LAST WEEK AT Bloomberg, Matt Levine wrote a 40,000-word piece, devouring an entire issue of Businessweek: “The Crypto Story: Where it came from, what it all means, and why it still matters, a purported explainer for “crypto.” Readers justly admire Levine’s writing. He is a fair and open-minded member of the financial press, with superfine establishment credentials as a lawyer and a former investment banker, and a lively, bouncy style of writing. He warns readers of this huge piece that he is not “a deeply embedded crypto expert.” He is, however, kind of an emissary for traditional finance, and so his understanding of cryptocurrency inescapably proceeds from that point of view.
The most interesting thing about Levine’s blockbuster–full of dad jokes and goofy superhero images—is that it’s a definitive sign of the financial establishment’s acceptance of blockchain technology, and of cryptocurrency, though on terms yet to be settled. His is the first piece I’ve read in the mainstream press that treats crypto as something that everyone should know about, a subject important enough for 40,000 words in one of the country’s biggest financial outlets, from one of its best-credentialed and most popular columnists.
Toward his readers, Levine is entirely confiding, easy and friendly; toward his topic, he maintains the aloof and superior, amused and just slightly contemptuous tone of a venture capitalist faced with a green, hopeful founder and a pitch deck that is a little too compelling to dismiss out of hand. This too is a sign of the financial establishment’s volte-face on crypto, wheeling as it has from downright loathing to the curious and condescending public approval—and eager behind-the-scenes participation—we’ve seen over the last five years or so. In September 2017, for example, JP Morgan CEO Jamie Dimon famously said that Bitcoin was “a fraud,” “worse than tulips,” and claimed he would fire any trader involved in crypto “in a second”; by February 2019, his company had joined forces with Ethereum’s venture arm, ConsenSys, to produce the “JPM dollar,” a crypto-based digital coin.
For Levine, writing in Bloomberg, crypto is “charming,” “interesting,” “cool” and “elegant”; “extremely funny,” even “incredibly beautiful.”
If you’re a certain sort of financial person—a financial engineer, an arbitrageur, a market-structure enthusiast, a builder of high-frequency trading systems—this abstract set of facts is incredibly, incredibly beautiful. You wake up one day, and there’s just a whole other financial system. It’s full of smart people building interesting things, and it’s full of idiots making terrible mistakes […] It’s so interesting, so intellectually appealing, such a blank canvas for all of your aesthetic views about how markets should work. Also, so many idiots are getting rich; why shouldn’t you?
“The Crypto Story,” Section III
In short, this piece gives the squares and the teacher’s pets, who’ve spent the last 14 years scoffing, a pass to get on board.
That whole time, though, people have held wildly different views on the question of “what it all means, and why it still matters,” not only with respect to cryptocurrency but to blockchain technology more generally. For Levine, “crypto” is all about money; for me, it’s all about tamper-proof recordkeeping; for others, it’s a revolutionary political tool, or just a game.
Progress on the many problems that blockchain can address will not really snowball until the global regulatory environment stabilizes, as many early participants learned the hard way: Civil, for example—the blockchain-based publishing platform that originally funded this publication’s launch—crashed into a series of regulatory buzzsaws and was forced to shut down in 2019. How can you keep afloat when you’ve followed every rule and then, surprise! the rules change, and your token might suddenly be illegal?
The regulatory smoke has cleared some since then, and there are now too many real-world blockchain-based projects to count, though Levine doesn’t mention them: tracking ethical sources of cobalt and palm oil; coordinating healthcare benefits, cutting the time to determine a primary insurer from months to minutes; tracking auto parts for global regulatory compliance; streamlining container shipping, so that a specific container can be tracked in seconds rather than hours; food traceability projects by the dozen; safeguarding against counterfeit pharmaceuticals; trading reclaimed and purified agricultural water; preserving government datasets from around the world. These real-world experiments and many more are taking place in the context of a business environment still subject to raging volatility, as thieves, governments, and industries all over the world battle to get their way.
So one key thing missing from Levine’s primer is the distinction between cryptocurrency as a store of value and medium of exchange (the finance part), and cryptocurrency as a utility token that can be used for keeping track of things in a distributed way (what you might call “web3”). The latter category represents a vast amount of investment and development activity.
Though Levine’s is a pinhole view, there’s no question that a lot of his massive piece is both accurate, and valuable. The Ethereum parts are great, and when he hits his stride on the crypto analogues to traditional finance, he’s amazing. But again, he can’t help seeing crypto largely as a set of new tools for the delectation and profit of finance. To understand what it means that crypto and traditional finance are converging on one another, it’s crucial not to lose sight of the original, antagonistic relationship between the two.
