CRYPTO AND THEORIES OF VALUE
Eight Models of Blockchain Value
The sector is getting written off as an irredeemable dumpster fire of radioactively toxic proportions
With the latest round of crypto industry horror stories reverberating around the space and highly leveraged crypto exchanges getting written off as an irredeemable dumpster fire of radioactively toxic proportions, what is happening is a clear out of the grifters and incompetents that rush to any new, potentially lucrative, field to try and grab as much of the cash as they can before they get found out or the roof caves in. That does not mean the field is intrinsically cratered, the underlying structures remain sound, their value is in how they are used, so let’s look at “theories of value” for crypto — why is this industry worth working in, what’s going on and what went wrong.
There are a variety of theories about how crypto might make you money, some pathological, some reputable
Let’s start with the primal root:
There are a variety of theories about the different ways crypto might make you money. Some of those ways are pathological, some reputable.
1) Bitcoin is a hedge against US dollar inflation — Lots of people have believed that, but it’s not been borne out in practice.
2) Transactional efficiency — a wire transfer takes four days and goes wrong 5% of the time. It’s simply easier and cheaper to send tokens. This is truer than ever because of L2s.
3) Speculation — as traders try to out-guess each-other and “the market” (an aggregate of many others traders). Zero sum: every dollar made was lost by somebody else, unfortunately. It is essentially gambling, it needs both skill and luck to work. Tough, risky but legal.
Bear Stearns and FTX had almost exactly the same business model, and failings
4) Exchanges, market makers and so on — taking a little slice off the top of crypto-to-crypto transactions and crypto-fiat transactions. This is not new, it is what currency exchanges have been doing since the dawn of time. This is fine if that is actually what the exchange is doing, FTX was not. Basically FTX was not *really* a crypto company. FTX was a tradfi company that was buying and selling crypto assets. Bear Stearns and FTX had almost exactly the same business model, and failings, at the end of the day, and it took both of them down, flamboyantly torching vast amounts of value on the way.
5) Collectible digital property (NFTs etc.) — in which inherently valuable new things are created on-chain and sold. Also covers play to earn and similar things. The risk here is that the things don’t necessarily remain inherently valuable.
6) Lending and particularly flash loan - good old fashioned usury, but for flash loans, a 100% guaranteed return because if the smart contract does not return the capital, the smart contract aborts the transaction and the loan is never made in the first place. Uses old school banking skills, minus all that cumbersome regulation. What could possibly go wrong?
7) Ponzi schemes — Why take a slice when you could just eat the entire cake? Something that looks like an investment, but is just using the capital from people who think they are investing to steal other people’s capital. Flat out crime — hugely profitable until they get found out, then very bad.
8) Novel security services - like ENS and using Metamask to log into things. Self Sovereign Digital Identity fits here. And, of course, crypto “itself” — that’s bitcoin mining, Ethereum staking, hardware wallet manufacture, and all the rest.
I want you to note how much of the action in crypto is things *pretending* to be one kind of value, when in fact they are Ponzi schemes and zero-sum trade games.
The distinction between Ponzi schemes and regular trading is important
Take most NFT projects: the NFT has value for three reasons.
A) It’s art and you’re buying some kind of a right/licence (transferrable proof of patronage + legals)
B) It’s an object for a Ponzi scheme to attach to.
C) And there’s also “legitimate” speculation on future value.
The distinction between Ponzi schemes and regular trading is important. If people are “wash trading” (buying their own NFTs to make it look like they’re selling better than they are) then usually the NFT collection has Ponzi-like characteristics. Wash trading is simply fraud.
This is where the Perez Cycle comes in
So, where does that leave us now? Well, this is where the Perez Cycle comes in. To sum it up, essentially what happens with a new technology is there’s an installation phase where new technologies create new ways of doing business and solving problems, everyone gets very excited, stuff gets hyped, bubbles happen, and grifters and scammers jump on board and exploit the tech to make quick bucks in dubious ways. Everything becomes overinflated and unstable, the bubble eventually bursts, a lot of people lose a lot of money and a few go to jail and everyone else says ‘phew, thank god that’s over, we’ll never go near that stuff again’. Once the dust clears and the madness dies down, rational actors look at what’s left standing and take over the tech to do something unflashy and useful that actually makes money in a sensible way over the long term. We saw it with the dotcom boom, and no doubt we’ll see it again with whatever creates web 4.0.
humungous amounts of value have been torched…the authorities are rounding up the felons
In the meantime, we’re at the point where the hype has happened, the bubble has burst, truly humungous amounts of value have been torched, all kinds of people are trying to put as much space between themselves and the blockchain as they can, and the authorities are rounding up the felons.
The ‘Great Disinfection’ is in progress
The ‘Great Disinfection’ is in progress — this is going to flush out the dubious use cases and leave the legitimate ones standing ready for the grownups to move in (would you really trust your money to someone who dresses like a toddler, even when interviewing presidents, and apparently can’t tie his shoelaces?).
The actual architecture of the blockchain is sound
The actual architecture of the blockchain is sound, it’s just a really good ledger, just as NFTs are just very useful receipts. Even the blockchain’s harshest critics admit that the technology works perfectly.
The problem has been that to date it’s been loaded with shonky assets with a propensity to blow up in investors’ faces. Moving forward it has potential to facilitate trade in stable, reputable, long established real world assets like gold and real estate, and Mattereum will be there to help make that happen.
My presentation to the London Blockchain Summit that gives some more context to all this:
…and the transcript
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