This is a rapid fire piece. I’m calling out nonsense I’ve noticed in the crypto industry.
Crypto critics and enthusiasts alike will both cheer and scorn at some of my quick takes. But it needs to be said. I’ve been closely following the crypto carnage of 2022 (see my article archive). There are several beliefs that are counterproductive and need to be dropped. I’m calling them out. They are:
DeFi did as it should
Not your keys, not your coins
Now is the best time to build
Diamond hands
Trustlessness
1. DeFi did as it should
DeFi has continued to work as it was intended amidst crypto collapses…but of course it did.
No DeFi platform has gone bankrupt. None halted withdrawals. It’s business as usual for DeFi. That’s exactly how DeFi protocols were programmed to operate.
Enthusiasts exemplify DeFi as the pinnacle of greatness. As a crypto triumph. DeFi is a technological innovation. But let’s get one thing clear. The reason DeFi platforms have survived, it’s not code. It’s…
Over collateralization!!
Of course no DeFi platform went bust, every loan is over collateralized. I’ll put that in a plain example. For every $100 lent, DeFi has $150 worth of collateral. If the collateral value drops to $120, it is automatically sold and the $100 loan is repaid.
That’s why no DeFi platform has ever gone bust; not because of code.
No bank would ever go bust if they too had 150% collateral for each loan they originated. But then they would have no business. There are few use cases for tying up $150 to get a $100 loan.
DeFi’s accessible borrow and lend platforms are a breakthrough innovation. But it stops short of doing one critical thing. DeFi does not extend credit. Credit powers economic growth. The financial system creates credit.
Let’s not be delusional and think DeFi, in its current state, will replace the financial system. DeFi is not sanctimonious. So far it has mostly helped crypto traders get levered long. DeFi helped spur the ridiculous crypto asset bubble. DeFi has not created economic value.
DeFi technology holds promise. Let’s keep building on it and save the praise for when it does something useful.
2. Not your keys, not your coins
This trope is a common refrain. It means that users should self-custody all of their digital assets. Proponents of the phrase claim users should have known better than to have their assets on centralized exchanges. The saying is self-defeating. For crypto to gain adoption users need to be able to trust exchanges. Users need to have trusted third party custodial services.
First, users can’t get into crypto without a centralized exchange. Exchanges are unavoidable. We need to be able to trust the crypto onramps.
Second, we do not live in a world where we self-custody. I do not run my own server to store my emails, pictures, music and photos. I use some cloud service I am not even aware of. It works. I can’t be bothered to do it myself because it’s so painstaking. Google, Microsoft and Amazon have trillion dollar businesses that specialize in doing it. They can secure it better than I can.
I do not store my cash under my mattress. It’s in a bank.
I do not directly hold shares in Google. They’re held on my behalf by a custodian.
I do not have tons of copper in storage in my garage. I bought rights to own copper through an Exchange Traded Fund. I’m not sure where it’s housed.
There is no world where I will be running my own server, stashing my cash under my mattress and turning my apartment into a copper storage facility.
Why would I do things differently for crypto?
Just because I can? Maybe. But I strongly believe that most people won’t. That’s why trust in centralized exchanges is paramount. Crypto users should be able to make their own custody choices. If they want self-custody; great. If they want third party custody; also great. Custody services need to be secure, trustworthy and regulated.
Two things are evident:
Crypto needs to move beyond complicated error prone self-custody solutions.
Users need to be able to trust centralized exchanges and custodians.
3. Now is the best time to build
Really?
The industry is a laughing stock. Regulation in the US is a minefield. Raising capital is a challenge. Layoffs are occurring everywhere (beyond crypto).
So what is it about “this” time that makes it the best time to build?
“Airbnb and Uber were created in the 2008 Global Financial Crisis,” is the typical response. So what?
“Bear markets are the time to build!” According to what?
These pithy sayings are examples of selection bias.
Tesla was launched in 2003. Amazon was founded in 1994. Microsoft in 1975. Apple in 1976. Ford in 1903. Those periods were not marred by a recession or bear market.
These companies were founded by visionary entrepreneurs who invented great products. That’s why they're successful. It has nothing to do with launching in a bear market.
Crypto enthusiasts tweet these fallacies ad nauseam. It’s to placate the pain and shill their bags. It’s not helpful.
My theory: the more someone tweets about now being the best time to build, the more they’ve lost in their crypto portfolio.
Let’s look at some facts. The number of developers in Web3 increases dramatically as crypto prices increase. The chart below from Electric Capital makes that abundantly clear.
It makes sense for 3 reasons:
Got my attention: Crypto got people’s attention when prices were soaring. People were intrigued by a new career option.
Gotta pay the bills: It’s easier to rationalize paying your bills, even if you're earning less, when your crypto net worth is increasing.
Wanna be rich: The prospect of making it big is higher when prices are mooning.
What we can take comfort in is that, if history repeats, developers don’t run for the exit when prices collapse.
