I find this extremely fascinating and I think stems from both understanding things that the other side doesn't fully appreciate. I wrote about this more on my blog: https://lawrencexie.wordpress.com/2022/05/13/on-crypto-misco...
Also, sorry for the wall of text, but I'm legitimately interested in engaging with you on this topic (obv).
On Terra/Luna - there were a ton of people who did 0 due diligence on it, saw a money printer, and didn't possess the capacity to understand that the economics of it were unsound. On the flipside, I know of a good number of people who predicted that it'd destroy itself on the first bear market cycle. Retail loses here because they believe the hype train, and that's not a good outcome.
MIM (https://coinmarketcap.com/currencies/magic-internet-money/) is another stablecoin that's over-collateralized (first pioneered by MakerDAO with SAI/DAI), but has people similarly nervous, not because of its economic design (which they lifted from MakerDAO's SAI/DAI) but because of the stewards of the protocol - https://rekt.news/sifu-scandal/. Similarly the same people who saw Terra on a crash course have sent out warnings about MIM, and in general it has stalled in terms of its market penetration, which is the market working IMO.
DAI is the most popular algo stablecoin, and I believe it to be sound because of a smart contract based liquidation process that ensures that any DAI generated are over-collateralized with other assets, even if the underlying price of the collateral falls rapidly (there are economic incentives for people to liquidate others when this happens). I disagree with them using multiple baskets of crypto (DAI's collateralization is largely backed now-a-days with USDC, another stablecoin) vs the initial model where it was backed solely by ETH though, since I think it compounds risk in the system.
> In many ways cryptocurrency projects are recreating many of the (failed) experiments in traditional economic history.
I agree with this wholeheartedly. People are taking risks and trying to overcome old problems with new technology and sometimes failing as a result. It doesn't to me mean that those risks shouldn't be taken, and I'm extremely glad that the UST/Luna explosion was isolated basically entirely to the crypto markets since I see this all as expieremental.
That said, I think that there are other tools/protocols/etc that are being built that are not purely economic in nature - things like multisigs are hugely useful for taking coordinated action in a trustless way, they just haven't been productized properly yet.
> However there are some fundamentals that technologists forget when thinking about cryptocurrency projects. One of them is that the total value of a system remains unchanged unless there is actual utility provided by a new product or service.
Value creation is something that's always hard to gauge, and is what leads to speculation I think.
Take Uniswap for example - it's by far the largest decentralized exchange (DEX) that exists. It recently surpassed $1T worth of value transacted, and even had stretches in the past couple years where it overtook the trading volume of Coinbase (binance of course shadowing both of them - https://www.theblockcrypto.com/data/decentralized-finance/de...). Is that value creation? I'd say providing a service to more easily swap pairs of assets with a very small finality window IS valuable.
Additionally, Uniswap (and some other protocols) have this notion of a "flash loan" or "flash swap" that, as far as I understand, are unique to on-chain crypto. The TL;DR is that this mechanism allows someone to borrow essentially infinite money as long as they repay it in the same transaction (with a fee). This leads to a situation where you don't need deep pockets to capture the value from an arbitrage opportunities - you can write an arbitrage contract that will either guarantee you a profit through a complicated chain of arbitrage, or it'll simply revert. To me that's a pretty unique primitive to build a more efficient market.
Another example I'll point to is Helium (https://www.helium.com/), which aims to build a global network of wifi hotspots, but incentivized (by crypto) based on the activity on your hotspot. Fon tried to do this in the early 2010s and couldn't find traction (because why would I share my internet with others for free?). Xfinity took a stab at this recently because they have a near-monopoly on people's internet connections (with no upside to the end user whose internet is being shared). To me, helium is creating value here, and the model is preferable to any alternatives.
That's not to say that I'm blind to the fact that there are a ton of ponzis and pump and dump schemes going on in the crypto space, but my point is that there is real value creation happening as well, it's just being drowned out by the other nonsense right now. The reason crypto keeps coming back is because bear markets shake out these crappy schemes and what's left is the projects and builders who are actually creating value and plan risk accordingly.
> The second reason there is a considerable amount of misconceptions about cryptocurrencies is the issue of echo chambers
I agree 100% with this, but it's also not localized to just crypto. Go look at /r/superstonk or /r/wallstreetbets on reddit and you'll see similar things. We have the same problem with our politics too, just across different mediums. All of these have bad impacts on individuals and as society as a whole, and is IMO one of the greatest threats to global peace that exists. The internet was supposed to unify us, not divide us.
> However misconceptions do not emerge purely from lack of access to differing ideas or opinions. Instead they originate when individuals are unable to recognize the limits of their own comprehension.
Again, 100% agree. This is also a problem pervasive in a wide band of things from politics to (as you pointed out) vaccine hesitancy. One thing I've grown to learn is that it's easy for me with my skillset to say "go do some research, idiot", but a good chunk of the population literally does not possess the skills to do so.
If you google "Is the COVID vaccine harmful" vs "Covid vaccine dangerous", you get likely different results, but most people don't understand that. Even if you do get to the right data it's usually nuanced and long/hard to comprehend so people's attention span falters and they look for a youtube video to explain it to them in 2 mins. Again, a problem that absolutely exists, but I don't think is unique to the crypto space.
As for your brainteaser: > A cryptocurrency stablecoin is introduced whereby holders must light a cash dollar bill on fire in order to “earn” one unit of crypto. The issuer reasons that for this reason, each unit is worth $1. Under what circumstances can this reasoning hold sustainably true? Is it possible for this peg to hold indefinitely?
This skips over the idea of redeem-ability entirely I think, which is a necessary part of a stablecoin. By destroying a dollar you're not creating something new since it's a one-way track. I can't redeem my crypto for the original dollar because it doesn't exist anymore.
If I instead "lock" that dollar in a smart contract to generate $0.50 of crypto, I can "unlock" that dollar by repaying the underlying debt. Likewise, I can take USDC send it to Centre on-chain to have them wire me money since USDC is just a tokenized representation of a dollar in a bank account.
Anyway, you seem like a smart person so let me know if you ever want to chat about crypto and economics in a more direct way. I think we could have some interesting discussions! :)
I agree with many of your conclusions, for example value creation IS occurring in the crypto space. Your examples of decentralized exchanges for example do solve a problem and increase efficiency.
And excellent - you got the brainteaser exactly! By destroying the dollar the no-arbitrage mechanism doesn't exist anymore and there is no more upwards pressure on the stablecoin to peg it to $1.
I have some other concerns with stablecoins backed by any asset correlated with crypto since it leaves the potential for market manipulation when controlled by a central party. I wrote about that in an earlier blog post too.
I'd be happy to chat about any of this more directly. My email is lawrence.xie90@gmail.com