In the so-called genesis block, the first Bitcoin transaction ever, which took place in the thick of the 2008-2009 global financial crisis, the currency’s pseudonymous originator, Satoshi Nakamoto, inscribed a comment:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
This was a reference to a specific article in the Times that same day, which read in part, “The Chancellor will decide within weeks whether to pump billions more into the economy as evidence mounts that the £37 billion part-nationalisation last year has failed to keep credit flowing.”
Shenanigans are afoot, Satoshi meant, in other words. The banks are ripping people off, and I’ve figured out a way to address this problem. Bitcoin was explicitly launched into a world where financial institutions had failed, and failed visibly, and dramatically. It seems safe to say that this is not the framework of understanding underpinning any piece that will ever appear in Bloomberg.
In 2008, Satoshi Nakamoto published a method for everyone to run a database, thus inventing “crypto.”
Well, I’m not sure that’s what Satoshi thought he was doing. Most immediately he was inventing Bitcoin: A Peer-to-Peer Electronic Cash System, which is the title of his famous white paper.
“The Crypto Story,” Section I, Part C
Napster, founded ten years before Bitcoin, was “a method for everyone to run a database,” yet it never invented a single “crypto.” Napster had tens of millions of users at its peak, before going down in flames after losing a bunch of lawsuits in 2001. By the time Satoshi Nakamoto published the Bitcoin white paper, decentralized databases had long since evolved into a mature branch of computer science.
In fact none of the separate parts of Bitcoin’s design (cryptographic techniques, timestamps, digital signatures, peer-to-peer networks) was an original invention. It’s the unique way in which they were combined to solve the “Byzantine General’s problem” of preserving data integrity over a network that enabled Satoshi Nakamoto’s launch of the world’s first real cryptocurrency. Though Satoshi is often credited with having been the first to solve the Byzantine General’s problem, his solution wasn’t the first; others predated him by years. The difference was the complete decentralization of the Bitcoin network and the means of validation, which rendered Satoshi’s method prohibitively (and increasingly) difficult to game.
For the past few years the most polarizing thing in finance has been crypto. Crypto is a set of ideas and products and technologies that grew out of the Bitcoin white paper. But it’s also, let’s be clear, a set of lines on charts that went up.
“The Crypto Story,” Section I, Part C
Yes and no. “Many people who got into crypto early got very rich very fast and were very annoying about it,” Levine says, which, sure, but there’s more to the story. In reality, the lines have fluctuated to an insane degree, so it all depends on where you choose your endpoints; those who bought Bitcoin in late 2017 and held it through the crypto winter of 2018 would not have had the sense that the lines were carrying them inexorably upward.
Later in the piece, Levine characterizes 2022 as crypto’s 2008—its moment of reckoning, analogous to the banking crisis in which all sins were suddenly revealed. Lol not hardly. The oft-ravaged landscape of crypto had altered dramatically many times by then.
If you look at the history starting in 2009, a ton of people, many of them awful, got rich in crypto and bought Lambos with their instant fortunes, but then a whole lot of them lost their shirts, and then all that happened again and again, in 2011, in 2013, and 2014, and 2017; businesses rose and fell, there were outrageous triumphs, and terrible crimes; and all the while, the world of blockchain fractured into a thousand different paths and goals. The history of cryptocurrency hasn’t just been volatile, it’s been incendiary.
The above chart, for example, is from CoinMarketCap, a site for stats that did not yet exist in June of 2011, when Bitcoin prices crashed—a harbinger of the disaster that would befall the markets in 2014, when MtGox, then the world’s largest crypto exchange, lost 850,000 of its depositors’ bitcoins. In fact, 11 years ago, well to the left of the chart above, there was even a flash crash during which you could briefly buy one Bitcoin, current price roughly $20,000, for one cent.
[Millions of people just have] some Bitcoin, trusting that everybody else will maintain the system correctly. Their basis for this trust, though, is slightly different from the basis for your trust in your bank. They could, in principle, verify that everyone verifying the transactions is verifying them correctly.
