcoin, it'd take time and lots of money, but it's possible.
But PoS currencies are more resilient. With something like Cardano, I don't see what governments could do, apart from banning its use within their own jurisdiction. Even if they purchased a 51% stake, once they start the malicious fork, the community would know which accounts were participating and could organize a hard fork to ban them.
> most crypto is actually regressive from a privacy/personal liberty standpoint when compared with cash, or even the current banking system in many ways
That's a fair criticism of Bitcoin etc., but future iterations of cryptocurrencies will surely include ZeroCash-style privacy at least as an optional feature, if not for every transaction.
> The classic "remittances" use case makes no sense because you still have to change the crypto for real currency, which is where the cost is, (yes, only until the currency is meaningfully bootstrapped, let me know when that happens).
Here's how bootstrapping could happen:
- {Apple,Google,Samsung}Pay add support for various cryptocurrencies. Initially, most stores may not support crypto payments, either because the POS (often Verifone) doesn't support it, or because the merchant doesn't want to deal with it.
- POS vendors start supporting crypto, starting with more agile companies like Square. For them, there's no downside apart from development costs. Online processors like Stripe and PayPal add support as well.
- As processor support improves, gradually more and more merchants accept crypto payments, either for PR reasons, or for the low fees, quick settlement, lack of chargebacks, etc. Some offer discounts for crypto payments.
- Payroll providers and and tax services eventually add support crypto payments. Again, no downside besides development costs. So people who want to can do everything in their favorite cryptocurrency, even though it's converted to and from fiat in the background.
- After several generations, taxes are the one thing people still (indirectly) use fiat for. The government still makes money from inflation tax, but eventually they realize that it's essentially a wealth tax, with tons of fees going to exchanges. They replace it with an explicit wealth tax, or (optimistically) something that makes more economic sense, like land value tax.
I'm not saying it's a sure thing at all, but it seems somewhat plausible, no?
It's not clear to me that this is meaningfully different than our current financial system.
> Granted, it defeats some of the benefits, but not all. E.g. most crypto has low inflation compared to USD. Even though CPI inflation is ~2%, the money supply inflates around ~10% per year, whereas most crypto will inflate <1% long term.
It's really not clear to me that this is a benefit, and even if it is was, there is nothing stopping the Bitcoin network, for instance, from deciding it wants to inflate after it has mined all the coins. The fact that the vast majority of mining is controlled by a handful of Chinese companies and that this is seen as preferable to The Fed for deciding whether or not to inflate seems crazy to me. But it's possible, even probable, that the people who make real money selling bitcoins will vote to make more bitcoins after they run out of bitcoins to sell, ie: squeeze blood from the stone.
> With something like Cardano, I don't see what governments could do, apart from banning its use within their own jurisdiction.
You're talking about a government that reads literally every single piece of internet traffic and likely has backdoors into many encryption products.
> That's a fair criticism of Bitcoin etc., but future iterations of cryptocurrencies will surely include ZeroCash-style privacy at least as an optional feature, if not for every transaction.
No, because anyone who wants to make a serious business out of these will be required to become a Money Services Business, and have a Know Your Customer (KYC) process. As I mentioned in my previous posts: we've thought about this problem before, we don't want money floating around that isn't easily traceable, and so we already have laws governing this stuff. It's not a matter of "design the right mathematical system to create anonymity." The Dudes With the Guns do not want that so it will not happen. These systems cannot meaningfully exist outside of the current political system without a real, guns and explosions, revolution.
> I'm not saying it's a sure thing at all, but it seems somewhat plausible, no?
There is literally no upside for the vast majority of the actors in your proposal. If a currency is truly deflationary consumers wont want to spend it, if it's not it's not meaningfully different. Consumers also want a layer of protection, which credit cards offer them. Big vendors (Microsoft, Valve/Steam, Overstock etc.) who accepted crypto have already decided to stop, and transaction volume is plummeting so I think your proposed series of events is extremely unlikely.
The market is surely irrational, and there are a ton of things that exist that shouldn't, so who knows. But this stuff is not a good idea, there isn't any "mystery" left to it. We understand what's being proposed, it's basically all been proposed before, and it's an idea filled with huge problems that have only begun to surface because it is a nascent system.
But at least it would be up to a community of users, rather than government decree. I doubt any of the crypto communities would decide to have ~10% long term inflation like USD.
> The fact that the vast majority of mining is controlled by a handful of Chinese companies and that this is seen as preferable to The Fed for deciding whether or not to inflate seems crazy to me.
Also a fair point against Bitcoin, but I think the future is PoS.
> No, because anyone who wants to make a serious business out of these will be required to become a Money Services Business, and have a Know Your Customer (KYC) process. As I mentioned in my previous posts: we've thought about this problem before, we don't want money floating around that isn't easily traceable, and so we already have laws governing this stuff.
Right, I'm not saying that ZEC will let people get around KYC controls etc. Businesses will need to apply the same processes when accepting a large ZEC deposit or a large suitcase of cash. I'm just saying that crypto privacy can be as good as cash.
> If a currency is truly deflationary consumers wont want to spend it
I doubt low-inflation currencies would actually change spending/hoarding behavior significantly. People who want to hoard wealth can do so already, with gold, land, TIPS, etc.
There would be a shift in the assets used for savings, from gold etc. to crypto, but that doesn't mean less economic activity. Currency that's "locked up" in long term savings just doesn't affect the economy (unless there's some reason to believe that velocity will change). For some evidence look at M2 supply, M2 velocity and the CPI.
Voting which is heavily centralized to a few massive owners is not a significant improvement on The Fed, I'm sorry, that's just ridiculous.
