The cryptocurrency space looks like a giant regressive tax that transfers money from the poor and technically kind of illiterate to sophisticated investors and early adopters and technologists.
SPEAKER_00Hello and welcome to Tech Won't Save Us. I'm your host, Paris Marks, and this week my guest is Stephen Deal. Steven is a software engineer and cryptoskeptic based in London, and he's been writing a fantastic series of blog posts on cryptocurrencies, Web3, and related topics from a skeptical perspective, naturally, but also informed by his work on the technology side of things and the recognition that these technologies do not stand up to the narratives that are built around them and really just don't work in a fundamental way. Steven and I had a great conversation going through a number of those topics, including the divide that exists among technologists when it comes to crypto assets, you know, those who are supportive versus those who are critical, like Stephen, the fundamental problems that exist with blockchain, the technology that underlies a lot of the sector, the issues with this narrative of decentralization that comes up time and time again, that just leads to a false technological utopianism, this belief that, you know, just by using technologies to decentralize or democratize power, which isn't really what happens, that technologies alone can solve the many social problems that we're dealing with. The scammy nature of cryptocurrencies, you know, why there's some kind of mix of like a Ponzi scheme and a pyramid scheme, and of course, Web3, this new term that has, you know, really been emerging and growing lately, and how this is just kind of a rebranding of a sector that is increasingly being associated with scams and frauds, and so needs some kind of a different narrative around it for investors and for the people who are making money off of these schemes to keep growing their bank accounts at the expense of much of the public, and in particular the people who you know get suckered into these schemes. I'd highly recommend going to check out some of Steven's blog posts after listening to the episode. I'll have links to them in the show notes. And you can also find Steven's Twitter there as well, where he is frequently uh, you know, giving critical opinions on cryptocurrencies and these other technologies. Before we get into this week's episode, just a quick note that the Harbinger Media Network, which I'm sure you have heard me refer to many times, uh and which Tech Won's Save Us is part of, is having a fundraiser this month, you know, to keep doing the work that it's doing to promote critical left-wing perspectives in Canadian media and Canadian podcasts in particular. Harbinger plays an important role in bringing together left-wing Canadian podcasters, you know, to collaborate, to share skills, knowledge, advice, and to try to push back against the right-wing dominance of podcasting that exists. So if you are Canadian, you want to find out more about what Harbinger does, or even supporting the fundraising campaign, you can go to Harbinger Media Network.com where you can find out more. If you like this week's episode, make sure to leave a five-star review on Apple Podcasts. You can also share it on social media or with any friends or colleagues who you think would learn from it. And hey, who knows? Maybe you uh know someone who's a real crypto supporter who could benefit from hearing a conversation like this. And luckily, this week's episode, like every episode, is free for everybody because listeners like you support the work that goes into making the show every single week. So if you like the show and you want to ensure I can keep having more critical conversations about cryptocurrencies, blockchain, and these other technologies, you can join supporters like Joey Ayub from Lebanon and Ada Bolton from Leeds by going to patreon.com/slash tech won't save us and becoming a supporter. So I can keep making the show, having these critical conversations and pushing back against the usual boosterism, crypto, excitement, and narratives of VCs that you typically find in tech podcasting. So thanks so much and enjoy this week's conversation. Steven, welcome to Tech Won't Save Us.
SPEAKER_01Hi, Paris. Uh, thanks for having me on. Been a long time uh fan of the podcast, and so it's it's great to be on today.
SPEAKER_00Thanks so much. Uh, you know, it it's obviously great to speak with you. You've had a fantastic series of blog posts that you've released recently on, you know, cryptocurrencies, blockchains, NFTs, web3, all of the things that seem to be in the conversation these days, and that naturally don't get enough, I think, critical analysis, critical perspective. And so I naturally wanted to dig into these topics with you today because, you know, in the past I've talked to journalists about this, I've talked to academics about this, but you, you know, work in the tech industry, you know, as a software engineer, you know the technical side of these things. So I think you can give us a perspective that maybe I didn't get from those other people to kind of, you know, give the listeners a fuller understanding of what's going on here. And so I was hoping to start with uh a division that I guess exists among technologists that you talked about in one of your blog posts, where you wrote that, you know, there's kind of one camp that is critical of these technologies that sees the deficiencies with them, but then there's another camp that, you know, kind of buys into the hype that wants to believe in uh what is being promised. And, you know, naturally you are on the more critical side of that. That's why you're on the podcast. Um, so can you talk a little bit about this kind of divide that exists and and why you find yourself on the critical side instead of the you know side that's buying into all the hype?
SPEAKER_01Absolutely. That's a great question. Um, so you're you're right. Cryptocurrencies are probably one of the most divisive concepts in technology that I've ever seen in my entire career, actually. I mean, there's a lot of things in technology that kind of draw a lot of debate, like you know, things that like artificial intelligence and like the efficacy of introducing biases into algorithms and those things. And, you know, there's a kind of ambient level of debate about these things. But, you know, they're kind of thoughtful arguments on both sides about like, oh, you know, we should probably put more controls on these technologies, you know, we should better regulate, you know, social media. These are all debates. And then there's the cryptocurrency debate, um, which at least among technologists that I know, is it's like Marmite. It will kind of like divide a room. You either absolutely hate it or you absolutely like think it's the messiah, you know, it'll come and save us all from everything.
SPEAKER_00I'll just say on the marmite question, not a fan.
SPEAKER_01Neither am I myself, actually. So but then, you know, like the the conversations I have with other software engineers, the way we talk amongst each other when nobody's kind of listening, um, I dare say most of the people in our industry uh kind of view these technologies with a great deal of skepticism because they're very much solutions in search of problems. And when you ask people kind of like the most basic question, like what is it useful for? You're either gonna get two answers. You're gonna get some long decentralized techno babble, or you're gonna get sort of libertarian politics, right? You know, uh the state is debasing the money supply, and we need to put this technology in place that's gonna safeguard us against the evil Fed or something, right? You know, and as a technologist, like I can see through the techno babble, that's fine. Um, but what I find very strange is that it's a it's a very political technology as hard. And uh that's very hard to reconcile it because a lot of us in the technology sector um we don't happen to share those kind of conspiratorial views about monetary theory. So it becomes kind of hard to reconcile. Like, what is this technology actually useful for? And is it having a good impact on the world? That's the big divide I see among technologists.
