If you don’t trust banks, why should you trust cryptocurrency?
I spent most of May in the United Kingdom and northern Europe and noted with interest the contrasts with my native United States. The universality of trains: very good. The inaccessibility of iced coffee: troubling.
Sometimes the contrasts were entirely unexpected. For nearly a month, no one tried to sell me Bitcoin. Perhaps this doesn’t sound remarkable to British or European readers, but Bitcoin is being sold virtually everywhere in the United States and seldom by investment professionals. Instead, you are likely to find Bitcoin being advertised on the door of a petrol station, alongside advertisements for the lottery. (Both are approximately as safe an investment.)
Given how many of my conversations on my European trip focused on the future of technology, it was remarkable that none of my interlocutors brought up blockchains, cryptocurrencies or Web3 (a vision for the future internet based around both). These topics come up in virtually every conversation about the future of the internet in the United States.
This blockchain sabbatical was a welcome respite, because conversations about cryptocurrencies rarely go smoothly. Cryptocurrencies, and related technologies like non-fungible tokens (or NFTs), have become one of the most divisive issues in the technology world. One side believes with near-religious zeal that this technology, which involves publicly recording transactions of all sorts on unalterable public digital ledgers, can solve a plethora of societal problems. The unconvinced often react with anger and contempt for the credulous. I have experienced friendships crumbling when I dissent from a friend who has embraced crypto.
In talking about Bitcoin and other cryptocurrencies, I find myself framing conversations with the phrase: “Set aside for the moment.” Cryptocurrencies such as Bitcoin and Ethereum use a process called “proof of work” to maintain their security, and to have a productive conversation about the benefits of blockchains, we must set aside for the moment its insane environmental impact. Digital objects are infinitely reproducible. To prevent digital money from being infinitely reproduced and therefore worthless, blockchains require many computers around the world to spend billions of processing hours to jointly register, track and verify transactions. The consensus between these many machines is what makes the Bitcoin blockchain thus far impossible to hack. But this means that cryptocurrency technologies, by some accounts, now use as much electricity as the nation of Thailand.
This is a stumbling block for anyone who takes climate change seriously. In fact, many cryptocurrency boosters acknowledge that the current environmental footprint of cryptocurrencies is not sustainable. Some developers are working on a protocol called “proof of stake,” which is far less resource intensive, but there remain serious security concerns about proof of stake, and for now the two major blockchains, the Bitcoin blockchain and the Ethereum blockchain, are an environmental nightmare.
A second “set aside” is the problem of grift and fraud within the cryptocurrency ecosystem. Phenomenal amounts of money go missing almost every week from pyramid schemes, pump-and-dump schemes, “rug pulls”—in which a project takes investor funds and closes down without refunding them—as well as good old-fashioned theft. Molly White, a 28-year-old software engineer and Wikipedia contributor (or Wikipedian), maintains a wickedly funny website, Web3 is Going Just Great, which tracks these frauds in the crypto space. Scroll through her site and a counter at the bottom of your web browser will add up the money stolen or lost in various cryptocurrency accidents in the past few weeks: it won’t take long for you to generate a figure in the hundreds of millions.
Pointing out that Bitcoin has now been around for more than a decade and that users have the right to expect basic security features—like the ability to withdraw from a fraudulent transaction—can be met with anger from cryptocurrency advocates. But White is fond of pointing out that the Bitcoin blockchain is now 13 years old—and that cryptoboosters’ refrains that “it’s early times,” and that the kinks in existing systems will eventually be worked out, are growing increasingly hollow.
So, putting aside the environmental toll, the fraud and the grift, why is there so much interest in digital currencies and the blockchains that support them? One answer is that a wave of venture capital investments that banked on the Uberisation of everything crashed on the shoals of WeWork’s collapse and the struggles other gig economy services have had in reaching financial viability. Venture capitalists are pack animals and cybercurrencies appear to be their new favourite experiment. But I think something deeper is going on as well. There is a factor that helps explain why talk of Web3 is unavoidable in the United States and far more avoidable in Europe. That factor is trust.