> Also a fair point against Bitcoin, but I think the future is PoS.
PoS has huge numbers of different problems, mainly that it is a system designed around plutocracy.
> I'm just saying that crypto privacy can be as good as cash.
And I'm saying that if the crypto currencies that actually allowed for cash-like privacy levels (ie anonymous transactions etc.) actually reached any level of scale FINRA would immediately shut them down. Anonymous transactions are not a technical feat, they are a political one. Again, the guys with guns already decided we don't get anonymous transactions so just writing the code for it isn't going to change things.
> I doubt low-inflation currencies would actually change spending/hoarding behavior significantly. People who want to hoard wealth can do so already, with gold, land, TIPS, etc.
Right, and the thing those things have in common is that they are "Not Currencies."
To go back to the accredited investor example: we don't need cryptocurrency to enable companies to raise money from a wide variety of sources. It's not even close to the best solution if that's your goal.
What's frustrating to me is watching people built technology without knowing anything about economics and thinking that they've built new economic ideas, when in fact they are extremely late to the conversation and don't have a real sense of what the state of the art is, nor the important moving parts are.
You're just not acknowledging the existence of people with political views different to your own.
Right, that's what I'm saying. The technology will yield to the government, not vice versa, so if you want this technology to take off you will need to change the political foundations upon which it lays. This isn't an argument about what should be, this is a description of what is.
> You're just not acknowledging the existence of people with political views different to your own.
Sorry, I don't mean to be disrespectful, but the differences coming out of the cryptocurrency community are extremely sophomoric and reflect people who have thought deeply about technology and almost not at all about the political or economic systems in which this technology exists. It's not a matter of having a different opinion, it's a matter of not being able to contribute to the conversation because the crypto community doesn't even know what it doesn't know.
You still think you are the one who gets to decide what the conversation is.
My point is that lots of different groups of people are having lots of different conversations. Just because the group of people you hang out with don't like cryptocurrency doesn't mean other groups of people can't or won't use cryptocurrency.
And there is nothing you can do to stop them. The genie is out of the bottle.
> if you want this technology to take off
It has already taken off. Millions of people around the world already use it. It is working just fine.
The "group of people I hang out with" you're referring to is actually the Federal Government of the United States, and it's not one that I'm particularly fond of, but they are who is in charge. As I mentioned in another post, the US government could easily shut down the effective use of every crypto currency inside of the United States. They have the legal and physical ability to do that today.
There is very little evidence that the crypto community understands the systems they are so eager to destroy and rebuild (often with worse solutions, that have already been tried and failed, to the same problems). This doesn't mean the current banking system does not have faults, but those who don't learn from history are doomed to repeat it.
You mean like the vast amount of paper money?
Money supply is not the same thing as inflation! Inflation is an aggregate measure of the level of prices and wages, and since almost all crypto transactions are pegged to fixed underlying USD values while the crypto price level floats, it's not at all possible to say that the purchasing power of crypto varies.
You've been lead astray by the virtual goldbugs.
(Also, Apple etc are not going to get on board with a system that doesn't support refunds by design, and the most likely attack on PoW is declaring that it's the biggest environmental threat since tetraethyl lead or CFCs and putting a global ban on participating in it)
Understood; I wasn't trying to say anything about spending power. I like to talk about inflation of money supplies since it sheds light on raw monetary policy. CPI metrics are more meaningful for some purposes, like retirement planning, but it didn't seem useful to me in this context.
> Apple etc are not going to get on board with a system that doesn't support refunds by design
You could be right. At least Apple/Google haven't banned crypto wallets from their app stores, so I think there's a chance. And there's talk about some phone vendors potentially shipping crypto wallets [1].
[1] https://insights.samsung.com/2018/07/02/why-smartphones-have...
ICOs in the USA only take accredited US investors now. That has been standard practice for a year now.
Finally, I would not agree that the political system has perfect solutions to everything and therefore cryptocurrencies are irrelevant. The financial crisis alone is proof that things can go terribly wrong.
Almost all countries that have public markets have a similar form of regulation.
> ICOs in the USA only take accredited US investors now. That has been standard practice for a year now.
Right, which makes them not significantly politically different from regular securities.
> Finally, I would not agree that the political system has perfect solutions to everything and therefore cryptocurrencies are irrelevant. The financial crisis alone is proof that things can go terribly wrong.
I'm not here to defend the law, I'm saying the decisions weren't made because crypto currency markets simply weren't possible then, the decisions were made because no one wants this, really. If you want to change the financial system you need to do it from the regulation side, this is not a "build it and they will come" situation. These aren't new ideas, people just forgot we already decided we don't want them. Maybe that's changed, but it's not clear why or how.
"The market can stay irrational longer than you can stay solvent."
I'm confident that betting on an unregulated asset on an unregulated exchange is a good way to get my money stolen.
It’s also a little weird to read about economics from cryptcurrencies that you still can’t use to buy beer.
Participants of modern mining pools for all coins are arguably just in it for the money (and likely have subsidized or below average electricity rates).
Proof of work isn't a democratic process at all. The "math problem" that the miners are solving is providing a hash of the next published block of transactions (plus some other things). The protocol doesn't check every miner's solution and democratically choose the correct set of transactions to publish based on consensus. Instead, it's a lottery - it's just that it isn't economically cost effective to "buy lottery tickets" that attempt to publish an essentially alternate "history" to the blockchain.
There are multiple ways to buy beer using cryptocurrency - physical debit cards that draw from a deposited cryptocurrency balance at time of purchase using the current exchange rate, for instance. Kind of like how it works when you use your EU debit card to pay for a beer in the US using euros.