Crypto is a solution in search of a problem — or problems.
When it comes to crypto, all the questions sort of boil down to one: What, actually, is the point of it? Crypto is supposed to be special, i.e., not like other markets — at least if you listen to its boosters. But what if it’s not? It’s felt pretty spectacularly unspecial lately.
The crypto market has been in a bit of a meltdown. The price of bitcoin, the godfather of the space, has fallen by more than half of its 2021 peak, and billions of dollars of value were lost from cryptocurrencies in a matter of hours. Coins that are supposed to be “stable” are looking anything but, and one of the major trading platforms in the space has warned users their money might not always be safe there.
The claims proponents have long made about cryptocurrency — that it’s an inflation hedge, that it’s digital gold — appear increasingly dubious. Well before the current downturn, a lot of what was going on was fishy. Hackers have stolen tens of millions of dollars in crypto, and the sector is rife with stories about various scams. One big trend in the space might pretty blatantly be a Ponzi scheme.
The Larry David commercial in the Super Bowl for FTX warned viewers “don’t miss out” on the next big thing — but what that big thing is isn’t clearly spelled out
In other words, crypto is having … a time. The type of time that makes you question why anyone is even investing in it.
For a while, the drumbeat for getting into it felt too loud to ignore; the Larry David commercial in the Super Bowl for crypto trading platform FTX warned viewers “don’t miss out” on the next big thing — but what that big thing is isn’t clearly spelled out. Many people in crypto don’t want to outright say the point of the entire endeavor is to try to make money, which, thus far, has pretty much been the thing. (That and some crimes.)
If you’re a little bit destroying the planet in service of a thing that’s mainly a speculative asset and/or isn’t particularly useful, you know it’s not exactly the best look. Plus, you kind of need to say the value here is being derived from somewhere, not spun up out of thin air. So it’s important to say there’s utility to it, even if that utility is ill-defined, to insist that it does something.
In recent weeks, I spoke with nearly two dozen people in, adjacent to, and critical of the crypto space about what they envision to be the purpose of crypto. What emerged was a picture that was simultaneously murky and clarifying, in that there’s not one good answer. Some of what it does is promising; a lot of what it does — even boosters admit — is trash, and trash that’s costing some people a lot of money. This probably isn’t the death knell for crypto — it’s gone through plenty of boom and bust cycles in the past. It would be unwise to definitively say that crypto has no chance of being a game changer; it would also be disingenuous to claim it is now.
Crypto is a solution in search of a problem, or rather, problems. And at the moment, it’s hard not to wonder whether it is, instead, creating more problems than it’s worth.
To back up a little bit, what we’re going to talk about here is the movement that’s grown out of bitcoin and blockchain starting in the wake of the financial crisis. In 2009, a white paper penned by a person using the alias Satoshi Nakamoto showed up online, outlining an idea for electronic cash that would allow online payments to be made from one person to another without a financial institution or some other third party in the middle. Transactions are recorded on the blockchain, an append-only ledger (meaning new information can only be added, not deleted or edited) managed by a decentralized network of computers.
Today, there are thousands of cryptocurrencies out there, the vast majority of which are not particularly notable. The second largest behind bitcoin is Ethereum, which also uses blockchain, but the idea is that people can build apps on top of Ethereum and host smart contracts, like little robots that can execute programs automatically.
I want to avoid getting too in the weeds here, but over the past decade and change a dynamic ecosystem has developed around cryptocurrencies and blockchains. And it’s constantly getting more complicated. We’ve now got non-fungible tokens, or NFTs, unique digital bits purchased with crypto that have mostly been associated with weird pieces of digital art and are an arena that looks very much like a bubble. There are stablecoins, cryptocurrencies that are supposed to be less volatile, pegged to something like the US dollar. There’s also the burgeoning world of decentralized finance, or DeFi, which tries to replicate a lot of the financial system but without intermediaries, and there are decentralized autonomous organizations, or DAOs, essentially internet collectives. Now, much of this is falling under the still-nascent umbrella of Web3, a relatively fuzzy reimagining of the internet on blockchains.
“That’s the price we pay for building a financial system that’s more permissionless, right? It’s also more permissionless with regards to fraud.”
Who is all this for? Crypto proponents are hoping it’s for someone, though it’s often not clear who or why or what. It’s an arena dependent on promotion and spreading the gospel, on insisting this is all a good idea, so people keep “trying to contort it into something useful, and it never gets there,” said Chet Wisniewski, principal research scientist at the cybersecurity company Sophos. “Every time they do that, they add more and more complexity.”