SPEAKER_00Yeah, you know, I I think it makes a lot of sense. And when I had David Columbia on, I believe it was earlier this year, you know, he kind of talked about some of that kind of conspiracism, I guess, that exists around these ideas that are associated with cryptocurrencies and these other technologies that we're talking about.
SPEAKER_01David Columbia's book is absolutely brilliant, uh, Bitcoin, the politics of right-wing extremism. Like he really kind of goes into a whole history of the ideas that kind of led up to the development of cryptocurrency, all the way back from the Austrian economists to kind of the cypherpunks in the 90s, to kind of the more right-shifting kind of attitudes amongst venture capitalists in Silicon Valley. And uh, you know, that all feeds into the kind of narrative that's kind of morphed into what has become the cryptocurrency movement.
SPEAKER_00Yeah. And, you know, as you say, beyond the tech industry, there are also opinions by other people who are kind of involved in this conversation. And naturally, you know, some of those big players would be investors who are putting a lot of money into this area, but also tech journalists who are covering it and who are giving the public kind of the context to, you know, try to understand what is going on here. And as you write in your blogs, you know, they also have certain incentives coming in to, you know, I guess buy into the narratives that are being formed around them. Um, because that they can either be good stories or they can, you know, produce an opportunity for people to make a lot of money. So, what do you see in their kind of approaches to the issue of cryptocurrencies, blockchains, and things like this?
SPEAKER_01It's absolute observation. And this is something that kind of struck me in when I started to start writing about cryptocurrency skepticism, is I saw that the narrative that was being pushed by kind of mainstream journalism around like Bloomberg, how Bloomberg covers blockchain technologies or you know, say CNBC or kind of the traditional kind of outlets, um, it's always very, very optimistic and it's always very, very short on the technical details. Um, and as a technologist, I would read these articles and I would just be scratching my head about like, what are these people talking about? Um, they're talking about things that are, you know, like perpetual motion machines and like, oh, we're gonna build this square circle and it's gonna like, you know, build things that are just completely logically incoherent. Um, and all the time, like kind of the narrative of the project is always, oh, and also there's a token attached to it that you should buy because you know, this project isn't gonna go to the future. And, you know, these kind of crypto companies have been around for like, you know, 13 years now. As far as successful businesses that have been built around this technology, you're looking at like exchanges. So companies that literally whose sole purpose is to bring more people in to trade more crypto tokens, right? There's not a whole lot of use for any of this technology except speculation. There's not a whole lot of businesses being built. Um, and the fundamental question and the disconnect I see in how these things are being reported on is that there's almost like no there there. It's like if the iPhone was developed 13 years ago and you know it was being sold as kind of a coupon that you could eventually redeem for an iPhone at some point in the future after 13 years. Um and that's the way I see all of cryptocurrency. We're still waiting for the killer app because I have not seen it yet. And that to me, this disconnect between the presentation, the marketing, and the technical reality is a very strange phenomenon.
SPEAKER_00Yeah, you know, it it's like you imagine the iPhone. There are no apps, it doesn't even work as a phone.
SPEAKER_01It's a store of phone value now, right?
SPEAKER_00Absolutely. Um, you know, so you've talked about how, you know, I guess all of these technologies are kind of solutions in search of a problem to solve, right? And I think the technology that kind of underpins a lot of this area is the blockchain, right? And the idea that all of these things should be on the blockchain, that this should be kind of the foundation for, you know, how we develop these kind of technologies in the future, and everything should be developed on the blockchain, their own blockchains, whatever. So can you talk a little bit about what the blockchain is, you know, how it actually works, and what the problems that you see with it are?
SPEAKER_01So the blockchain is a very simple thing. I mean, in computer science terms, it's uh what's called a data structure. So it's a way of aggregating a bunch of transactions in a way that they can be stored and kind of reduced down to a single number called a hash. Um and then you combine that with something called a consensus algorithm, which is a way of basically reconciling changes to this ledger structure over time. And it introduces this kind of game theoretic mechanic by which different participants can add additional transactions to this ever-growing data structure. And that gives rise to something that you can kind of use to sort of simulate financial transactions. You can think of it like a bank ledger that evolves over time, that kind of says who owes who. Uh and it's all denominated in this sort of native currency of the blockchain, which is something like a Bitcoin or another token, right? Um, so blockchains work in the sense that they're kind of a one-trick pony for building cryptocurrencies. And cryptocurrencies do work, you know, obviously the networks are all running around. It's kind of impossible to deny that they don't actually exist and they do work. Um, it's just unclear what they work to do because the narrative that these things have always been pushed as a peer-to-peer payment system. Well, you know, basically most people scrapped that idea about 10 years ago when they realized that like the technology doesn't actually scale up fast enough to run more than like a small supermarket. Um, you know, these things are just incredibly slow. You know, thinking like you're gonna spend three days to confirm a transaction on some of these chains, and every single transaction is going to consume a vast amount of computational power to confirm the addition of one of these transactions, because that's part of the consensus algorithm, which is this method of by which you uh solve math puzzles to basically perform a lottery uh in which people compete in this sort of game to uh add new transactions. But this is an insanely wasteful process, and basically it's wasteful by design in order to give the world this kind of global lottery in which the tokens will be distributed out to the participants who confirm transactions. So this is a terrible way to basically build a currency. Uh in fact, there's a strong economic argument that these things could never possibly function as money themselves. Um but if we just look at the technology, yeah, you can build cryptocurrency, you can build speculative investments that are censorship resistant on top of them. And that does work. However, that's not a terribly useful thing for the world. Um a speculative investment which exists to basically arbitrage financial regulation around the world, in which people can kind of gamble on the random price movements of an asset that has no underlying value. Yeah, it works. It's a cute trick. Um, but I'm not sure what the societal value of that actually is. And then when people try to apply blockchains anywhere outside of the realm of cryptocurrencies, you end up with a solution which is effectively either completely pointless, doesn't scale, or is strictly worse than just using a centralized database. And that's the big problem I see with these technologies. They don't really work.
