Crypto’s Finance Fetish
By CleanApp on Altcoin Academy
A lot of blockchain discourse — not all, but a lot — is based on the idea that blockchains are financial tools. Some people, like Aftab Hossain, suggest that entire blockchains like Ethereum should be seen as financial networks.
Analysts like Hossain get really triggered when people counter this finance-heavy narrative, including seemingly-benign memes like ‘Eth is money.’
The reason crypto-financiers get triggered is because they confuse being with becoming, and because they don’t like to have their assumptions and strategies questioned.
They say memes don’t matter. But because Eth has no widely acknowledged utility/use as money outside of the Ethereum ecosystem, they have to end their critiques with restatements of the same fiat meme they claim doesn’t matter: ‘Eth is money.’
Why is it money? Because we say so!
Folks at Devcon use food stamps to buy food, but that doesn’t matter: ‘Eth is money.’ Because we want Ethereum to become economically relevant and meaningful to the world.
But memes like ‘blockchains are finance’ and ‘Eth is money’ may actually prevent blockchains like Ethereum from reaching their full potential.
To see why, let’s take a step back and work through crypto’s finance fetish from first principles.
Disclaimer: there are a lot of really cool projects growing in the crypto-finance & DeFi space, and nothing here is meant as a critique of any specific project. The critique here is focused on totalizing narratives, like ‘blockchains are financial systems,’ ‘Ethereum is financial infrastructure’ and related memes.
What Is Finance?
According to the Oxford Dictionary of Finance and Banking (5th ed., 2014), finance is the practice of manipulating and managing money.
The 1st definition is OK, but the 3rd definition is closer to the mark: in today’s usage, finance refers mainly to myriad ways in which money is lent.
- how did Alice finance her house? → what are the terms of Alice’s mortgage?
- how are Bob’s finances looking? → what’s Bob’s debt-to-asset ratio?
- how is FedEx financing that new drone delivery program? → what sort of corporate debt instruments is FedEx potentially using?
The definition of finance-as-lending also corresponds to the thousands of derivative finance-related terms, like financial instrument, financial gearing, or, say, financial obligation or financial risk:
The ability to define money and finance is, of course, wildly lucrative. That ability also confers extraordinary power. Like all powers, this power is prized (& jealously guarded).
Among other ways, money-makers guard their money-making power by producing an incredibly complex institutional matrix in which finance games are played — aka, ‘the financial system.’
The system facilitates, encourages, and handsomely rewards financial innovation, even when that ‘innovation’ leads to financial crisis and financial ruin for the bottom-rung borrowers who bear the heaviest material costs.
The complex institutional matrix that structures ‘the financial system’ is called … Law.
The point here is that centuries of financial and monetary ‘engineering’ have gone hand in hand with ‘legal innovation.’ Both give institutional life to increasingly complex forms of finance and money.
The question isn’t which came first (law or money), or what is more powerful (financial institutions v. legal institutions). In capitalist societies, they are really one and the same; or, to be a bit more precise, they operate in largely symbiotic ways, perhaps because the folks who control legal institutions spend an awful lot of time at brunches with folks who control financial institutions.
This is why, to this day, nobody has faced any real accountability for the 2008–2009 financial crisis.
Bitcoin As Anti-Finance?
The Blockchain Revolution was a rejection of this order.
Finance — which can *only* manifest through ‘financial institutions’ — was the problem that Bitcoin set out to solve.
That’s literally the first line of the abstract, and the first two sentences of the Bitcoin Whitepaper. These are the only mentions of finance in the entire Whitepaper.
The whole point of Bitcoin was to open the “possibility for small casual transactions” without the need for a trusted financial party.
The key innovation is a peer-to-peer network “for electronic transactions without relying on trust.”
Crucially, the “unstructured simplicity” that assures robustness of the network was never solely a function of ‘money’ incentives. It was also operational simplicity (vote with CPU power; freedom to “leave and rejoin the network at will”).
And freedom to leave or rejoin the network necessarily meant legal freedom of maneuver, which is why the Whitepaper does not mention property, contract, assets, and why the Whitepaper does not claim that Bitcoin is some new type of financial instrument.