“The Crypto Story,” Section I, Part C
“In principle” might suggest something more complicated than visiting a website and putting your transaction number in, which is all it has ever taken. Right from the start, crypto users have been able to verify transactions for themselves, in very fine detail, through searchable online copies of the ledgers; and that is the kind of transparency that a lot of participants in these markets, even casual ones, find inspiring and cool. These lookup services are called “explorers”; the first one I ever tried was the one at blockchain.info (now blockchain.com, apparently). Every crypto token has these, like Etherscan.io for Ethereum, and Snowtrace.io for Avalanche.
The do-it-yourself options and opportunities for using these systems have always been streets ahead of what any bank can offer. Crypto is risky and dangerous as all hell, but then again it’s also really exhilarating to watch money shoot across the internet and into your friend’s wallet far away, based on little more than your own command.
Not this, again!
Mining Bitcoin uses as much electricity as various medium-size countries. This is not great for the environment.
“The Crypto Story,” Section I, Part C
Next-generation blockchains like Ethereum, Solana and Avalanche are already using the far more efficient consensus mechanism called “proof of stake,” which consumes like 99 percent less electricity than Bitcoin’s “proof of work” method does, as Levine points out later on. A case can be made that the original energy-intensive proof of work consensus is already obsolete and on its way out. (That’s the system we were talking about earlier, Satoshi’s solution to the “Byzantine general’s problem,” which in effect set up a computational arms race, where the odds of mining bitcoin rise with computing power; proof of stake systems require participants to risk money for a reward, not by buying electricity, but by staking cryptocurrency.)
Still, though, the claim that Bitcoin uses “as much electricity as various medium size countries” makes no sense, as I’ve said before, and for a number of reasons: the world’s economies are interconnected; “medium-size countries” don’t use some bounded, measurable amount of electricity each year; and Bitcoin’s energy consumption consists to a significant degree of excess production, such as gas flaring and surplus hydroelectric power, that would otherwise go completely to waste. Remember, Bitcoin miners are making money out of their investments in electricity, and have spent unimaginable sums to ensure their access to the cheapest available, all over the world. Computing energy experts like Jonathan Koomey and others have been correcting the errors in the “medium-sized country” argument for years now.
The facile, out-of-context way the “medium-sized country” argument is trotted out makes a false scapegoat of Bitcoin, when the real and infinitely larger villain is all around us (starting, say, with the global political system of petrodollars undergirding the US dominance of global finance).
Socially, cryptocurrency is a coordination game; people want to have the coin that other people want to have, and some sort of abstract technical equivalence doesn’t make one cryptocurrency a good substitute for another. Social acceptance—legitimacy—is what makes a cryptocurrency valuable, and you can’t just copy the code for that.
That’s a revealing fact: What makes Bitcoin valuable isn’t the elegance of its code, but its social acceptance. A thing that worked exactly like Bitcoin but didn’t have Bitcoin’s lineage—didn’t descend from Satoshi’s genesis block and was just made up by some copycat—would have the same technology but none of the value.
“The Crypto Story,” Section II, Part A
“Social acceptance” is a very inexact way of describing what makes a cryptocurrency valuable. “The technology” isn’t just the code, it’s the people maintaining the code. It’s the people using the code. I guess you could say a poststructuralist view of crypto would be better and more accurate, just like it is in literature. The phenomenon is a whole complex world that cannot be understood, can’t even really exist absent the consideration of all participants.
There are certainly “crypto bros,” like those Levine describes above; maybe they want to show they admire Elon Musk by hodling Dogecoin, maybe they’ve been scammed by some weirdo on YouTube. Take a step forward from there, maybe they’re into the Greater Fool Theory.
Governance is a crucial aspect Levine doesn’t really go into, but any student of Bitcoin’s early days can tell you that lapses in this area—leaving too much decisionmaking power in insecure hands—have led to many crises, including those at the Bitcoin Foundation and Terra Luna. There have been good stewards and bad, as with any human institution. I’d go so far as to say that without the imperturbable guardianship of Gavin Andresen, Bitcoin’s chief technologist in its early days, the project would have failed in its infancy. He steered Bitcoin through catastrophic bugs, he was invited to speak on it by the CIA (and went), he blandly announced that he expected he’d have to pay taxes on his gains, that he considered US regulators “reasonable,” and that he anticipated that some governments would try to ban Bitcoin; he advised people not to risk more time or money on it than they could afford to lose.
The people in charge, they matter a lot, here as anywhere in business. And yes, there are people in charge of every single one of these decentralized blockchain systems: the so-called “core devs” who have commit authority, that is, the credentials required to make permanent changes to the software. Every project has core devs who have the ultimate control over the code that governs any given blockchain—but no core dev has the ability to alter the ledger of a real blockchain.
