Cryptocurrency's Utopian Vision

I was originally going to post this to /r/technology, which is why parts of it assume a hostile audience. But for some reason you can't submit text posts here. It feels like a bit of a waste preaching to the converted, I was much more interested in talking to a hostile crowd, but I'll submit it for posterity anyway.

Cryptocurrency is currently enduring its most widespread and hostile US governmental attack in its short history. Spearheaded by the SEC, but with the collaboration of many US regulatory agencies, crypto protocols and companies are being put under unprecedented pressure. This subreddit has, historically, been profoundly anti-crypto in sentiment, and I have no doubt that many here are feeling something between complacency and schadenfreude.

But what is actually at stake is extremely poorly understood, and I have come here, to the lion’s den as it were, to try and cut through some of the misinformation, and provide an account of the immense transformational potential of trust minimised software architectures. Not just as a series of scams, or even as some utopian libertarian vision of failing governments, but as the fairest, most equitable and most humane financial system in human history. Big call, right?

This will be long, there is no way around it, but if even one “crypto skeptic” here reads through it, and comes out with, if not a changed opinion, then a more nuanced one, then I will consider it worthwhile.

To begin, what is crypto actually about, at its idealistic heart? The answer is not $100,000 ape pictures, despite what the headlines may say. At its core, crypto is about building financial systems, at the moment best characterised as “experimental micro-economies”, whose salient features are:

-Unified, unbreakable rulesets that apply equally to the strongest and weakest participants

-That have the capacity for any network participant to verify, for themselves and beyond doubt, that the system is functioning as purported

-That use both consensus and cryptographic guarantees to replace a reliance on human agents, with game theoretical structures that are far more reliable than any individual person or company can be

Crypto is often laughed at, especially by people who are technically literate in Web2, as simply a worse version of things we have already. “It’s just an append-only database with far higher latency” etc etc. But those weaknesses are the result of very meaningful and intentional trade-offs that are needed to meet the requirements laid out above. And the more that you understand both the importance of maintaining those features, and the fact that the current disadvantages are engineering problems that can and will be overcome, the more you appreciate the immense potential of what is being built.

Before describing the world changing potential of this technology, it would be prudent to clarify what the major features of this technology actually are. Let’s look at what “consensus and cryptographic guarantees” mean.

Consensus Guarantees

To describe the nature of consensus guarantees I will give the following, hopefully not too tortuous, example:

Imagine you live in an apartment building in an apartment that faces east. Across the corridor, you have 10 different neighbours whose apartments face west. On the western side of the building, there is a billboard, and you want to know, at all times, what is on the billboard. Let’s say that, in this example, the person who lives in one of the western facing rooms actually runs a business whose entire job is to accurately report what is on the billboard. Honest Jim’s Billboard Reporting Service, referred to hereafter as Jim’s.

Under the current system you go to Jim’s, and he provides you the answer that you need. What Jim tells you is on the billboard, you take as gospel, having no other choice.

Now compare this to another system, a system where all 10 neighbours report on what is on the billboard, where their answers are collated, and, when 8 or more neighbours agree on the result (that is, they’re all saying the billboard is saying the same thing) they each get a financial reward.

When you put these two systems side by side it’s immediately obvious how superior the second one is. You get redundancy, you get multiple confirmations from multiple parties, and in times when there is a tremendous lack of consensus (maybe the billboard is halfway through being updated) you get clear evidence of that, too.

It’s extremely important to point out here that even if Honest Jim is completely, 100% honest, even if he takes his business very, very seriously and tries his best to give honest answers the whole time, the consensus method is still more reliable. Honest Jim might be sick that day, he might be dealing with a family emergency. A single point of failure does not have to be actively malicious for a consensus system to still outperform it, when it comes to reliability and redundancy. If one of the neighbours, under the consensus system, is similarly out of action, then you still get accurate results from the other nine.

Redundant, consensus based systems require collusion to undermine them. Eight of the neighbours could get together and lie, for some reason. But even in that instance, the requirements to get 8 neighbours to lie are far higher, and the chances of the plan failing by someone speaking up are also much higher. The difficulty of coercing an incorrect result is much higher in consensus systems.