Capital is a silver lining. A record $33 billion of venture capital was deployed in crypto in 2021. It was 5% of all venture capital deployed. $33 billion is more than all prior periods combined. $18 billion has been deployed through Q3’22. Nearly $17 billion of crypto venture capital was raised between 2021 and early 2022.
Let’s be real. This is certainly not the best time to build. It’s arguably the hardest time to build. But there are other benefits to that:
Die-hards: The people sticking around crypto are die-hard. Gone are those trying to make a quick buck. These are great people to build businesses.
Frugal: The days of crypto-bros balling out in Miami night clubs are over. That’s a good thing. Less money, less distractions, more productivity.
Useful: We can no longer develop some useless hot potato that some other schmuck will pay more for in hopes of flipping it onto an even greater schmuck. Capital is dear. Talent is limited. Use it wisely.
This will be the hardest time to build. Not the easiest. We may look back on this period at some point in the future as the most promising time to have built.
It’s on us to determine how history will judge this period.
4. Diamond hands
Diamond hands is a flattering term bestowed on crypto hodlers who remain steadfast in their beliefs. Their conviction is so high that there is no amount of pressure that can break them. Their hands have turned into diamonds.
The term is ironic and counterproductive.
It’s ironic because of the genesis of crypto. Satoshi envisioned a new financial system. Doing so required an open mind. A willingness to think differently. Yet diamond hands’ conviction in their beliefs is so strong they refuse to entertain any other. Diamond hand-ing celebrates people who refuse to change their minds. That goes against the very nature of crypto.
It’s counterproductive because it stymies innovation. What is there to innovate on, when you already think it's the greatest? Diamond hands breeds complacency.
It’s a horrible attribute for investors and entrepreneurs.
Investors should hold strong convictions loosely. They need to have conviction in their beliefs. But when things change, they need to reassess their beliefs. Hence, hold them loosely.
Entrepreneurs need to be steadfast in their conviction. Even more so than investors. Most startups fail. Entrepreneurs need an almost delusional belief that they will prevail. But, they also need to be able to pivot their business to ensure product market fit and continued success in competitive markets.
Instead of being so convinced that nothing can change your mind (e.g. diamond hands), crypto should follow John Maynard Keynes:
“When the facts change, I change my mind.”
5. Trustlessness
Some crypto enthusiasts believe that no organization or individual can be trusted. They proclaim everything on chain needs to be trustless and decentralized. I disagree. Trust is a good thing.
Humans are inherently trusting. It’s in our biology. The brain is wired to trust. Infants develop a predisposition to trusting others because they cannot survive on their own. Nature and nurture combine to make us trust. Technology is not going to rewire that. Nor should it.
Society is a collection of humans trusting each other to varying degrees. On any given day, we make thousands of subconscious trusting assumptions. I trust that the power plant employees do their job so that when I wake up I can turn a light on. I trust that the subway conductor is alert and can safely get me to work. I trust that my nephew’s school teachers are qualified. I trust that everyone on the highway is paying attention and not going to cause an accident. I trust my plumber to fix the water leak in my apartment. We make so many trust assumptions we don’t even realize it. Many of which are made easier by regulations.
Capitalism is an extension of trust. Credit is the “killer app” of capitalism. Credit is the creation of new money that powers economic expansion and prosperity. A bank makes a loan to a business by trusting the business will repay that loan. For example, a business gets a $100 loan by pledging $40 of assets. $60 of new money is created to fund the businesses’ expansion. That new money is created based on trust.
Relationships, society and capitalism are built on trust.
Trust makes life easier. Trust scales. To trust is human.
Where did this notion come from that nothing should be trusted?
That has the making of a bleak society.
I think of trust on a continuum. At one pole, trust is paramount. It is so important that it cannot be entrusted to people. Ethereum’s base layer and Bitcoin are examples that reside at this pole. These blockchains need to be decentralized and censor resistant. At the other pole are the every day trusting relationships I previously exemplified. Somewhere along that continuum we move from not trusting to trusting each other. Near that inflection point is where regulation is needed. That’s the point where our fear of trusting is eclipsed by the scaling benefits of trust.
To do away with trust entirely goes against 300,000 years of human evolution. It’s not going to happen. Crypto should embrace trust as a continuum. Some things should not be regulated, like Ethereum’s base layer. Other things should be regulated, like centralized actors prone to abusing power.
Moving on
I wrote this piece in hopes that the industry will reconsider these sayings. I care about the industry. I think the technology holds promise. For crypto to be useful, it needs to move beyond the confines of early adopters. These sayings, and the mindset they embody, prevent crypto adoption. Let’s drop them for the sake of our own industry.
Stay curious.
Follow my on Twitter @samuelmandrew for my latest.
I think this is a perfect summary of the bullshit that needs to be dealt with in crypto.
That said, as more and more of the hypocrisy and idiocy gets exposed and stripped out, it's becoming harder and harder to believe that there's really any "there" there, so to speak. So perhaps, if I may be so bold as to suggest, it would be appropriate to revisit your "is there value" topic from a while back. Personally, I am finding it increasingly hard to see the actual legitimate use cases.
Well-put!