There are exactly three mentions of ‘money,’ but even those are heuristic — once to restate the problem of centralized banks (p. 2) and twice to describe possible ‘money’ incentives that could motivate a would-be attacker (p. 6).
Please pause on that a bit.
Honest nodes are transacting, mining “new coins,” recording messages to the public history of transactions. They are going about their business of building a disintermediated peer-to-peer data ledger in their unstructured [encrypted] simplicity (eg, the data represents whatever the peers want it to represent — nobody has to know or care about what this data represents).
And when “money” and “wealth” come into the picture, they are there to describe and address the greed motives of would-be attackers:
Grinch ought to find it more profitable to play by the rules, such rules that favour Grinch with more new coins than everyone else combined, than to undermine the system and the validity of Grinch’s own wealth.(p. 4).
Translation: “if you’re such a power-hungry Grinch that you’ll stop at nothing to control the network, please realize that your power after that point (vis-a-vis the network) depends on the flourishing of … the network.”
But, Bitcoin Is Money!
Nakamoto couldn’t have been any clearer regarding why there’s a need for pure peer-to-peer transactional networks: because “financial institutions CANNOT avoid mediating disputes.”
Nakamoto is 100% correct here. Financial institutions cannot avoid meddling with private parties that want to create their ‘own money’ or #WriteTheirOwnLaw because that would be suicide — it amounts to voluntarily relinquishing their own power, Cincinnatus-style.
There is little historical precedent of states voluntarily giving up their financial and monetary sovereignty. Monetary unions like the EU are counter-examples, but to what extent are those centripetal transfers of power really voluntary? And in any event, the viability of those experiments is still very much an open question.
On the contrary, for states and money-making financial institutions, power politics is still very much a zero-sum game. That’s why French and German finance ministers cannot avoid proclaiming:
We believe that no private entity can claim monetary power, which is inherent to the sovereignty of Nations.
That’s why Marc Zuckerberg & US political leaders cannot avoid articulating the current money debates in existential terms.
Because these are existential money/finance/law/power debates for these actors.
People can survive without money; Bitcoin & blockchain networks can survive without money. Today’s states and corporations cannot survive without money.
Maybe this is why the Whitepaper does NOT call Bitcoin ‘money’ (or Ideal Money) or a ‘financial product’ or ‘property’ or a cluster of ‘contracts’ or a ‘digital asset’ or any other term in legalese that could have been interpreted as a shot at the King. One that would have severely undermined Bitcoin’s unstructured simplicity.
Maybe this is why we still don’t know who are Satoshi Nakamoto?
Because that type of unstructured simplicity reduces liability and adds to security.
Is Ethereum A Financial Network?
Like the Bitcoin Whitepaper, Ethereum has maintained a healthy ambivalence towards finance, money, and law — since inception.
This makes total sense in light of the stated goal of maximizing blockchain utility.
If you were creating a general-purpose blockchain operating system along with a Turing-complete programming language, why would you want to limit that system’s utility to finance or ‘money-based’ applications?
Crypto ‘Finance’ Today
Eleven years later, many of these hard early lessons are at risk of being forgotten.
- Calls to preserve broad and ambivalent postures are mocked as ‘idealism’ or ‘ideological puritanism.’
- Calls for preemptive political/legal risk mitigation are derided as ‘legal fear-mongering.’
- Many vocal advocates within Bitcoin/Ethereum/other communities proclaim that blockchains have demonstrably ‘won’ the right to issue ‘private money’ & run DeFi networks, on their own terms (#WriteYourOwnLaw).
- Warnings about the imprudence of inviting frontal assaults are derided as ‘impossibly dumb.’
Bitcoin has morphed from an unstructured peer-to-peer transactional/record network to a caricature of itself:
Here’s a functionally equivalent thought trending in Ethereum-land, even though forks have always been a key governance lever & counter-balance.
Very quickly, we went from “unstructured simplicity” and a conscious detachment from “financial institutions” to self-congratulatory crypto-financial manifestos:
Running non-stop for eight years, with almost no financial loss on the chain itself, [Bitcoin] is now in important ways the most reliable and secure financial network in the world. Szabo (2017)
Why would any self-professed Bitcoiner take this giant leap backward? Well, you see, because traditional “financial institutions” are “highly evolved” and aren’t that bad:
Reverse-engineering our highly evolved traditional institutions, and even reviving in new form some old ones, will usually work better than designing from scratch, than grand planning and game theory. Id.
