Crypto’s bad incentives are dying

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Jill Gunter is a co-founder of blockchain com­pa­ny Espres­so Sys­tems. Pre­vi­ous­ly, she was a ven­ture cap­i­tal­ist focused on cryp­to. She start­ed her career as a trad­er at Gold­man Sachs.

Char­lie Munger is very quotable. Some of the things he has said that have stuck with me are “cryp­to is an invest­ment in noth­ing” and “cryp­to is like some vene­re­al dis­ease”. Ouch.

To be hon­est, Munger’s assess­ment of the cryp­to indus­try as it has devel­oped over the past five years doesn’t actu­al­ly strike me as unfair. The Hin­den­burg of Sam Bankman-Fried’s FTX is only the lat­est in a long suc­ces­sion of dig­i­tal-asset dis­as­ters that have burnt investors. 

How­ev­er, these cat­a­stro­phes have not been a result of the under­ly­ing tech­nol­o­gy being fun­da­men­tal­ly bad or bro­ken or evil. Rather, they are the result of anoth­er Munger max­im: “Show me the incen­tive and I will show you the outcome.”

Since the ear­ly days of the cryp­to indus­try, the incen­tives have just been about mak­ing mon­ey. These incen­tives have, unfor­tu­nate­ly, held the indus­try back from focus­ing on cre­at­ing actu­al, real utility.

In many cas­es, mak­ing mon­ey means quite lit­er­al­ly “cre­at­ing your own cur­ren­cy,” as Munger has also deri­sive­ly called cryp­to. While some looked at bit­coin and said, “wow, some­one invent­ed dig­i­tal gold” a lot of peo­ple just looked at it and said: “Wow, some­one just made up their own mon­ey. I could do that too.” 

Doge­coin is a rebrand­ed riff on bitcoin’s code­base, which on paper today has a val­u­a­tion of almost $10bn. It is one of the ear­li­est exam­ples of some­one mak­ing up their own token. Per­haps fit­ting­ly, the man who cre­at­ed Doge­coin as a joke has gone on to become a vocal cryp­to sceptic.

The “alt-coins” like Doge­coin that were cre­at­ed in the ear­ly days of the indus­try gave way to the Ini­tial Coin Offer­ing (ICO) hype of 2017 and 2018. These ICOs raised tens of bil­lions of dol­lars in non-dilu­tive cap­i­tal through the cre­ation, issuance, and sale of tokens often with­out hav­ing cre­at­ed or deliv­ered any work­ing prod­uct. Some of these enter­pris­es did go on to deliv­er on their promis­es and yield­ed mean­ing­ful returns, but many oth­ers . . . how shall I put this? They did not.

This is an indus­try where a per­son can copy some code, super­im­pose the image of a good dog­gy on a yel­low back­ground, and cre­ate $90bn of appar­ent mar­ket val­ue (at all-time highs). If this is the incen­tive, what did we expect in terms of outcome? 

Of course so much of the ener­gy in the cryp­to world has gone towards try­ing to cre­ate mon­ey out of thin air, whether in the form of dog coins or mon­key JPEGs, instead of cre­at­ing durable util­i­ty and real con­sumer val­ue. For many peo­ple, if you can make hun­dreds of mil­lions of dol­lars sell­ing dig­i­tal pic­tures of pri­mates, you are not going to spend time ask­ing hard ques­tions about the util­i­ty of what you are offer­ing. If you can get away with a mon­ey grab, you are not going to stick around to try to cre­ate value.

There are many who today write off cryp­to as “dead” because it has not deliv­ered any sub­stan­tial, main­stream util­i­ty despite over a decade of exis­tence and tens of bil­lions in fund­ing dumped into the space. This is not quite fair, though: only a frac­tion of that time, ener­gy, and mon­ey has gone toward a mean­ing­ful search for util­i­ty. The incen­tives around the cryp­to mar­kets have been tox­ic for years: make token; watch num­ber go up. 

It is not all bad though. I’d argue that even amid the grift and mon­ey-grab­bing, there has already been some real val­ue cre­at­ed by earnest projects. While these efforts have often been more under-the-radar, resist­ing the temp­ta­tion to get a quick cash-out or spon­sor sports teams, they have made strides to uncov­er actu­al appli­ca­tions for crypto’s technology.

At the same time that Doge­coin was being devel­oped as a joke (a fun­ny one at first!), Zcash was mak­ing break­throughs in applied cryp­tog­ra­phy to enable pri­va­cy for blockchain-users. Ethereum raised fund­ing back in 2015 before it had a ful­ly fledged prod­uct, but has more than deliv­ered on its promise of cre­at­ing an open, decen­tralised devel­op­er envi­ron­ment with con­tracts enforced by code.

Many oth­er projects have made strides toward deliv­er­ing infra­struc­ture suit­able for more main­stream cryp­to use cas­es and devel­op­ing the appli­ca­tions them­selves. This has hap­pened despite the industry’s incen­tives. This helps explain why cryp­to fac­tions that are not so mon­ey-moti­vat­ed tend to be dom­i­nat­ed by ide­o­logues (read: weirdos) and hard­core enthu­si­asts (read: nerds).

Among the weirdos and nerds of cryp­to, sen­ti­ment over the last two weeks has been mixed. On the one hand, there is a real despon­den­cy that so much dam­age has been done to the vic­tims of the FTX fall­out, cou­pled with a sense of dis­gust with the state of the indus­try that rivals Munger’s. On the oth­er hand, there is opti­mism, because as of last week the par­ty is over. The incen­tives have changed. 

The sink­hole of spec­u­la­tion that has sucked in atten­tion, time, mon­ey, users, brain­pow­er, and builders over the last sev­er­al years is final­ly clos­ing. Per­haps an oppor­tu­ni­ty to focus on build­ing prod­ucts with real util­i­ty is emerg­ing — some­thing Munger might actu­al­ly approve of?



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