What could have prevented the crypto crash
Or, how the crypto collapse is exacerbated by crytpo's inherent ungovernability
Today on a call with Raul (one of Kelsus’s principals in Argentina), we talked about the crypto crash. That’s what you want to talk about too, isn’t it?
I had this whole other idea for a newsletter about why deal making CEOs are worse than product CEOs, but no one has brain space for that. We just want to doom scroll the economy.
During our conversation, we did something we’ve done before. We played out worst case scenarios. What happens if all our clients fire us at once? Then we walk that back to something more realistic: which clients would jeopardize their business if they fired us? Fortunately for us, there are a few of those, and I think Kelsus will survive a dark winter, even if it is Games of Thronesian.
While we were talking about the worst case scenario for the economy, Raul pointed out that his biggest concern is the knock-on effects of inflation plus crypto crashing together. He reminded me that there is a lot of institutional money getting lit on fire right now, and that people were relying on returns from that institutional money for their livelihoods and future plans.
That realization made me think back to the early 2010s when the term “too big to fail” was the the thing we all talked about:
Crypto is really big. Could the complete failure of the crypto markets be the final straw on an ultra-strained market that leads to a multi-year, deep recession? As recently as 2021, The Institutional Investor published an article quoting a confident Daniel Masters, chairman of CoinShares, a digital asset investment firm, who said, “I don’t think there’s a chance in hell that crypto is the source of any systemic financial collapse.”
I’m in wait and see mode.
Meanwhile, as scams and fraud have been a springboard for the deeper collapse in crypto prices than in general market prices, I decided to reread a piece I wrote in 2017 about a problem that crypto needed to address before it could be effective.
It read as fresh and valuable today as I hoped it would 5 years ago, and I had a much smaller reading audience then, so I decided to republish it in entirety below.
Please let me know what you think, and let me know how a 5 year recession would change your plans.
Using bitcoin is like living in caveman times
Originally published Jul 27, 2017 on Kelsus’s old Medium blog.
Like you, and your brother in law, and your older kid, and your neighbor down the street, and your Uber driver, I’ve been learning about the blockchain lately.
My deep dive coincided with my reading of an important book by Steven Pinker called The Better Angels of our Nature. For a summary of that book, see Bill Gate’s blog. A light summary is that Pinker very thoroughly describes that these are the least violent times in history and that there has been a general trend downwards from our most violent times as hunter gatherers to our current, very peaceful—though it might not seem intuitive—times.
I’m going to get back to the blockchain, but first I have to mention a couple more things from Pinker’s book. Two things he talks about that were causal to reduced violence in history were 1) the formation of governments and 2) well functioning democracies. Governments themselves are really important to reducing violence because they help people avoid something called a Hobbesian Trap wherein it’s safer to engage in a preemptive strike than it is to attempt cooperation. Once governments are in place to protect citizens from committing violent acts on each other, they tend to get carried away and commit a great deal of violence on their citizens, so along came well-functioning democracies to check the power of the governments.
With these ideas floating around in my mind at the same time as the libertarian and sometimes anarchist views of many cryptocurrency enthusiasts, I had an “aha moment.” Crytocurrencies and the internet are a new layer of society. They are a virtual place where people can hang out and interact and exchange value with one another just like they can in the real world. But this cyber world has been referred to as a wild west. It’s a hunter-gatherer world of violence and lawlessness.
Rogue bands of hackers are looking to prey on anyone who is vulnerable just exactly like roving bands of humans used to ambush and kill vulnerable small groups back in the days before history. Just last week $32MM of Ether was stolen by hackers. The rogue hackers want money or LOLs just like the cave people wanted some fruit or access to hunting grounds. Looking at the risk reward profile of those times vs the risk reward profile of today’s modern hackers on the blockchain it’s exactly the same. The reward is tangible — it’s money. The risk? Almost zero. And even if it’s these hackers are only a few bad apples, they can cause damage to the whole group.
In prehistoric times this was solved with the advent of monarchies and rulers. In today’s times we can skip through a bunch of history straight to functioning democracies. But there’s still a piece missing. In order to create a governing body that controls what happens in the world of cryptocurrencies, it needs to have some power. Significant power. It needs to be seen as the sole authority to commit violence against the citizens of the community. And the violence it commits (the risk it creates for citizens contemplating violence of their own) must be a real deterrent. It’s not enough to say “if you try to steal from the crypto wallets of people on this blockchain we’ll take the money back”. It needs to be “if you try to steal from the crypto-wallets of people on the blockchain we can mess up your life,” (eg send you to jail.)
Therein lies a problem. Cryptocurrencies currently lie outside of any system of government, so no governing body of a cryptocurrency can possibly have the power to jail someone. And even if some governments, for example the US government, put rules on cryptocurrencies that could jail thieves, it wouldn’t be sufficient. Thieves would just move to another country whose government wasn’t as enlightened.
I believe this problem is surmountable, and maybe it can be done with the help of software that metes out punishments (for every $1 we catch you stealing, we’ll take $2 from you). Or maybe it can be done with software that’s so robust that it becomes impossible to steal. Transparency seems to help. “We see that you, Stealy McStealface stole and you are hereby ostracized on the blockchain and in real life.” Proof of stake models for cryptocurrency governance also seem to help because they prevent the owners of the currency protocol from committing violence (stealing) from the participants, and thereby mirror representative government.
All in all I don’t know the answer, but I feel certain that the rampant theft and cowboy times in the cryptocurrency world have the same underlying causes, and potentially some of the same available solutions that rampant violence had in the history of the real world.
Thanks for reading Startup Win. I’m hoping next week we’ll have enough room in our brains to talk about building great startups instead of just adding to the cacophony of things crashing around us.
I’ve been so fortunate to hear from a few people that this newsletter has helped them. If you’ve enjoyed one of the stories and haven’t replied, please do.
Good luck out there. Prepare for leaner times, but enjoy every day.
Talk to you next week.