Grand strategy? Game theory? Boo. Reviving traditional financial forms, processes, and institutions? Yay! Especially when it helps your bottom line.
Network Value
As Nakamoto teaches, when folks start viewing the blockchain as just money and monetary ‘wealth,’ (whether done consciously or not) they are really just pricing attacks on the network.
Yes, Nakamoto’s genius lies in using this price tag for defensive risk mitigation. But the greater genius lies in convincing the would-be attacker that a decentralized transactional network denominated in BTC or ETH is far more valuable than whatever fiat-liquidated gains the attacker could realize.
What is the price of an open global blockchain? If it’s priced in fiat, won’t it always be an “irrelevant curiosity, incapable of changing the world,” by definition?
These are broader philosophical questions, but they translate directly into day-to-day operational logic. They manifest as concrete investment decisions. Because of this reality, nobody is suggesting we get rid of fiat valuation. Of course, it’s useful.
The narrow question here is whether it’s net useful or harmful to draw a totalizing institutional equivalence between blockchain systems (blockchain networks, forms, and processes) and financial systems (legacy financial networks, forms, and processes).
By this point, it’s clear that blockchain ~ finance homologies are deeply flawed. Even if you think of yourself as a purely money-profit driven blockchain stakeholder, you should see that blockchain’s monetary premium comes from decentralization, not just artificial ‘digital scarcity.’
Blockchain-is-finance frameworks (Bitcoin is “the most reliable and secure financial network in the world;” Ethereum is financial infrastructure; etc.) directly threaten decentralization. And real decentralization is why blockchain instruments have monetary value.
In what may come as a paradox, blockchains-are-finance frameworks already undermine and depress the value of cryptocurrencies. In other words, (the higher risk of) capture and failure gets market-priced in.
So next time you wonder why there isn’t a higher demand for your Cinderella cryptocurrency, it may have to do with this unappealing financial and legal wrapper that you and/or others have chosen for it. Totally unnecessarily.
You v. Network
Ultimately, crypto’s finance fetish may just be a form of getting high off one’s own supply — folks caring more about securing their ‘financial property’ than they care about securing the blockchain.
Please note, following Nakamoto, that (1) securing one’s financial property and (2) securing the blockchain are two different things that may, in fact, be incompatible.
- Financial frameworks are not benign or cost-free narrative devices.
- Memeing Bitcoin/Ethereum as ‘financial networks’ and BTC/ETH as ‘money’ (or any other type of financial instrument) may have near-term #NumberGoUp effect.
But over the long haul, crypto’s finance fetish is a one-way street that leads to capture of blockchains by the very ‘financial system’ they set out to avoid.
Selling Out Crypto?
These issues aren’t unique to Bitcoin or Ethereum. DeFi is all the rage across the cryptosphere. As we see, the themes raised aren’t limited to finance, DeFi, etc.
The issues here are manifestations of a broader trend: crypto’s finance fetish.
One of the most disturbing parts of this fetish is its tendency to rationalize virtually anything so long as it can have the effect of #NumberGoUp (higher price). Even liberal ‘empowerment’ memes and anti-censorship values don’t have to make sense anymore:
- We hate FB, but if Libra turns nocoiners to crypto, that’s a net gain! Here, let’s make it easier for them to ‘empower’ Africans.
- We hate censorship, but “whoooaa, look at that China bump! 1.3B people who can now buy my greatly inflated crypto bags! Let’s empower China!”
- We hate those financial institutions, but let’s not forget that “traditional banks and financial infrastructure seeded ALL the ability to conduct economic activity and then industry development.”
Slaves and women — your massive amount of already decentralized economic labor still falls out of mainstream formal economic models —but don’t worry! Those crypto microloans are coming to liberate you from your misery.
Just don’t focus too much on the “smart fine print.”
Really, whatever you do, just don’t worry. We’re pretty sure your crypto lawyers have this under control.
Remember, this is all just fear-mongering.
It’ll all be DeFine.
