Bored of the coins

Something strange is afoot in the world of cryptocurrencies. For the first time since Satoshi dropped Bitcoin on us like a benevolent bomb, this painfully new, highly bizarre field has become … well … boring. The true believers will tell you that great strides are being made, and the mainstream breakthrough is just around the corner, but they’ve been saying that for long enough that it’s beginning to seem reasonable to start wondering if these wolves were ever real.

I know, I know, it seems especially weird to be saying this at the same time that the President of China and CEO of Facebook have both become blockchain advocates. But China’s cryptocurrency, if it happens, will be a panopticoin, a tool to centralize monetary control even more firmly in the hands of the Communist Party, nothing like the decentralized censorship-resistant programmable money that the crypto community is theoretically all about; and Facebook’s, while making technical progress, keeps losing partners and gaining enemies.

The crypto community is currently all agog about “DeFi,” for decentralized finance, a movement which basically expands cryptocurrencies from “censorship-resistant money” to “censorship-resistant financial instruments,” such as collateralized loans and interest-bearing investments, along with “staking” (not really DeFi, but often treated as it.) Inside the crypto world, this seems like a revolution which will one day replace Wall Street. Outside the crypto world, it seems … a little like monks debating how many angels can dance on the end of a pin, one that no one is actually using and nobody outside the monastery cares about.

It’s easy to get the impression the cryptocurrency world has sacrificed technical engineering in favor of financial engineering. It’s easy to see them as having abandoned “banking the unbanked,” the alleged initial noble goal of many, to “offering sophisticated financial instruments to the unbanked,” long before any of those famous unbanked have actually been, you know, banked. And I’m sorry to report that you wouldn’t be entirely wrong.

But there are real technical advances being made. It’s just that they’re mostly slow and behind the scenes, and in the interim, the community’s “MOPs and sociopaths” have seized on DeFi.

There is some visible progress. ZCash is making apparent breakthroughs in important, foundational cryptographic research. Tezos continues to upgrade its governance algorithms — modify its code constitution, basically — successfully.

On the application layer, I’m interested in Vault12, which uses “friends and family to safeguard crypto assets” — basically, instead of entrusting the secret keys which control your cryptocurrencies to a third party like an exchange, something not particularly different from traditional banking, you protect them among people you trust, so that some number of them can collaborate with you to recover your keys if they’re lost, using a cryptographic protocol known as Shamir’s Secret Sharing. Luminaries such as Vitalik Buterin and Christopher Allen have argued for “social key recovery” for some time, and it’s interesting to see it offered by a slick new Valley startup.

But a lot of what’s happening is more fundamental, in search of the ability to support many more transactions than today’s blockchains. The entire foundation of today’s second-leading cryptocurrency, Ethereum, is being torn apart and replaced wholesale, in search of “Ethereum 2.0.” Bitcoin remains much more stable and conservative, but a whole new story is being added to its foundations, the Lightning Network. Both make me uneasy. A fundamental rewrite is always worrying. Lightning may scale, but it is if anything even more user-hostile than Bitcoin, basically the cryptocurrency equivalent of a hard-to-use prepaid credit card. Still, the permissionless equivalent of prepaid credit cards would be good for the unbanked that everyone’s clearly so worried about, right?

I’m also uneasy because almost all blockchain scaling solutions — Lightning, sharding, Plasma, optimistic rollup, etc. — turn fundamental blockchain security from something relatively passive (check the hashes and use the chain with the most computational power) to something active (“watchtowers,” “fraud proofs.”) This seems to me to increase the security attack surface a lot.

All these issues may yet be solved. Sure. But at the same time, it feels like dissonance between the attitude inside the crypto bubble and that of mundanes may never have been greater. Meanwhile, the dark spectre of Tether hangs over the entire industry. OK, circumstantial evidence is inadmissible for good reason … but there sure is a lot of it.

I’ve argued before that “ongoing associations with a cloud of crazy scandal and hangers-on snake-oil salespeople — all of which would be catastrophic signs for, say, a traditional new startup — can actually be indicators of the strength, not weakness” of the cryptocurrency movement …

…but at some point, your religion — or “brain virus,” as Naval Ravikant once called cryptocurrencies — has to begin to appeal to people who do not actually live on your compound, or else you are going to remain a cult and wither away. When is that going to happen? Is that going to happen? The answer remains no clearer than it was five years ago.