If this all feels pretty unwieldy at this point, it’s because it is. Not everybody in the space holds the same beliefs or even likes each other. Some bitcoin people don’t love the broader crypto community and vice versa. Not everyone buys into Web3 as the future, and plenty acknowledge that much of what’s going on is pretty scammy, and many of these projects won’t survive.
“There’s a lot of bad, excessively financialized, Ponzi-like things you can find in crypto, absolutely no question about that,” said Nic Carter, partner at venture capital firm Castle Island Ventures. “I think that’s the price we have to pay for building a financial system that’s more permissionless, right? It’s also more permissionless with regards to fraud.”
The strongest case for crypto is that it’s money outside the hands of banks and government
There’s no single story everyone in the crypto space is going to tell you about what they think the point of it is. There are a lot of opinions! But maybe the most succinct answer is that the hope is crypto will do for money what the internet did for communication. It’s a way to send cash and value and scarcity across a computer network and, importantly, to try to do so without any intermediaries or oversight of a government.
“The point of cryptocurrency is to give people who, for whatever reason, can’t trust or access the third-party financial system, an option,” said Neeraj Agrawal, director of communications at Coin Center, a crypto-focused think tank. “The most powerful thing that it changes is it has given people a way to hold their own money again.”
Who would this be useful for? In the United States, the answer is not really your average consumer. If you want to try to use crypto as a store of value, like digital gold, or as a speculative investment, sure. In general, though, there are pretty fast, inexpensive ways to move money from person to person now. I don’t need to send you bitcoin, which you can’t really use to do much with in the real world, when I can just send you dollars on Venmo.
Some people in the crypto space like to say that it’s solving a problem for the unbanked, meaning people without banking access, and the underbanked, people who have banking accounts but often rely on other financial services, such as payday loans and check-cashing services.
Perhaps, but crypto is not some financially democratizing panacea. For one thing, when experts in the financial access space talk about how to help the unbanked, they talk about solutions like turning the post office into a bank, not crypto. Crypto can also be expensive to use and trade. So-called “gas fees” — a toll users pay to use the Ethereum blockchain — fluctuate but can be quite high. Ethereum transaction fees this year have generally floated from $7 to above $50, though in May they briefly spiked into the hundreds of dollars.
“Crypto as a technology and as a financial system, as much as you can call it, is very libertarian and very hyper-capitalist; the idea that your money is your money and it’s not going to be regulated, and if you lose it you should have been smarter,” said Molly White, a software engineer and crypto critic. “I wonder how a lot of these people who are saying it’s going to democratize wealth can hold those two things as true, because there’s no situation in which a hyper-capitalist, unregulated system will just sort of naturally trend toward a more equitable society.”
One paper in October 2021 found that, at the end of 2020, the top 10,000 investors owned about 5 million bitcoins, or about a third of what’s in circulation. That’s less than 0.1 percent of total bitcoin holders.
“Money is broken for most people”
There is an international and humanitarian case for crypto that is compelling. In the US, consumers can generally trust that the bank won’t lock up their money and that the dollar won’t suddenly plummet in value overnight. But in other parts of the world, that’s not the case.
“Money is broken for most people,” said Alex Gladstein, chief strategy officer at the Human Rights Foundation. “Bitcoin … represents an escape, it represents an alternative that they can opt into that doesn’t require an ID or passport, it can’t discriminate.”
It’s not hard to find evidence of this. Some women in Afghanistan were able to receive aid via crypto and hide it from the Taliban; millions of dollars of donations were sent to Ukraine in crypto (and other currencies). In countries such as Argentina and Venezuela, where inflation is high and it can be hard to get more reliable forms of money in and out, crypto provides an alternative. According to Chainalysis, global crypto adoption jumped nearly 900 percent in 2021, with countries such as Vietnam, India, Pakistan, Ukraine, Kenya, Nigeria, and Venezuela leading the way.
Social, political, and economic circumstances determine a country’s level of crypto adoption, Kim Grauer, director of research at Chainalysis, explained. Sometimes it’s a financial need, sometimes it’s a culture that’s into gambling; often, it’s a mix, she said. “When you say speculation, it’s not always gambling. Sometimes it is just trying to be financially secure, and sometimes it is just making the best out of a bad situation where you don’t have these equivalent investment options you would have sitting in the United States.”
White says she does see some value in these cases where crypto has benefited people in tough spots, but “I think those cases are a lot less common than crypto people would like people to believe.”
According to Triple A, a crypto payment company in Singapore, about 13 percent of Ukrainians own cryptocurrency, 10 percent of Venezuelans, and 3 percent of Argentines. That’s a lot of people, but nowhere near most people.