SPEAKER_00You know, what you're saying on the the time that it can take for these transactions to work, it reminds me of a video that was circulating a few weeks ago of a guy in El Salvador who was trying to buy a beer with cryptocurrency and like he was kind of standing at the beer stand for like 20 seconds, like, you know, waiting for the transaction to actually go through. And it was like, you know, if he just used his like credit card, it'd be immediate, it'd be done. And I think it's also a good point to point out, you know, the issues with these blockchains. In one of your articles, you wrote that Silicon Valley kind of ran out of ideas and created blockchain, and you called it a simulacrum of innovation. I think it's a good term. And I wonder if you can go into that a little bit more, because as you, as you just said there, you know, you note that many of these kind of applications that blockchains are applied to could be better solved through centralized databases. Um, you know, the kind of worries and issues that can come out of that, you know, if people want to know more about that, they can go back to my conversation with Olivia Jutel, where we talked about, you know, how blockchain is applied in the global south and how, you know, it's used to kind of marketize and create land databases, uh, like it's a very neoliberalized kind of politics. Um, can you talk a little bit about that element of it?
SPEAKER_01Yeah, I mean, it is kind of a simulacrum, this is kind of postmodernist term of innovation because it's it's a technology that precedes its use case. It's a development that was invented and then it was in search of an application for itself. Uh, that's a very strange thing because usually innovation kind of proceeds the other way around. So as a technology, I think the the use case about the beer is actually quite relevant because it's much slower technology. And if you just kind of picture yourself as a uh, you know, you own a pub, right? And uh you want to theoretically transact in Bitcoin, you're gonna have to go to the brewery and you're gonna have to source kegs of beer and bring them to your pub, right? And then you can ultimately serve them to customers. And if all of these transactions are being done in Bitcoin, like this hyper-volatile speculative asset, you know, the time between the shipment between the brewery and the time between like a payment being confirmed from one of your customers, right? If the price of the asset uh is gonna change or draw down like 80%, you know, you're losing money on the time between you paid for the beer, when you pump it into the pint for the customer, and then when they actually settle their payment, right? And that means you have to constantly update all of these prices, constantly. Uh, because the underlying payment, you know, can change 80% in one day. If Elon Musk had a bad day and tweets two emojis, right? Suddenly your pub loses 90% of its inventory, you know. This is not something that you could ever run an economy on. Um, and there's no reason to think that these kind of currencies will ever kind of stabilize because there's no central bank or any kind of issuer kind of controlling the supply relative to kind of domestic goods. And so when people talk about trying to apply these technologies, kind of to be like a widespread treasury layer for some theoretical techno-libertarian utopia, right? They just don't really think through the end state of what that would actually look like for your average person that actually tried to use it. And that's why the guy is sitting there tapping his phone on the beard, like getting frustrated with it, because this is a technology that by design could never function that way. And yet people kind of are convinced that we need to keep selling it as a currency. And that's part of the narrative. It's kind of this sleight of hand between saying it's a currency when it's beneficial to call it currency, and it's a speculative asset when you want to tell people they're gonna get rich off of it. But those two are diametrically opposite, they're logically incoherent, they're logically inconsistent with each other, right? You don't want a currency that's gonna go up or down 80% in a day because you can't run an economy on that. But you also don't want a speculative asset that you know stays at 2% growth for 10 years, right? Because you're not gonna get rich off of that. And I can't reconcile the fact that people kind of like to hold both of those thoughts in the mind at the same time about these assets. And that kind of internal logical inconsistency is what really bothers me about the technology and the kind of financial narrative around it.
SPEAKER_00Yeah, you know, I I think that makes a lot of sense, right? Especially when you consider that like something like Bitcoin is, you know, not used by a whole hell of a lot of people right now, especially when you think about like regular transactions that aren't used for kind of speculation. And so if you were to expand that and have like, you know, every shop accepting Bitcoin, like the time that it would take for those transactions would only increase because of the pressure on the network to process all of these transactions, because it's not designed in an efficient way. And so, you know, it's just fundamentally not something that is going to work in the long term if we're thinking about how to build like a proper financial system that is actually going to work in any meaningful way.
SPEAKER_01The only way these things scale is ultimately by becoming the very centralized systems that they were designed to replace. So the best way to run a great payment system is great, you recreate Visa and you recreate, you know, a bank. And at scale, the problem I see with these technologies is they're kind of based on this whole decentralization sort of libertarian narrative about not having any kind of intermediaries or third parties. Yet the very way that they would ever possibly be used is by becoming the very thing that they were designed to replace. And, you know, maybe there is a place for some of these things to kind of exist alongside the traditional financial system. But the only way that I possibly see that they would become that is by becoming kind of very inefficient versions of technologies that already exist. Like wiring money across the world is a solved problem for the most part. I mean, we know how to move two digits in a computer. Two banks basically credit one account and you know they debit another account, and that can be done as fast as you can update a database, right? If there are any inefficiencies in this kind of processes, they're entirely related to regulation, compliance, just the brute facts if you have two nation states with two separate laws and two separate jurisdictions and two separate sets of consumer protection. And those are the roadblocks that most consumers hit up against in the traditional financial services system. But those are not necessarily baked into the technology in any way. And if crypto technology is solving any of those problems, it's because it's basically just ignoring all the regulation. It's basically a means to arbitrage, you know, capital controls or you know, KYC, know your customer requirements, or sort of terrorist financing restrictions and stuff. And having worked in the financial services sector, like those are very important things to be doing as a financial institution, and they're there for a very good reason. Uh, because if you remove them, then literally all sorts of sort of criminal elements start using your service to launder money and all manner of bad things happen. And the truth is that you know the financial services system has never been perfectly able to block all of those things, but it's a best effort and it does so in a way that protects most consumers far more than they probably understand. And, you know, the big issue with the cryptocurrency system is it's kind of like it's like capitalism, but with all of the breaks and all of the controls basically just removed in this kind of complete anarchic system in which you know everybody has to be their own bank, uh and you have to run your own information security, uh, and you have to safeguard your private keys against, you know, anybody who would kidnap you and you know, torture you to get them. And like I can't possibly expect a world in which my grandmother Has to become her own bank, you know, and defend her private keys from armed robbers who would want to steal her pension. You know, I just don't see this as this utopian vision of the world. I see this as a dystopia.
