The Digital Gold Rush
Financial History Repeats Itself in a Lawless Vacuum of the US Wild West
We are all familiar with the popular memes telling us in crypto that we are “going West.” The idea of “going West” alludes to the exploration of the Western frontier of the United States in the 19th century, meaning that those of us in crypto are also heading into unknown terrain with new rules and norms. We are modern gunslingers with code as our law.
For all the popularity of this sentiment, a specific episode in the Wild West era offers even more apt parallels to the development of crypto today: the Gold Rush in the Black Hills of Dakota. The adventurers who settled the Black Hills faced similar opportunities and challenges we are now confronted with in crypto, making the gold rush a fitting analogy for the current state of crypto. While the Black Hills Gold Rush ended in a dark hour of U.S. history, future development of crypto and Web3 could offer a far happier ending.
The Black Hills Gold Rush
In 1874, General George Armstrong Custer’s Black Hills expedition discovered gold in a small mountain range in what is today South Dakota. This land had been granted to the Sioux Nation in the Fort Laramie Treaty of 1868, but that didn’t prevent thousands of prospectors from flooding into the region in hopes of striking it rich.
After a few years of rapid wealth creation resulting from gold mining, the U.S. Government reneged on its promises of sovereignty in the treaty with the Sioux and incorporated the Black Hills range into U.S. territory in 1876.
The HBO show “Deadwood” depicts a real boomtown in the Black Hills during the Gold Rush in 1876. Deadwood offers more than the typical drama series set in the Wild West. One major theme of the show is the prospectors’ reliance on the U.S. to incorporate the Black Hills area and the prospectors’ assets into the U.S financial system.
The gold miners and the infrastructure sprung up to supply them with the necessities of life operated in a lawless gray zone. The land they worked on belonged to the Sioux Nation and was not part of the U.S., therefore: U.S. laws did not apply in Deadwood.
The lack of U.S. jurisdiction over Deadwood generated enormous wealth for prospectors and businessmen who didn’t have to comply with any restrictions or regulations. Fortunately for the prospectors, taxation was not an issue because federal income taxes did not exist in the U.S. at the time. Some prospectors and clever entrepreneurs, particularly those specializing in vices like alcohol, prostitution, and gambling, quickly became extremely wealthy in the absence of laws and regulations. And while many in Deadwood enjoyed this way of life, the absence of the U.S. legal system deprived the settlers in the Black Hills of protection over their life, property, and other rights.
The settlers had to transport their gold via stagecoach to larger U.S. towns to deposit it in a bank, thereby introducing it into the U.S. financial system and allowing these pioneers to fully enjoy the fruits of their labor and business in the Black Hills. However, this arrangement was unsatisfactory to the settlers, and the only long-term solution was the extension of the territorial claim of the U.S. to the Black Hills area. The calculation was that this would offer retroactive legitimization to the businesses and wealth created in the relative legal vacuum of Sioux Nation.
The parallels to the evolution of crypto, of digital gold, are uncanny.
The Digital Gold Rush
The invention of Bitcoin can be regarded as the discovery of digital gold. Since then, all crypto ecosystem participants have also been operating, to a large degree, in a regulatory vacuum, in a lawless frontier. Even today, it is often unclear which transactions are legal and how they should be taxed.
Thanks to centralized exchanges and their off-ramps, there are now ways to convert crypto gains into fiat. Many investors found ways to take off chain the generational wealth they made in crypto. However, like the Gold Rush in the Black Hills, the market operates on the premise that sooner or later, digital assets will be accepted as legitimate sources of wealth and income, and that crypto may well supplant, and certainly forever augment, the legacy financial system. This much grander vision for crypto may be a sign that this Gold Rush will have a different outcome than the Black Hills Gold Rush in 1876.
Big Spending and Crime
Enormous wealth sitting in legitimacy limbo often results in conspicuous spending. Gold miners were paying exorbitant prices for basic necessities, tools, alcohol, and prostitution. Prospectors were gambling large amounts of money, living a lavish and expensive lifestyle, which they paid for in gold dust. Today’s crypto investors pay hundreds and sometimes hundreds of thousands of dollars worth of ETH (a mined resource like the gold dust of 1876) for NFTs. Those who convert their wealth into fiat sometimes spend lavishly on luxury items. “When Lambo” became a meme depicting some early crypto millionaires’ distorted sense of value.