The people who count in these markets, by which I mean those who are creating utility and value, approach them like grownups—by weighing the fundamentals of any given project. Who the management team is, the business case, the consensus model, whether interest is growing among engineers based e.g. on Github activity, and other basic facts that can help determine a project’s utility, its apparent resilience and thus its likely chances of success. “Social acceptance” in the sense of just “wanting what other people have” doesn’t rate much in any meaningful assessment of crypto valuations. Again, very like the stock market.
In judging the progressive acceptance of crypto into the world’s markets, it’s a good idea to remember the five pillars of blockchain, as described by Andreas Antonopoulos: a real blockchain is “open, public, borderless, neutral, and censorship resistant.” Absent these five characteristics you’re likely looking at a scam, or some project to subvert the original aims of crypto, whether it’s sponsored by Mark Zuckerberg or some weirdo on YouTube.
Related: the current banking system is tilted toward big money, and big money does not care for competitors.
This brings us to an aspect of Levine’s piece that isn’t erroneous so much as slanted: he fuzzes out the importance of the difference between public and private blockchains. “Big public blockchains are generally not something a banker is going to like,” he observes mildly.
(And that is the fucking point, pal!)
Having all transactions be public is good for security (everyone can verify that everything is correct) but also bad (if your transactions are meant to be secret). It’s also just sort of icky for regulation.
“Who makes sure that your transaction records are correct?” a bank regulator will ask, and the bank will answer, “Well, we don’t really know, but we think it’s some mining pools in Russia,” and the regulators will get nervous.
“The Crypto Story,” Section II, Part C
This is really sideways. Any distributed public blockchain is transparent, and anyone can determine instantly and exactly how and where its records are produced, recorded and stored; again, that’s the point! In an open public blockchain, the distributed public ledger ensures that your transaction records are correct. Oy.
But many of the basic ideas of a blockchain—a ledger of every transaction that’s demonstrably shared by every computer on the network—can be implemented privately. Also, what’s to stop a gang of crooks from creating a private ledger and claiming the halo of trustworthiness for themselves? If you’re seeking to persuade the public to trust your institution, without the five pillars you are pretty much back to square one.
If you get together with 11 of your friends and agree that the 12 of you will do transactions with one another, keep a ledger, verify all the transactions, and use cryptographic hash functions to make sure the ledger isn’t changed, then you can just do that. If you all trust each other and don’t let anyone else join the network—or if you let only people you trust join the network—then you don’t have to worry about malicious miners taking over your network. It’s just you and your friends.
This has advantages for security, particularly for explaining security to bank regulators.
“The Crypto Story,” Section II, Part C
Whatever! A private system like this may have its private uses. But it ain’t a real blockchain. Taking crypto private is exactly what the bankers would like to do, obviously. (And they have tried it, with a coin called Ripple).
[O]ne important possibility is that the first generalization of Bitcoin, that an arbitrary tradeable electronic token can become valuable just because people want it to, permanently broke everyone’s brains about all of finance.
“The Crypto Story,” Section II, Part A
The token didn’t become valuable just because people wanted it to (though some people certainly just wanted it to). Bitcoin became valuable because it is a unique and reliable system for providing unfalsifiable records.
Earlier in the piece, Levine marvels, with good reason, at how arcane and silly the process of buying a house is.
Don’t even get me started on the property registry. If you buy a house, you have to go to a ceremony—a “closing”—where a bunch of people with jobs like “title company lawyer” mutter incantations that let you own the house. It can take hours.
“The Crypto Story,” Section I, Part B
The incantations are necessary because the information is pollutable. If it weren’t, there’d be no need for a ceremony; instead, the moment the escrow company took possession of the relevant documents and deposits, title would transfer to you, the new owner, automatically, via smart contract: no incantations required. That is the promise offered by five-pillar blockchains (and only by five-pillar blockchains); with the aid of a solid smart contract, you and the seller and the realtors and everyone else involved would be able to look up and verify each bit of the transaction in real time, with no need to wait to hear from banks or title companies or escrow or anyone.
It’s altogether possible that the titans of finance, government and Silicon Valley will eventually succeed in perverting the original goals of Bitcoin—independence and transparency for individual users, and an end to the hegemony of the global banking system—gain control of all digital currency, and eradicate the world’s open public blockchains. But that may not be so easy, provided regulations develop in a healthy way, and media is clear enough, and loud enough, about the danger. For example, Facebook announced the creation of Libra, its own private cryptocurrency, in 2019; as many crypto watchers predicted, that project failed, and the token never launched.