SPEAKER_00In that way you can see like it's a vision that only really works for the kind of really technologically savvy people who are behind this in the beginning and kind of forming the ideas behind it and like not thinking about how it applies to everyone else. But you know, I think what you were saying early in that answer about, you know, the only real kind of goal with these technologies or the only real kind of endgame is really to recreate the system that already exists, but with new players controlling it. And, you know, I think that gets much closer to the reality of this than a lot of people who are kind of putting out these narratives are um admitting. And like I think you can start to see that with what some of the major kind of crypto companies are doing when they're trying to lobby for um favorable regulations in the United States right now. And for me, what it does is kind of remind me of the story of PayPal, which also kind of emerged with all these promises of you know, disrupting the financial system and giving everyone their own bank account and like all of these grand promises. And then when it came time to actually make money, they started working with the government, they started following the financial rules so that they could be just another one of the big kind of bitdlemen who are making a ton of money uh in the sector, um, instead of you know, all of the kind of libertarian ideas that were associated with the brand early on. And so I think if you look back at that history, you can see something similar playing out with cryptocurrencies today, and that if there is going to be like a business use case, it's not going to be this kind of decentralized libertarian utopia. It's going to be, okay, they're just going to become like the new major company that that is working in this space. Um, and so, you know, you mentioned the decentralization aspect of this, and that that's kind of the next point that I wanted to get to, right? Because in one of your blog posts, you explained that these ideas of decentralization really work to justify a lot of kind of technological utopianism that occurs um in the space, but around these technologies in particular right now. So, can you talk about that issue of what these ideas about decentralization create and you know, also how they misunderstand the idea of decentralization itself?
SPEAKER_01That's a really good point. So, my industry in particular in software, we kind of fetishize this word decentralization in a certain way. And it's sort of used kind of analogously to the word like democratization. And I think the conflation of the two is often the kind of fulcrum on which a lot of sophistry rests. So decentralization is kind of a term that you know comes from like network topology, basically talking about the distribution of like data and how it flows through a system of computers, right? And there's certain networks that are decentralized. So you can probably use things like Tor or like BitTorrent, like those are examples of like decentralized technologies where there's no single point of failure in the system, right? And these are very cool technologies in a way. BitTorrent was like a successful protocol, even though it had kind of uh you know use cases that were kind of uh extra legal, but you know, ultimately it was it was uh very useful as a pure technology. Um, so decentralization tends to be the kind of catalyst by which a lot of people kind of pitch new ideas, and they kind of use that word interchangeably with democratized, that we're gonna basically treat people as if they're computers, right? You know, instead of taking data as it's being distributed through a network, we're gonna actually diffuse power through a network of people. And that's kind of the implicit assumption. And generally, from what I've seen with the centralized networks so far, um, and we see this manifest everywhere in crypto, is that who is actually getting rich off of these things? And the answer is usually billionaires, people that have resources to allocate toward the development of these technologies and to understand them enough to profit off the continued their existence, right? So these are things like the miners, the exchanges, all of the billionaires that are you know stockpiling crypto. And this is the exact opposite of democratization. This is plutocracy, uh, you know, distribution of wealth to the wealthy, already wealthy. And my fear about cryptocurrency is it is itself this kind of plutocratic technology that wraps itself in this populist narrative about we're gonna liberate the people from you know all of the perils that led up to the global financial crisis, like we're gonna fix all of the problems with the banks, and we're gonna decentralize them and remove all the middlemen that are you know causing all of your problems in your life. And if you just invest in this, you know, this coin today, it's gonna solve all of your problems tomorrow. And what actually happens is it's kind of as a macro level, the cryptocurrency space looks like a giant regressive tax that basically transfers money from the poor and technically kind of illiterate to sophisticated like investors and early adopters and technologists. And for a lot of people in my field, that's great. I mean, they've gotten fabulously wealthy uh on the back of issuing these things. But if you have fundamental questions of like, what is that actually doing for the world? You know, it's it's kind of reverse Robin Hood. Uh, it's you know, stealing from the poor to give to the rich. And I don't see a way that these technologies morph into the kind of populist narrative because there's these kind of logical and technical inconsistencies of their heart.
SPEAKER_00I think you've really hit the nail on the head with that. And as you were saying that, it really brought to mind something that I hear on like the crypto left as well, right? The kind of people who say that they're socialists, but who say that, you know, cryptocurrencies and blockchains are a means to some kind of liberatory politics that has like a left-wing slant to it. And, you know, what I often hear is that they make the argument that these technologies are offering this like unique opportunity toward, as you say, like democratization through decentralization and also, you know, to empower people in these ways that they haven't had before because they're, you know, getting away from these big gatekeepers and these massive companies and blah, blah, blah. But then at the same time, as soon as you start to interrogate that question and critique that question, like when you start to point out, as you just did, that so much of this is controlled by really rich people and they're the ones who are making the money off of it, all of a sudden they start to say, yeah, but you know, this is already a really unequal system. We can't expect this to actually change anything right now without changing something greater. And it's like, okay, so now you are admitting that these technologies are not actually creating the benefits that you are saying, and that ultimately to have those benefits, we're going to need to change larger social structures. So then why would we then base that change around these really libertarian technologies that are not delivering the benefits anyway? Like it, you know, it just seems like a circle that like keeps going around, it doesn't make any sense. Like, yeah, I don't know.
