Financial incentive, maximalism, and the unnecessary tribalism of crypto
Why tribalism is rampant in crypto and what we can do about it
The cryptocurrency industry is a fascinating space. It elegantly blends the disciplines of finance, technology, and cryptography into a brand new beast that offers novel solutions to old problems.
There’s a lot to appreciate in what we’ve accomplished already. Crypto is making a real impact in areas of economic strife. Crypto-enthusiasts are passionate supporters of building awareness, real adoption, and have some of the best meme game on the Internet. On top of that, some of the most brilliant technological minds are joining up to look into how we can use it to level up the Internet.
All that being said, one aspect of the industry that has always frustrated me is the belief that there will some day be one coin that dominates over all the others. This view is termed “Maximalism” and it is holding back this nascent industry.
Cryptocurrencies naturally foster maximalism through its use of financial incentive. It’s understandable that we’ve gotten to this place, but if we can find a way to understand why it’s happening and how we can take a different view, the cryptocurrency industry will benefit.
Financial incentive is fundamental
Cryptocurrencies are generally more complex than traditional protocols. They leverage financial incentive to secure the networks facilitating the transactions. When we say “secure” here, it means that the way in which the currency operates, it will punish bad behavior and reward good participants, making the network operate more reliably. Mining serves as a good example:
Suppose one of the computers, Miner A, is deciding which transactions should be processed in the next block, and accidentally (or maliciously) included transactions that conflict with one another, potentially double spending money.
In a proof of stake system, when another participant, Miner B, sees the mistake, Miner B will receive a reward for pointing it out. The reward will come from Miner A, which will have their stake “slashed”; directly losing money from their mistake.
However, if Miner A had just done things correctly, they would receive a block reward for their efforts as well as all the fees on any transactions processed.
Introducing financial incentive presents new challenges, but is a required component to allow for trust-less parties to interact in a shared data layer. The financial implications of participation makes everyone play nice and allows for the system to work.
Why you’ve never heard of TCP maximalism
Protocols are how we connect, communicate, and move data between computers and people on the internet.
If you are reading this article in a browser or on your phone, you’re using one of the more common combination of protocols: TCP and HTTP.
This combination of protocols dictates how your device finds and requests this article, securely transports the data to your device, and reliably communicates the required information for your device to present you with the content.
There’s a wide range of protocols used across the Internet, a short list of examples covers some of our most common applications:
* Watching Parks & Rec on Netflix (TCP)
* Taking a Skype call with your cousin in Tokyo (UDP)
* Sending that draft in your Gmail account (SMTP)
* Pulling up this blog post on your Medium app (HTTPS)
These protocols have different requirements and characteristics depending on their intended usage. For example, TCP requires a response from the requester acknowledging receipt of the transmission; UDP does not. This makes UDP much better for streaming data that is tolerant to loss, such as video conferencing. If you’re loading HTML to render a page, you can’t miss half of the markup and still proceed as normal, so we use TCP.
Neither of these protocols are better than the other. They serve different purposes and are both ill suited for the others’ use case. More importantly, because the protocols don’t depend on the issuance of a token, you’re not holding any TCP coin or UDP coin. You don’t have a vested interest in who uses which, so you don’t care what protocol Netflix is using, you just want to watch your movie.
So why is there maximalism in crypto?
The financial incentive that secures the network is the same driving force behind the widespread speculation in the industry. By using the secured network, a participant has a vested interest in the value they hold.
This vested interest manifests itself through a perceived zero sum competition between coins. A quick look at Crypto Twitter you’ll find all sorts of people saying the coin they’re holding will revolutionize everything and coins they’re not holding are “shitcoins”. The appearance of maximalism comes down to a few characteristics:
* Cryptocurrencies implement a tradable token to leverage financial incentive
* Participants in the network have a vested interest in the coins they own
* Participants have FOMO that another coin will appreciate more than theirs
* This stuff is complex and can be challenging to distinguish between the technicals of two coins meant to accomplish the same functionality
When participants in the network dig in their heels and advocate for only one coin (most often the coin they hold), they are referred to as a “Maximalist”. When you have competing maximalists arguing over which coin will “win”, you end up with rampant tribalism, pitting people against each other.
What’s the problem with tribalism?
From a markets perspective, tribalism doesn’t make any sense at all. Crypto markets are very correlated. The idea that another coin gaining or losing value has any bearing on your holdings is unfounded. Hodlbot did a great analysis of this last year, finding 50% of the top 200 coins have a correlation of 0.80 or higher.
The tribalism in cryptocurrency is a distraction from real progress being made. I’ve always wondered what the development of TCP would have been like if you had an audience of millions of users picking apart Cerf’s work back in the 1970s as he’s establishing the foundation of the internet.
The end result is a more aggressive and confusing industry for people new to crypto. All they see is in-fighting between maximalists from opposing tribes and don’t know what currency they should use for what they need.
An alternative to maximalism: Crypto Oligopolism
There’s nothing wrong with competition between two coins vying to provide the same functionality, but to think that one coin will serve every use case for cryptocurrency is absurd. It’s like saying we should be serving Netflix movies over the same protocol we use for delivering email.
If we can move away from Maximalism and toward a landscape of different coins, each serving their purpose, we can point the competitive benefits in a productive direction.
If we can find the categories of utility cryptocurrency intends to provide, we can foster discerning consumers within those categories. The networks that operate the best for transacting payments may not perform the best for executing smart contracts. Just as TCP and UDP have different characteristics, if we can treat these use cases separately, each can do better in their own category.
The industry will move toward the formation of Crypto Oligopolies around each utility vertical. Over time we will learn what use cases cryptocurrency serves well, and well executed solutions will win in each category. A competitive few coins will do well within each category and we will be rid of the expectation that one coin will serve all use cases. Payments, identity, storage, and others will each establish their own oligopolies as their use cases and networks reach maturity.
This allows consumers to be selective about the networks they interact with based on the network’s performance within their respective categories. We can hopefully move away from “everything but Bitcoin is a shitcoin” and toward “I prefer x over y because it has fast block times” or “I love x because I can earn interest staking my coins”. It will make crypto far more inviting, which I think everyone in the industry should want.