The rapid accumulation of enormous wealth attracts bad actors too. During the Gold Rush, bandits regularly robbed stagecoaches transporting gold to Cheyenne, in neighboring Wyoming. Shady businessmen exploited the remoteness and lawlessness of the boomtown to defraud the often poor miners. Nowadays, we must contend with rug pulls, hacks, and protocol exploits. The recent drama around the project Wonderland, where a convicted felon became the steward of investors’ funds, echoes the phenomenon of outlaws and criminals becoming sheriffs and deputies out West.
Solving Coordination Problems
Another theme emerging from “Deadwood” is the attempt by the prospectors to create a self-governing system. They are wary of creating a parallel system of governance, fearing the U.S. would regard them as a separate national entity. Such an appearance would make the annexation a matter of international law instead of domestic politics. Reality soon forces them to establish institutions to take care of the essential government tasks. Even a lawless boomtown in the Wild West needs a sheriff to go after the most egregious crimes. A smallpox epidemic calls for organized vaccine distribution. By the end of Season 1, Deadwood has a municipal government.
The show is a Wild West series that is also a story about how people need to organize themselves. Similarly, crypto’s original promise was to fix the financial system after the crash of 2008. Crypto has since grown into an improved coordination tool. One only needs to look at DAOs, which use tokenomics to incentivize certain behaviors to see how crypto can improve coordination through incentive alignment.
Many of these structures grew organically out of the need to coordinate large groups of people in the crypto space. And crypto itself emerged as an excellent tool for this task. In contrast, these complex coordination systems were absent in the Black Hills. It was extremely challenging to create institutions and governance systems. The result: the Wild West.
Crypto Is Its Own Source of Legitimacy
The further we go down the rabbit hole, the more the parallels between the Gold Rush of 1876 and crypto break down. No comparison is perfect, but the differences between the two are fundamental. Most importantly, the expectations of the outcomes could not be more different.
The gold prospectors in 1876 expected to be able to fold their economy into the existing U.S. system and eventually be able to rely on its powers to protect their economic rights and claims. Deadwood and other settlements in the Black Hills were de facto U.S. towns from the moment of their establishment, even if de jure they were outside U.S. borders.
Crypto investors aren’t a homogeneous group. Some do expect crypto markets to merge into the existing financial system. However, crypto’s most enticing promise is the establishment of a new blockchain-based financial system. Many participants committed to this vision hope that the legacy financial system itself will fold into crypto and migrate on chain.
This difference is more crucial than it might seem at first glance. As a result of the Gold Rush, the U.S. appropriated the lands granted to Native peoples. What followed was a bloody war between the U.S. and the Sioux Nation. U.S. forces suffered several defeats, such as at the Battle of Little Bighorn. Nonetheless, the U.S. forces crushed the Sioux Nation and other tribes with all the might of an industrialized nation. In the pursuit of the war, the U.S. resorted to destroying the dwellings and property of the Sioux and deprived them of food with the so-called Sell or Starve rider to force the Sioux to give up their land.
Protection of economic rights with the military might of a nation-state is antithetical to crypto and Web3. In crypto, enforcement of property rights is automatic and does not involve trade-offs of different rights connected with violent enforcement. These consequences of centralized systems are one of the reasons why proponents of decentralization and code-based systems are devoted to creating an alternative to the legacy financial system.
Property rights encoded on a blockchain are protected by a neutral code not beholden to a country and its politics. Immutable records and code are immune to violent or even legal interventions by state actors. The code doesn’t rely on enforcement by might and cannot serve as a reason for atrocities and genocide. Crypto is the source of its own legitimacy.
Mark Twain famously said that “history does not repeat itself, but it often rhymes.” Let’s hope that the next verse is an ode rather than a tragedy.
Author Bio
Dimitri Litvin writes to bridge the divide between the world of traditional finance and crypto, DeFi, and NFTs. He is fascinated to explore how technology changes how we live and do things.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
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