SPEAKER_01Yeah, I mean, you see that narrative all over it on kind of the crypto left as well, that somehow these these technologies are a shortcut to basically not engage with the political system and not actually interact with people and engage the political bodies and effect reform, but we can do it with technology itself. And like we can just fix social problems with technology problems. And the history of technology has always taught us that you cannot fix you know human problems with technology, right? Uh, if anything, technology tends to introduce more human problems at the end of the day. Um, so yeah, I remain very skeptical uh because number one, these arguments are very lacking in details, they're all very hand-wavy. Like, how is Bitcoin going to liberate the world? It seems to be doing the opposite. Um and there's this kind of reductive quality to a lot of those arguments, is that people see kind of deep issues with our financial system. And don't get me wrong, like there are some deep problems with the way the current system, especially in the United States, with how it's set up and banking access and uh income inequality. And these are financial phenomena, but I think it's overly reductive to say that they're monetary phenomena. And those phenomena arise out of, in my opinion, uh the kind of neoliberal policies for the last 40 years that have basically gutted the middle class and the dissolution of labor unions and the non-increase of the minimum wage. And uh, these are things that I think have largely given rise to the kind of despair and the income inequality we see in a lot of Western countries. To reduce that down to like monetary policy, though, is I find a very reductive argument. It's a very seductive one to say that, oh, there's this one root cause, you know, and if we just fix that, then you know, we're gonna fix all of society. And you know, the fancy interest rate does affect macroeconomics and people's lives. But, you know, there are probably six or seven other factors that I would say are largely contributing to uh the degradation of people's lives, far more than, you know, quantitative easing on the dollar, for instance. And I think we really have to kind of defy reduction down to monetary policy because it's a simple answer, but it's also probably the wrong one.
SPEAKER_00Yeah, absolutely. You know, it also stands out to me that you know, there's this really strong like technological utopianism that comes with this, right? This this kind of belief in these that these technologies will deliver what the narratives say, ignoring the history of every other time that those narratives have been used in history and not delivered. And then, you know, especially when we think of like a crypto left, like then the solution is to adopt these kind of technologies instead of like, you know, have public banking and actually design a banking system that like serves, you know, the public instead of you know just hoping that these technologies are going to deliver something beneficial in the end. Yeah, it just seems wild. But you know, as you are talking about there and as you've talked about through this conversation, you know, I think that there needs to be this kind of deeper kind of uh understanding of cryptocurrencies. And you've already talked about them in relation to assets rather than currencies and why they don't work well as currencies themselves. I wonder if you can maybe draw out that distinction a little more, because in one of your essays, you talk about them not as cryptocurrencies, but as crypto assets. So can you talk about that distinction?
SPEAKER_01Yeah, so cryptocurrency for good or for ill has become kind of the term that the public has used to kind of refer to a lot of different tokens, basically. And if you look at the way the finance people and the policymakers talk about these things, they usually refer to them as crypto assets. So if you go read like a white paper by the Bank of International Settlements where they do the kind of traditional financial analysis of these things, the term most people call is they're an asset, they're not a currency. So there's a kind of space of financial instruments that we kind of have to understand. Um, you have the monetary and the currency instruments, which is like one category. So these are things like the dollar, the yen, the sterling. They serve as a function that kind of fulfills three different purposes. It's a it's a medium of exchange to store a value and a unit of account. Um, and so things like the the pound sterling uh satisfy that because they're the mechanism by which an economy sustains itself, by which we transact in, you know, when I go to the pub and tap my car and I get a pint of beer, and like it all just kind of works, right? Uh they function in that capacity.
SPEAKER_00And you don't have to wait like you know, a few minutes for it to work. Yeah.
SPEAKER_01It's like magic. It's contactless, visa settles it in three days, it's like magic, yeah. Um so monetary instruments are much different than say commodities. So a commodity would something be like uh cow, uh gold, or uh, you know, wheat or you know, petrol or something, right? So these are you know physical goods that are used as inputs to other economic processes to produce downstream consumer products, right? So they're priced in terms of their intrinsic value, right? Because you can you can eat wheat, you can make bread out of it, you know, you can burn petrol, produces energy, you can you know turn the cow into steak, you know, like there's a process by which we can value those things in terms of their impact on human lives. So those are commodities. Oh, and then we have securities, uh, which are financial instruments, which are kind of a fiction, right? They don't actually exist, right? Um, so these are things like stocks, uh bonds, derivatives, you know, swaps, futures. They're you know a shared delusion about a contract that exists between different parties, which gives certain parties legal rights to certain cash flows based on what the contract specifies as like an underlying asset. So their way of basically distributing money between people based on a kind of a formula or description, right? So things like stock in a company or securities, for instance. And then you have a fourth class, which is kind of alternatives and things like art.
unknownYeah.
SPEAKER_01So these are kind of very difficult things to value, like uh what's the value of a monet or something, right? Economics doesn't have an answer that question. Um, it's it's a piece of art that sits on the wall, and you know, it has value by whatever someone will pay for it. But you know, economics it doesn't concern itself with what we price a Picasso or a Monet is, right? Uh it's kind of a weird asset. So those are four things. Um so if you look at cryptocurrency, we talked about why it didn't satisfy the monetary category because it can't function as uh a store of value or a medium of exchange, so that's out as a commodity. There's nothing inside of a Bitcoin that can be used for any human process, right? There's no non-circular use case for a Bitcoin or anything inside of a Bitcoin that can be used like a cow or you know, a gallon of petrol can. So it's not a commodity, then you're left with securities. And if you value cryptocurrencies as securities, they end up being very pathological because they're a security who, if you apply the kind of traditional valuation models to, it's an asset class that has no income, right? It doesn't have an underlying thing that it's attached to and it has no external cash flows. And this is a really important thing to note about crypto assets is that they are what's called a zero-sum game, which is a game theory term, uh, which says that you know, the only money that pays out investors is money that's from new investors paying out old investors. Or to put it another way, if you bought low and sold high, somebody else bought high and sold low, right? So there's no money coming into the system that's not by bringing more investors into the system. So if you apply the kind of traditional like quantitative finance models to these things, like this kind of cash flow model, you get answers that say that these things should basically be worthless, right? They have no income, their entire terminal value depends on like an infinite chain of fools that will just keep buying this thing forever, which are like absurdities. Like they can't possibly have a non-zero value as a security. Um, and securities are very regulated in the states for a good reason because you can construct them out of thin air, it's like cryptocurrencies, right? Uh they're a they're fiction. Uh they exist to basically give people rights to cash flows on economic enterprises. But with Bitcoin, there's no economic enterprise. With Ethereum, there's no economic enterprise. It's purely an investment whose value is derived from the theory of the greater fool that, like, if I buy an asset, I have to pass this on to another fool. So it's a it's an infinite hot potato, right? So by deductive reasoning, you end up with these absurdities if you kind of try to price them as securities. And then you can say that they're like art. So basically, Bitcoin is like a piece of libertarian performance art uh that's split into 21 million parts, right? And it wouldn't be the first time somebody's actually done that in history, but that's a kind of significantly kind of less coherent story that uh the Bitcoin's a is a performance art. And it doesn't drive with the kind of narrative we keep hearing about, that it's being treated as a financial instrument, but it's actually kind of this piece of performance art. So I kind of reject that one outright. Um, so then you're kind of left with the logical conclusion that you have these kind of like valueless penny stock assets that are kind of being traded purely on the theory of the greater fool. And you know, that looks like a speculative bubble. And those things do happen in economics. Uh, it's just they always have one outcome, though. And I think ultimately the history of these things ultimately trends toward one place to zero.