Early supporters of Bitcoin were critics of fiat money—paper currency created by governments as they abandoned the gold standard. These critics are concerned that central banks can defraud holders of the currency by printing money and decreasing its value through inflation. Bitcoin’s pseudonymous creator, Satoshi Nakamoto, made it clear that his motivations for creating Bitcoin were thoroughly political and thoroughly centred on this idea of trust. In a 2009 white paper, announcing the release of the first functioning Bitcoin code, Nakamoto explained: “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Bitcoin replaces one form of trust with another. Instead of trusting a central bank to manage an economy responsibly, you are invited to trust your money to the developers of cryptocurrency protocols that you are probably as underqualified to evaluate as you are to evaluate global monetary policy. Some of that trust has been warranted: Bitcoin’s core protocol has not been compromised. But many other parts of cryptocurrency systems—wallets that hold users’ coins and make them available for transactions, exchanges that buy and sell cryptocurrencies for conventional money—have a much worse track record than central bankers do. Yet for individuals who have lost faith in national governments, maverick mathematicians and computer coders are easier to trust than central bankers and politicians.
A second group fascinated with cryptocurrencies is focused on how blockchains can be used to create a new social structure, called the “decentralised autonomous organisation” or DAO. (I know this is all getting absurdly jargony—stay with me and I promise I’ll explain.)
The hope here is that by giving participants in a project voting shares—registered as cryptocurrency tokens on a blockchain—that can be used in discussions about the future of that project, its founders can avoid the centralisation of corporate power and control associated with companies like Facebook and Google. A group called ConstitutionDAO invited investors to contribute funds to buying a copy of the US Constitution, up for auction at Sotheby’s. Donors would receive tokens which could allow them to vote on where the document—collectively owned by the group—would be displayed, what museums it would be lent to, and so on. That project failed when their bid fell short, and many investors lost money due to the heavy transaction fees they paid, first to invest and then to refund their investment. Further complicating the picture was a secondary market for these tokens, which were traded as a cryptocurrency and experienced booms and crashes as the project progressed.
The consensus between many machines is what makes Bitcoin thus far impossible to hack
Other DAOs appear more promising. Gitcoin collects donations to support open-source software projects and rewards developers who create programs and fix bugs with cryptocurrency. They use a separate token to allow participants to vote on worthy projects to support. In order to identify projects with a wide buy-in they use quadratic voting, which makes it more likely that a project with many small backers will win support than one with a single, rich backer. These features—a separate governance token and a novel voting system—are designed to counter some of the known bugs of DAOs, namely a tendency to reward the wealthiest and silence the less privileged. DAOs are not conventional democracies where one person has one vote; they are more like corporations, where holders of many shares have a greater voice than someone with a single share, and where one can win a vote by purchasing more shares.
Why take DAOs seriously? Again, the people who are putting time and effort into these new forms of social organisation have low trust in existing institutions and corporations. They see our financial systems as so badly rigged against innovators and entrepreneurs that they are interested in playing an entirely different game, where if imbalances exist, they are at least new imbalances.
The problem of low trust in institutions is particularly acute in the United States. In 1964, 78 per cent of Americans said that they trusted the government in Washington to do the right thing all or most of the time. During the Obama, Trump and Biden presidencies, that number has rarely risen above 20 per cent. Trust in other social institutions, from Congress to big business to banks to universities, has dropped sharply over the past 40 years. Some other democracies have seen sharp falls in confidence as well: mistrust runs very high in most countries that used to be part of the Soviet Union, and is high throughout much of southern Europe.
By contrast, in northern Europe, where social democracies are strong, there is a stronger tendency to trust the government. It seems possible that the interest in Bitcoin, cryptocurrencies and blockchains currently informing the US technology economy is in fact a symptom of this deeper mistrust in institutions. Perhaps Europe should be celebrating the limited traction that Web3 has received. It may be a sign of social and institutional health, not technological backwardness.
And if you are really worried about missing out on the cryptocurrency gold rush, the gas station down the street offers Bitcoin at very attractive rates. Drop me a note and I’ll set you up.