I’m not a finance guy, but as you’d expect, I saw no errors in “The Crypto Story” regarding anything specifically to do with finance—TradFi vs. DeFi, leveraging, stablecoins algorithmic and otherwise, margin calls, collateralization, AMMs, hedging contracts, and so on. This is where Levine shines, and his explanations are clear and a pleasure to read. The explanations of staking and wrapped tokens, in particular, are the best I’ve seen; I can just almost barely say I understand them now.
This stuff to me is like… OK, I agree with Levine that it’s extraordinary and weird and compelling that an entire new financial system just basically burst into existence over the last ten years with no warning. But the jury is still way the hell out, much too far out for me as a very small and risk-averse investor, in fact, so I can’t help kind of tuning out on all that. The parts of crypto that interest Matt Levine don’t really matter to me, though I’m fairly interested in markets, and have been studying blockchain for more than a decade.
He’s so in love with the cha-ching aspects of this thing that the last bit of his piece founders and loses focus, mired in dreams of avarice regarding the myriad of new opportunities for arbitrage and other legal exploits that could bring a clever participant instantaneous wealth.
… so many idiots are getting rich; why shouldn’t you?
Levine’s biases in favor of the current financial system are on full view at the end of the piece, wherein he claims that the history of traditional finance shows how it is tethered to the real world legitimately, unlike crypto.
[Using traditional financial instruments, participants] could buy bigger houses, because they could borrow money from banks. They could also trade out-of-the-money call options on GameStop, because that’s fun and you can make memes about it, but that’s an accidental feature of a financial system that mostly does serious stuff in the real world.
“The Crypto Story,” Section IV, Part D
No it doesn’t, and that’s why we needed open, public blockchains in the first place. The financial system parted company with the real world many, many years ago, a simple illustration of which may be seen in the increasing share of US GDP represented by financial services, which went from 4.9% in 1980 to 7.9% in 2007, right before the Great Recession. Some economists argue that banking is beneficial to people, but another way of looking at it is that the bankers have wound up with too much of everyone’s money at the expense of better education, food, and healthcare and other services for everyone.
Which brings us to the eternal and crucial misapprehension of all those who’ve dedicated their lives to longstanding and venerable institutions such as Wall Street and the legal profession, namely, that these institutions are specifically and validly connected to and “built up from” the “real world”:
When you think about modern finance, you often think about things like those GameStop options, or the system of payment for order flow that enables their trading, or synthetic collateralized debt obligations referencing other CDOs referencing pools of mortgage-backed securities. There’s a house there somewhere, under the CDO-squareds. All the sophisticated modern finance can be traced back, step by step, to the real world. Sure, it’s a lot of steps now. But the important point is that sophisticated modern finance was built up, step by step, from the real world.
“The Crypto Story,” Section IV, Part D
These chaotic early years of the 21st century have shown us that not a single institution has proven as stable or reliable, nor as “connected to the real world,” as we were taught to believe in the 20th. It’s impossible to read Levine’s views on “sophisticated modern finance” without recalling that, during the mortgage crisis, these institutions were frequently quite unable to connect loans to house titles through any proper unraveling of financial instruments. Instead, they just basically steamrolled over any responsibility to represent underlying reality, in favor of making sure finance didn’t lose its claim on the money. And then millions of people lost their houses, many of them in ways that any sane person would judge as illegal.
But despite all the evidence, a lot of institutionalists—establishment lawyers and bankers, neocons and neoliberals, et al.—still desperately want to believe. Levine tries to make a contrast between the “epiphenomena of finance,” based in the real, and the relative flimsiness of crypto:
Crypto, meanwhile, has built a financial system from first principles, pure and pleasing on its own, unsullied by contact with the real world… it’s attracted a lot of finance people who also enjoy contemplating it, and getting rich. And their task is to build back down, step by step, to connect the elegant financial system of crypto to the real world. You’ve built a derivatives exchange, cool, cool. But can a real company use it to hedge a real risk facing its real factory? You’ve built a decentralized lending platform, awesome. But can a young family use it to buy a house?
“The Crypto Story,” Section IV, Part D
I submit he has this backwards. It was abrasive contact with the contamination of the finance industry that angered Satoshi Nakamoto enough to produce an alternative. It’s the untethering of money from the real world—the creation of a society that puts the objective of profit before all—that necessitated the invention of Bitcoin in the first place.
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