SPEAKER_00Exactly. And I don't think we need to go into it too deeply, but there are you know very clear relationships you can draw to historical events. You know, one that I have noticed a lot that that keeps coming to mind whenever I read about these stories is the Wall Street crash of 1929. But in one of your essays, you also mentioned the Albania pyramid scheme crisis in the 1990s, where post-communism Albania seemed to be having this economic miracle, but it was just like you know, half the economy got involved in pyramid schemes and then it ultimately collapsed. I wonder if there's anything that you want to say about either of those examples.
SPEAKER_01So both of those are actually really great historical analogs for about kind of what we're living through. And uh the lesson about history is that history repeats itself, uh, first as tragedy, then as farce. Um, and so I think what we're seeing is kind of the uh the farcical version of those two events kind of repeating. And I guess we're kind of doomed to repeat the same cycles of history. So to go back to like the 1920s, and every journalist I talk to right now says, oh, it's like the 1920s again. And they're they're right. Um, what you're seeing right now is what happens when you have a kind of wild speculative media. We saw that in the 1920s when America was kind of first building its kind of market economy. We were still figuring things out about how to actually build a stock market. Um, these have been around for a while, since like the 1700s, but they kind of reached a fever pitch as the kind of US kind of industrialized and kind of entered the early 19th century. Uh, and so things like the New York Stock Exchange kind of exploded in popularity. And then there was a Cambrian explosion of companies and all sorts of new financial instruments and all this financial innovation, if you will. And the retail public, which is like everyday citizens, started investing very heavily in financial instruments in companies that they didn't understand. And this created a massive sort of bubble, which ultimately led up to the Great Depression and the Great Market Crash of 1929 when the entire House of Cards ended up falling down because all of this was, you know, based on hot air. Um, but there was a very kind of interesting set of laws that came into effect in the states, which were called kind of blue sky laws, which were explicit prohibitions on the type of like securities uh that's cryptocurrencies were most like. So blue sky laws were basically a restriction around trading securities that were backed by nothing more than the blue sky of Kansas. So they were instruments that had no underlying fundamentals, right? People would just sell these things and like they were like the Dogecoin of the day, basically. What's the value of uh you know the blue sky can? What's the value of a dog meme? Right, you know, they're asking the same kind of questions back then in 1929, right? And ultimately the US decided, oh, these things were probably bad because how do you price these things? You know, like uh what's the value of the blue sky, right? And so most states basically banned these things, and this kind of got codified into um what became the Securities Act of the 1930s, where it turns out you probably don't want to actually have these things to existence because they're basically predatory instruments. And I think you're you're seeing all the historical analogs repeat themselves as farce again now, basically. Um these things look like securities, full stop. Like most cryptocurrencies, and the SEC sort of agrees on this, they look like blue sky securities, blue sky contracts. And since the US has decided like not to regulate them at the moment or has just not stepped up to do that, you're seeing exactly the same patterns repeat themselves. And ultimately it's going to take something like a securities act for cryptocurrencies to ultimately come in and kind of clean up the mess. Um, unfortunately, though, I think like most of those securities probably disappear because they're backed by nothing, right? You know, what's the value of Dogecoin or something, right? It's you know, history told us what happened to most of those. They went to zero when they became illegal. And the second one was the pyramid schemes of Albania, which is actually a really interesting story. And the Financial Times actually just did a story last year about this, which is really very good. Um, so to kind of summarize it for people that don't know the story, Albania came out of uh the communist bloc and kind of left the USSR and transitioned from uh like a centrally planned economy into a market economy. And so the people of Albania, they'd always lived their life under communism. And so they were not, they didn't have the same kind of institutions and the same kind of cultural norms around what to expect from interacting with the market economy. It was basically like a libertarian paradise in Albania at the time, where there was no regulation. Uh, anybody can start these large investment funds, and that's what people did. Um, they started these large, basically, infrastructure development funds that people would pile in and they would promise things like five, six percent return initially, and then they would allegedly take the funds and invest them into infrastructure, which would then generate a yield and they pay that back to their shareholders, right? Except they forgot to do the investment part of it uh because turns out if you take people's money and there's no regulation, there's a perverse incentive just to run off with that. And that's exactly what happened, right? So these things became massive pyramid schemes, uh, which basically ended up consuming large chunks of the GDP of the entire country to the point where the government was basically like in on the action. Like all of the government officials were like, well, we could regulate this or we could just pay ourselves, right? And so by the end of this farce, these funds were promising like you know 50, 60% returns. I think they got up to like 120% returns because they were just robbing Peter to pay Paul, right? They're paying out a small group of people to kind of keep the illusion going under the hopes that you know most people would not withdraw their money. Well, you know, what happened eventually? People wanted to withdraw their money, and then what always happens with you know these kind of schemes is that uh outflows exceed inflows, and then the entire structure becomes insolvent, and you know, it goes poof. And that took down the entire economy with it, and then the country descended into civil war for several years. And that's a kind of cautionary tale about the size that large financial frauds can get if left unchecked, and when government fails to do its job, when there's no clear role of the state to kind of step in and be the kind of guarantor of last resort against systemic risk. And Albania should be a very, very cautionary tale for cryptocurrency because left unchecked, I see the same patterns repeating themselves.
