novapbs t1_izg5x8h wrote

Oof, I mean, you're not wrong. At all. When we talk about what cryptocurrency is notionally doing it has failed to meet all those criteria. Not truly decentralized, by a long shot; not really circulating as currency, huge problems with scale, huge problems with consistency of value (as opposed to hyperinflating or remaining deflationary and therefore hoarded). Far from the goal of transparent and trustless, in terms of how third parties and middlemen are now everywhere in the process: the exchanges in particular have been, obviously, a catastrophe.

(EDIT: sorry one more ranty point: the WHOLE DAMN PURPOSE of the p2p blockchain apparatus in Bitcoin was so you didn't need exchanges, custodians, or banks! You could have a trustless, transparent account and settlement system that didn't require any intermediaries! You didn't need some loser in Miami purporting to be a custodian whose admin password is "dudesrock1" losing your life savings! And yet here we are.)

This is not a satisfying answer, b/c I don't see any work happening in the current landscape to directly address it -- but also, I'm a historian rather than an industry dude so I might be missing something.

But with my historian hat on, I would say that part of what we're witnessing now is the consequence of a prototype technology with a philosophical agenda that is smacking into the reality of how it is being adopted and used. BTC originates among highly technical people -- being kicked around as a fun experiment on a list for cryptographers -- and was never intended for broad adoption. It was trying to square a conceptual circle -- to produce a provably unique but fungible digital object, which could be verified while being impossible to copy -- with an idiosyncratic goal in mind: to make something digital that could hold value like a precious metal. It's got all these weird incentives, most of which have backfired in one way or other.

Not to be glib, but due to a unique combination of historical and economic circumstances (particularly with technology hype cycles), we ended up with a lot of people -- everyday investors, big whales, miners with all their sunk costs in equipment, the people who loan money to miners, hell, even pension funds -- with a whole lot of money put into what is effectively the alpha rollout of an experimental technology. It's as if we, as a society, went completely 100% all in on wood-burning, steam-powered cars and then just kept tinkering with those forever.


novapbs t1_izg204i wrote

And I totally forget to mention the GOAT Mark Miller (whom I disagree with on a lot of political stuff but damn do I respect the intelligence and technical vision!) who was working on smart contracts and a lot of digital money and ownership ideas decades before BTC was a twinkle in Nakamoto's eye.

And, of course, the blockchain itself wasn't developed for BTC, but by a couple of Bell Labs engineers in the 1980s, Haber and Stornetta, who wanted to figure out how to irrefutably authenticate digital information. (They cooked the idea up at a Friendly's restaurant in New Jersey -- the most important Friendly's in the history of computer science)


novapbs t1_izg1c07 wrote

Ok, here's the thing: I said this above ("you could use BTC to buy good drugs on the dark web") and it sounds sarcastic but I swear to you it's not. Many of the early theorists of cryptocurrency were politically radical libertarians and extremists (with various ideologies -- agorism, anarcho-capitalism, etc etc). And they'd given this issue a lot of thought. A general consensus among them was that a viable digital currency needed a way to enable something that people wanted to do that they couldn't accomplish with existing monetary systems or technologies. So what can we offer that existing money can't?

Answers included: untaxable transactions. Secret, anonymous transactions. Global, cross-border transactions free of fees. Information marketplaces for secrets, pirated data, cracked software. Black markets for drugs, firearms, and other contraband. And finally, a safe haven from a widely predicted coming financial collapse.

So BTC, when it arrived (in the middle of a global financial collapse!) ended with a patchwork of value propositions: first, it's technically cool and interesting to play with. A lot of early BTC stuff was people using it for the sake of using it -- like getting Doom to play on your graphing calculator -- b/c it was challenging and fun. But other people adopted it b/c it fit with their politics: it was alternative to central bank currencies, it would gain value as the dollar collapsed (always predicted any day now), it was untaxable. And still others -- the first really substantial group of adopters -- got into it b/c you could buy contraband with it, with the Silk Road and other dark web marketplaces. And not just buy drugs but buy BETTER drugs: excellent quality, safe, without putting yourself in danger. Finally, there were a lot of early applications for communities that weren't well served by existing financial systems, like sex workers, remittance workers, and refugees.

I would say, bluntly, that none of those really had a chance to take off before the tidal wave of get-rich-quick speculation came in and washed them all out.


novapbs t1_izfzao4 wrote

BTC was not the first cryptocurrency!! I'm not just putting in my exclamation points out of excitement, I'm basically shouting this all the time. It doesn't take away from Nakamoto's (and Finney's, and other's) technical step forward to point out that it's basically an innovative way to combine a TON of important prior work. I shout this from my car at stoplights to get across the idea that there's a lot of ways to build a digital currency, and cryptos are neither the only way to do it, nor the best for most purposes.