If crypto were as good of a solution as some boosters say it is, it feels like more people would be using it. It’s not like Venezuela’s and Argentina’s economies became hard to navigate six months ago. El Salvador’s bitcoin experiment is not going great. If you were fleeing Ukraine when Russia attacked and weren’t already well-versed in crypto, it wasn’t a moment to get up to speed. And if you did get money out in crypto and weren’t able to get your coins into fiat currency in time, it’s probably worth a lot less now than it was.
A lot of the things crypto does, or could do, kind of already exist
Kevin Owocki, the founder of Gitcoin, a platform where open-source software developers are paid for their work in cryptocurrency, is bullish on the future of Web3. He thinks it could fund digital public goods, and says that while NFTs currently are associated with the ownership of a silly image, someday they could be used for something that matters, like a house deed. (The house deed comes up in conversations about NFTs a lot.) But this is all very much a theoretical future. “For most of your audience, there’s probably not a whole point of using crypto yet,” he said.
Beyond some modest (or, if you have enough money, significant) speculation, there’s not a lot for normies to really do in crypto. What people can do in the space currently also has some kinks, and some of it doesn’t make sense.
Take the example of NFTs. Their proponents say they really could be game changers, that they’re an experiment in digital ownership and a way for artists, for example, to monetize their work. Some artists have been helped; others have had their work stolen. The same goes for people’s NFTs — complaints on Twitter about stolen Bored Apes have become a bit of a meme. In their current iteration, NFTs can look very much like an overhyped space and a bubble that’s about to burst.
“An NFT is the world’s most expensive link,” Wisniewski, from Sophos, said.
Part of the appeal of NFTs is supposed to be the community around them, that there are Discord chats and bigger projects on the horizon, some better formed than others. If you’re a member of the Bored Ape Yacht Club, you’ll get access to events and other perks. In New York, a restaurant is set to launch in 2023 where you’ll have to own an NFT to be a member and get in. The community-building aspect is maybe interesting, but it’s also not particularly new. Membership clubs and subscriptions have existed forever. NFT boosters will say that before, we didn’t know who exactly owned those unique subscriptions. Now that you have an NFT that is just yours that will unlock something, you will truly know who owns what. But are we currently super confused about who owns anything?
In DeFi, instead of bankers and lawyers running the show, it’s software developers, but the show is kind of the same
If you’re not an expert and you find yourself in conversation with a person really entrenched in crypto, chances are you’ll at some point find yourself pretty lost. It’s a strange conundrum: If you don’t get it, you feel compelled to hedge by saying maybe you just aren’t smart enough to get there. In two recent episodes of the Ezra Klein Show, Klein — Vox’s co-founder and a guy who is generally considered to be pretty smart — qualified some of his qualms about crypto by saying maybe he’s too “dumb” to understand. Maybe it’s true that the doubters are just confused. Maybe it’s that there’s not much to get, or maybe the hyper-complexity is a sign something weird is going on. Or, at the very least, this all isn’t ready for the mainstream.
When I talked to people about DeFi, a lot of them told me I would “get it” if I did it. And so I tried. At the advice of a source who works in DeFi professionally, I opened a Coinbase account to buy some cryptocurrencies, spending a little over $100, downloaded MetaMask to move some of my currencies there, and then tried to use those currencies on Uniswap.
In DeFi, instead of bankers and lawyers running the show, it’s software developers, but the show is kind of the same.
“You can build basically the same product you can build in traditional finance except a) the barrier for entry for the creator is way lower, and b) you don’t need as many lawyers,” said Tarun Chitra, founder and CEO of Gauntlet Networks, a financial modeling platform for blockchains. That translates to lending, trading, derivatives, and pretty much anything that exists in traditional finance. For a lot of regular people, there are real technological and knowledge-based barriers for entry here. “At the end of the day, all the data is transparent. It’s just that right now you have to write software to read it and understand it.”
Do we actually want this?
The most bullish people in crypto have much more grandiose goals than sending payments cross-border and owning pixelated punks. They see a reimagined internet, potentially a world of hyper-financialization, and one where new players are in charge.
“We have this new magical playground, we have these things called smart contracts that are programmable to do anything we want,” said Eva Beylin, director of the Graph Foundation, which envisions itself as a sort of Google for blockchain.
How realistic or desirable this playground is isn’t clear.
In its current iteration, some of what is going on with crypto is quite nefarious, though maybe not as much as you’d think, proportionally. That it is only useful for crimes is untrue — according to Chainalysis, about $14 billion of crypto was directed to illicit addresses in 2021, representing less than 1 percent of all crypto activity. Still, crypto is an enormous enabler of ransomware, a malware that locks up systems and holds them hostage until victims pay the perpetrators to unlock them.
“There would be no ransomware without cryptocurrency,” said John Reed Stark, a former Securities and Exchange Commission official. At the very least, attacks would be much harder.