SPEAKER_00Yeah, you know, it just seems like it's such important analogs to remember. And, you know, especially when you think back to the 1920s and what you said about, you know, the regulations coming in later. One of the great things about technology is that it just pretends that existing regulations don't apply to it uh unless, you know, it's actually forced on them. And usually that takes a long time for. governments to come around and do it, at least, you know, in in this period of time. You know, I think it's also interesting you say like, especially as you can see in the case of Albania, that you constantly need more people to come in. And that's why you see like, you know, people like the Winkelvoss twins on Twitter all the time saying like, you know, you have to get it into Bitcoin. You have to put everything you have into cryptocurrencies because, you know, this is the only way that you can like get rich or or help yourself or whatever, right? And so you can naturally see these trends like playing out and continuing. And you know, naturally you described cryptocurrencies as, you know, like some combination of like a Ponzi scheme, a pyramid scheme that you said could even be considered a snowball scheme. Do you want to talk briefly about you know how you see cryptocurrencies in that way?
SPEAKER_01Absolutely. So cryptocurrencies are very weird because traditionally speaking they don't fit into any one of the categories of the traditional financial frauds. So the question I always ask is like, what would you call a Ponzi scheme before Charles Ponzi invented it? You wouldn't have a term of art for it. And I think cryptocurrencies are something that in the future we're going to have a term of art for it because it's going to be illegal. So I think it's sort of this proto fraud that we're still grappling with. But you're right, they kind of synthesize different aspects of the kind of major types of financial fraud that we see already. So a Ponzi scheme is basically like an investment fund that robs Peter to pay Paul. So you're basically paying out people a return by basically bringing in more money to pay out the next person, the next person, the next person. And you have to kind of keep this going on and on forever and ultimately that's unsustainable because you know you run out of people or you know outflows eventually exceed inflows or you start making uh returns that are uncorrelated to the market. That's how Madoff's fund basically got busted because they were pretending to give you know 8% when they were in a bear market right this doesn't make any sense. And that's how they eventually got caught. Although they write it for 20 years. So people don't remember this but like Madoff read his fund for 20 years. So these things can go on for quite a while. And then you have pyramid schemes. So pyramid schemes are basically like a form of Ponzi scheme um except they kind of have these tiered layers by which people are recruited. And then the pay arts are basically a result of you bringing in more people to allegedly buy some utility or some product some utility coin if you will to basically justify the entire structure. So you're buying vitamins or you're buying you know leggings or you're buying some phony you know thing to justify the entire scheme. And you purchasing that bullshit product basically feeds money back up the pyramid that basically pays off people at the top of the pyramid and that money slowly trickles down fractionally down different levels. Except the problem with this is that if you do this like with like 15 levels of a pyramid, you've basically recruited everybody on Earth into the scheme. So it's inherently an unsustainable enterprise. And the sad thing is pyramid schemes are basically rampant in the United States. They're basically called multi-level marketing companies and for very strange historical reasons under the Nix administration, these things were let to exist and they're purely predatory schemes that basically just suck wealth from the poor to do nothing economic in the economy. They're cancer honestly but they're let to run. And then you have like high yield investment fraud which is like the third type of investment fraud which basically is kind of like a Ponzi scheme but basically it's an investment scheme that sucks in a lot of money from a very small number of investors with a pool of money that's seeded by the initial like schemers and it pays out enormous dividends and those people basically take that money and they go to their friends and say look at how much money I just got paid out of the scheme and then a bunch of people pile in with their money and then people run off with it basically the perpetrators of the scheme run off with it. So it's a very like ephemeral Ponzi scheme if you will. And then you have like multi-level marketing companies um which are kind of a form of pyramid scheme except they're based very very heavily on recruiting and so they have a very kind of like cult like mentality. So things like I can't say this because they're all very litigious companies but maybe maybe you know some companies in the states that meet this criterion and so crypto happens to kind of like synthesize like different aspects of all of these frauds in different ways but it's not subsumed by any single one of them. So strictly speaking it's not a Ponzi scheme because there's no central operator. But it has the kind of obscured cash flow mechanisms and the robbing Peter to pay Paul. So basically paying out old investors from new investors, which is very Ponzi like it has the kind of recruiting mechanism that you see in pyramid schemes and the kind of downline mechanics between people bought early and bought later. There are certainly like DeFi products that look like high yield investment fraud or very ephemeral tokens that are kind of like one pump and dump tokens that look like high yield investment fraud. And you know they share the kind of cult-like recruiting mechanisms that multi-level marketing schemes have where they're not based on financial returns but on this kind of culture around the thing that we're kind of we're all pursuing financial liberation and be our own boss and you know we're going to create generational wealth through you know belief in this this missed message that has been brought down to us which is going to bring us into this financial utopia. And uh so cryptocurrency I think is a whole new type of fraud I think the history books are kind of kind of have a term for this but it kind of withdraws on all four of those categories to synthesize into this new form of it. And it's a very internet phenomenon. These things could not exist without technology and the scary thing is that these things can grow extraordinarily large like MADOff ran his fund for 20 years and it got to around 60 billion just to show you how these things can grow cryptocurrency is kind of like MADOff's fun. I think it can just grow to a very very large point but ultimately with all these frauds at some point outflows exceed inflows and there's only one outcome that happens.
SPEAKER_00Yeah you know I I think that's a really good description of the space and and all these different frauds that give us some kind of way to think about cryptocurrencies even though they don't necessarily fit into each category. And I would just say you know on the MLM piece that you that you brought up, you know, I'm I'm not specifically making this comparison but I saw someone on Twitter the other day say that cryptocurrencies were like Mary Kay for young men. So you know just uh that's just a tweet that I saw. Not something that I'm that I'm necessarily saying, right? Not necessarily inaccurate though. Yeah. And so you know we we've discussed what technologists think on this the divide between this we've discussed blockchain and and you know the various concerns around that the belief in decentralization as something more than what it really is and you know the issues that exist with cryptocurrencies. And I think now we're seeing this term Web3 emerge to kind of provide a narrative to kind of weave all these things together and make people believe that this is like the future of the internet, the future of you know digital technology and things like that. And you know one of your most recent blog posts was on the issue with this concept of web three um you know why it's this kind of like inherent marketization and you know a significant problem. So I think we should end with that question. You know, what is web three and what is the problem with positioning this as the future of the internet?