A big one (that I'm a big fan of) was David Chaum's DigiCash from the '90s -- it was arguably more about the cryptographic tech than "cryptos" are today. Super intelligent and interesting, a way to make a perfectly private digital version of physical cash. Google his name and you'll find all his papers. It almost took off, too -- the internet we know now would be way, way different if it had. And better, I think.

Likewise, a lot of the people who ended up helping out with BTC in one way or another made earlier versions. Hal Finney made "RPOW," these very clever digital tokens; Nick Szabo made a bunch of experiments with "bit gold" and ideas for using digital signatures; Adam Back cooked up a fantastic tool called "hashcash" with a lot of applications.


novapbs t1_izfxuri wrote

Another great question. I think you've nailed the answer already: building a central bank (CB) crypto would be for FOMO purposes. I don't even say that to mock! It's important for institutions to fiddle around with new technology, you never know what might be useful -- for instance, a blockchain-based system for interbank settlements could be a boring, nonsexy, but maybe significant application. The question to ask with crypto -- with any technology, frankly -- is: what can do I with this that I can't do another way? And what are the opportunity costs, as well as benefits, of using this new tech to accomplish that goal? And cryptos are a lot of downside and not a lot of upside from a CB perspective, for the reasons you spell out here.

BUT! I'm super interested in the development of CBDCs -- central bank digital currencies. There's a lot of really interesting things (from a policy perspective and an econ perspective) that you could do with well-designed digital cash that currently suck to do with existing mechanisms. A CBDC could be a big deal and do a lot of good -- it just wouldn't work the way (most) cryptos work today.


novapbs t1_izfwa90 wrote

Fantastic questions.

  1. I know everyone has had this first-year-econ bong-rip moment already, but of course all money is ultimately a reflection of confidence: confidence, above all, that it will pass -- that someone else will accept it from you, as you accepted it yourself. (The great term of art for anything that functions as money is that it's "passing current".) Usually that confidence stems from long cultural history (precious metals, cowrie shells) or state authority (legal tender for all debts public and private). The rough deal a crypto faces is what anyone novel currency faces: how do you get people to take it? How do you get it to circulate? One answer is, you make it possible to do something with it you can't do another way (in the case of Bitcoin, and I'm not being sarcastic here, it was buying good drugs online). The problem arises if the answer is, promising people it will be worth more tomorrow than it was yesterday. That means cryptos are uniquely vulnerable to being turned into Ponzi schemes: if that's the best way to drive adoption, and driving adoption is how you get rich, then you keep constructing new ways to bring in fresh suckers to prop of the value of current holders. And like all Ponzi schemes it works great until it doesn't. So cryptos are not Ponzi schemes inherently, but in the absence of any other value proposition they tend to turn into them.
  2. I think a lot of academics (myself included) are very skeptical about the current crypto landscape addressing any major issues that it was originally intended to -- in part because the technology and culture of crypto have evolved from their early days, moving from a post-national currency for radical libertarians to opt out of statist banking systems, into the jankiest of the asset classes for financial speculation. An abstract financial vehicle, wobbly as any other, but where the guys in the room wear hoodies rather than polo shirts. They have become, in many ways, solutions in search of problems to solve.
  3. Crypto in general is, by design, phenomenally inefficient. It's meant to be a giant resource hog, an extractive industry, like strip mining. That's now changing (Ethereum is a good example of this), in part b/c of changing attitudes: the population that still thinks of crypto as a digital version of precious metals is small, and shrinking.

novapbs t1_izftqbo wrote

That's an astute question. I think "crypto" sadly joins the ranks of "cyber" as a technical term that got creatively misapplied, and has been rendered more or less meaningless at this point. Nakamoto simply called it "peer-to-peer electronic cash" that relies on "cryptographic proof" for its trust; as your question alludes to, cryptocurrency is not particularly cryptographic! It relies on public keys and hashing problems, and as you say much of the more interesting technology involved (and subsequently studied) involves distributed systems.

Here's the thing: crypto sounds kind of cool. It's associated in the popular imagination with ciphers and secrets and hacking and spies. And it played really naturally into the perception that Bitcoin, in particular, was somehow private or secret in its transactions. I would suggest that, historically, we see it adopted not as a deliberate way to steal cryptography's scientific valor, but rather as a cool portmanteau that evoked what fairly non-technical people thought of when they thought of cryptography.


novapbs OP t1_ivpza9e wrote

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