There’s quite a bit of predatory behavior, too. In some NFT markets, there’s a lot of wash trading going on, where individuals buy and sell to themselves. Pump-and-dump schemes aren’t uncommon, and oftentimes, people who think they’re going to be the pumpers end up being the dumpees. There’s a term — rug pull — for when developers disappear with investors’ money. Some projects look similar to multilevel marketing, pyramid schemes, and Ponzi schemes. The value of many cryptocurrencies and tokens is derived largely from belief.
“When there’s that high of growth, everyone wants to get a slice of the pie,” said Caitlin Cook, head of community at Onramp Invest, a crypto management tech company. She, like many people in the crypto space, notes the internet has had its own set of growing pains, too.
“When there’s that high of growth, everyone wants to get a slice of the pie”
When users make a mistake or are victims of a scam and lose their crypto, there’s no central authority to appeal to, like the FDIC for bank deposits. Coinbase, a major crypto exchange, has said that if it goes bankrupt, its customers’ assets could be taken. If a smart contract has a screw-up, there are no backsies.
“In some sense, the people pushing for mass adoption today, that’s a little bit risky, I think. Because it’s sort of okay if it’s the crypto zealots who are using this stuff, because they have had a lot of training in how to use blockchains without having all of your assets hacked from you all the time,” Carter said. “But when we do see episodes of mass adoption — NFTs are a good example — you see a huge explosion in fraud and phishing, because all of a sudden there are less initiated people that are using this stuff.”
“Most consumers actually want things like fraud protection, transaction reversal,” said Stephen Diehl, a software engineer and prominent crypto critic. “If somebody steals their money, they want somebody to call up.”
People may want to think twice about every piece of data and every transaction living on a transparent blockchain that can never be deleted. Do you want someone who knows your crypto wallet address to be able to see every purchase you’ve ever made? Do you want every picture and post of you on the internet to live on the blockchain forever? It’s something to chew on. There are ways of ensuring greater privacy and anonymity, but it requires some effort.
It’s also worth contemplating whether we want to live in the super-financialized world some people in the Web3 space envision, where every little bit of information and content is something to be paid for and valued at an individual level. What the internet has been so remarkable in accomplishing is eliminating the scarcity of information and making it accessible to everyone for free. “We’ve come full circle, to ‘let’s take things that are free and lock them behind cryptographic solutions and charge people for them and … make digital things that could be available to everyone ownable by someone,’” Wisniewski said.
I don’t know
I kind of want to be a crypto believer. It can seem exciting (at least before the recent turmoil), and if recent history tells us anything, it’s often not a good idea to ignore a thing rich and tech-savvy people are into. At the same time, I have a hard time telling myself a coherent story about all of this.
Maybe Web3 really is the future of the internet, but at least thus far, it doesn’t feel intuitive or tangible to most people. Web3 proponents say nobody got Web1, the early days of the internet that just got people online, or Web2, when the platforms sucked everything up, when they first started, either. It’s not obvious whether that’s true. I remember as a kid being well aware who in my neighborhood was getting the internet and knowing pretty instinctually that I wanted to be there. When Facebook and Google came around, what I was supposed to do with them — and that I wanted to — came fairly easily.
“We have to stop trying to think that crypto as a whole is ever going to matter to everyone”
“You just had so many platforms that were emerging that were based on participation,” said Chris Hughes, one of Facebook’s co-founders (turned critic). “It was a meaningful shift in the internet and the term made a lot of sense, and I don’t think that Web3 at this moment at least is anywhere near that. There’s a lot of capital and investors who want people to think that it’s just around the corner, but I think we’ll know it when we see it.”
Nobody here is saying Web2 is great. But does Web3 fix it? The current financial system is full of inefficiencies and inequalities. How much better is crypto? It’s hard to say. Web1 and Web2 didn’t mean the same thing for everyone, and Web3 doesn’t have to, either.
This could all just be creating new winners on the backs of new — and perhaps more — losers.
For Steven McKie, a crypto veteran and founding partner and CEO at Amentum Capital, crypto has been life-changing. “New things are new, and sometimes new things are hard,” he told me when I expressed some of my reservations about some of the space. “It would be very advantageous if we would stop trying to think that every use case in crypto is for everyone, and we have to stop trying to think that crypto as a whole is ever going to matter to everyone.”
Maybe this whole space will evolve more so that the point becomes clearer, so that the problems it’s solving are actually ones that it can uniquely solve. In its current iteration, there’s a lot of contorting going on, a lot of using the word “utility” without actually defining what that is, and a lot of innovating to be done — maybe.
People in the crypto space argue that it’s still early. We’re about 13 years in. At a time when technology changes rapidly, how early is that, really?
All Rights Reserved for Emily Stewart