SPEAKER_01Yeah so my my last post is called Web3 is bullshit. So it's subtle uh the point that it's trying to get across but uh very subtle yeah it's subtle but um web three is kind of a marketing term. If you go to like a room of developers and you go up in front of them and say Web3, you're probably going to get laughed at because it it's it's like one of those words like I don't know agile or like you know synergy or something. Like it doesn't actually mean anything. It means whatever you want it to mean. So it's kind of a marketing term that several large investment funds have been kind of pushing. And my thesis is that largely it's because the crypto brand is so toxic at this point that it's basically synonymous with scams and fraud that people need a new word to talk about their allegedly legitimate businesses. And so Web3 has been kind of kind of said oh well what if we reenvision the internet and anytime somebody tells you that they're going to reenvision the internet uh you should take whatever they say with a very large grain of salt. In fact this is sort of the the punchline of several jokes I don't know if you've ever seen like Silicon Valley the TV show uh like that's the whole punchline of the entire show is that we're going to reinvent the internet. If you take the you know the biggest innovation that basically humanity has ever done and you start comparing anything to that, right, you know, it's always going to have this kind of aura effect around it like, oh well who wouldn't want to reenvision a more egalitarian internet. What's always lacking in these descriptions about Web3 is the details about how that will actually be achieved. And when I look at the people talking about what they're gonna build on top of Web3, number one, it's not really well defined because the terms not really well defined. Number two, it always basically involves some sort of blockchain technology. And number three it always involves one of these thinly veiled schemes by which the company basically launches some sort of product and they simultaneously launch a token alongside of it. And the thing about these token schemes that people have to realize is that there's a pre-sale that happens on these tokens. There's some very large investors that basically buy up most of the supply of this token of the space of tokens that will ever exist and they buy them for fractions on the penny. Right? And they buy this before the alleged company is even ever formed. And that gives them an enormous market advantage because you know you're sitting on like you know 90% of the supply of a token that will allegedly be used for some web application which will probably fail in the next you know year and a half. But they'll launch the token and then there's the application and allegedly the token is some sort of like you know it's like a slot machine like it's used to like push into the machine to get some sort of you know outcome or something or deliver some service. But in practice what most people are buying these tokens for is for price appreciation. They're buying them to basically you know to speculate on the price movements of the token. So of all the projects that are basically be pushed in web three they all look like sort of thinly veiled ways of basically issuing these tokens as sort of a proxy for equity in a company. And that's problematic because equity in early stage ventures is regulated as a security in the states and it's gated to a very small group of individuals who are basically sophisticated investors who are basically given the the risk and return to basically invest in early ventures. And it turns out when you invest in those kind of companies you typically have to wait for about 10 years before you can kind of sell those things to the public. So you can only sell equity in a c in a startup until it gets listed in an IPO. So if that's like 10 years, I mean that's a long time in terms of technology and it's a long time before the initial investors can actually realize their returns on their initial investment. So what you have is tokens are basically a way of circumventing that whole process. So you can launch a product and it can be the most alpha early stage thing that basically doesn't even work, but you can launch the token just like you would an IPO. And then you can offload that on the public initially. So people are speculating on what's basically like a six month old company which doesn't have a product, has no customers has no revenue has no semblance of a business model, but they have a token and the token has a market cap of you know $16 billion or something or some like you know DECA unicorn or something in Silicon Valley terms. And then what never really happens on these projects is that people like trade them on the speculative type of there being a ventral product. But usually the founders generally get rich off of you know the initial pump on the initial offering and then they exit and the product never manifests. And so this is what you saw with most of these so-called like initial coin offering companies. They're basically a thinly veiled way of basically getting around securities regulation and selling securities to the public directly on companies that were always doomed to fail. So on a macro level that's basically just a giant wealth transfer from the public speculating on what's mostly nonsense to early investors who bought into this pre-sale. And so I think a lot of people have kind of called the game on this thing. And so like people needed sort of new marketing term, a new umbrella by which we can kind of put this new class of ventures under. And I think Web3 has become that thing. It's still going to be used as a term to kind of promote decentralized applications which run on tokens now. And if I see the kind of arc of where some large investors want to take our industry is they want to turn every single app on your phone into like a pay-to-play slot machine where you have to purchase a token from this infinite array of rent-seeking token issuers and exchanges to run every single service that you currently use. And that we're basically going to put toll roads on every single aspect of the internet and basically everything is going to be a play-to-play slot machine because quite frankly these pay-to-play slot machines they feed into people's gambling addictions and they're a very lucrative business for people who get in early on them. Except they're basically a way of crippling everything that already exists and taking the abundance of you know computer power and gaining it and intentionally slowing it down and introducing artificial scarcity to do the things that we already do for sort of some handwavy notion of decentralization which doesn't actually hold up to water. And that's the way I see the whole Web3 narrative I think it's mostly marketing to kind of continue the gravy train of securities fraud.
SPEAKER_00Yeah and you know I think your description really illustrates to us why Web3 needs to be opposed in you know any and all form. I think I want to end with this quote from one of your blog posts just to leave this with the listeners. You write that web 3 is a rhetorical trick to set up a false dichotomy between the legacy internet world of pop-up ads and Zuckerbergs, which legitimately does suck, and a fantasy world built on technologically incoherent pipe dreams and phony crypto populism. Steven, you know I've really enjoyed the blogs, I've really enjoyed chatting with you today, so thanks so much.
SPEAKER_01Still be chatting with you Paris for good day.
SPEAKER_00Steven Deal is a software engineer and cryptoskeptic based in London. You can follow him on Twitter at SMDL you can follow me and at ParisMarks and you can follow the show at TechWon't Save Us. Tech Won't Save Us is part of the Harbinger Media Network and it is having a fundraiser this month. You can find out more about that at Harbingermedia network.com and if you want to support the work that goes into making the show every single week you can go to patreon.com slash tech won't save us and become a supporter. Thanks for listening