Cryptographic guarantees

A cryptographic guarantee is simply a mathematical guarantee that the likelihood of an event happening for the wrong reasons is vanishingly small. Think of the difference between these two login passwords; “811” and “b324o23u5@o31i&h5ou15h1o3h5ou1#3h51”.

Even a regular desktop computer could brute force a three digit password in a fraction of a second. With every character added to the password, the computational difficulty of brute-forcing the password grows exponentially. At a certain password length, the analogies start to become ridiculous. Things along the line of “every computer on the planet would need to be working together for 81 billion years in order to have a 1% chance of breaking the password through the brute force method.” At this point, we have a cryptographic or mathematical guarantee that is as close to certain as possible that the only people getting into that password-protected space are those who know the password already.

So take these two things together and you have consensus results arising from game theoretical structures that are backed by cryptographic guarantees that the rules are being followed. It is, in essence, a philosophy of hardening software’s security and performance guarantees by relying on group consensus rather than trusted individuals, and cryptographic guarantees rather than human or corporate agents.

When you look for meaningful market gaps for these developments in the real world, it doesn’t take long to see immense, near universal opportunities.

So what is it useful for? One of the great challenges of describing the importance of this technology is that, nearly all the time, the technology that we already have seems to works fine. If I buy something on eBay or Amazon it usually arrives, and if it doesn’t it’s generally not a software issue. Cryptographic guarantees like password protection already exist in Web2. So, apart from the general idea that sure, a consensus response it probably better than trusting a single agent, why would anyone frame this as world changing, even world saving?

The answers become more clearly visible when cracks appear in the system. During the 2008 financial crisis, markets were stopped while major players took positions in CDS’s, and were only restarted when those parties had moved their chips into a winning part of the board. During the GameStop saga, Robinhood turned off stock purchases for retail investors. Both of these examples involve powerful market participants suddenly changing the rules to profit themselves. The “rules of the game” of investing were suddenly turned off, and the assurances that people had that the playing field was somewhat level, suddenly turned out to be non-existent.

These are examples of a much more general problem in finance called “counterparty risk”, which is nothing more than the ever-present risk that the other person in any transaction or exchange of value is not going to do what they promised to do. This exists on all scales, from peer-to-peer online transactions to the global movement of billions of dollars across jurisdictions. And it’s a problem that becomes more acute, the greater the power disparity between the transacting parties. History is full of examples where even litigation as a backstop is ineffectual, as the business who did the wrongdoing factored the cost of litigation into the overall profit/loss of the project, and just marked it off as a further expense.

Counterparty risk is a spectrum, with complete non-performance at one end, and perfect performance at the other. The engineering problem at the heart of cryptocurrency/Web3 is how to build systems that maximally reduce or remove counterparty risk at every stage of the transaction. And the logic for this goes back to Jim’s. That even if your counterparty is honest, a system that minimises the need to have to trust any individual, through the use of consensus and cryptographic guarantees, can still provide assurances of accuracy and redundancy that no single market participant can.

When you come to understand this, then the scale of the applications of this technology becomes clear. Reducing counterparty risk, guaranteeing performance/execution on exact contractual terms, where neither party is able to renege, change the rules at the last minute, or otherwise undermine the transaction, is something that can be applied to pretty much any digital exchange of value.

Honest market participants lose nothing under this system. It just guarantees what they were going to do anyway, which is to be honest. Dishonest market participants lose a lot. They lose the capacity to wiggle and worm around the contractual terms, to introduce delays, to coerce single points of failure. Once a smart contract (a unit of code that manages and oversees the exchange of value) has been populated with the collateral of the transacting parties, then that’s it. Execution is guaranteed on the terms that have been agreed upon. Fairness in guaranteed and not even the most powerful player can get out of that, (at least, not without inducing huge numbers of consensus participants into collusion).

The Dream of Crypto Idealism

I said in the beginning that crypto platforms, in their current incarnation, are essentially “experimental micro-economies”, and one of the engineering challenges that has taken up much of recent years is how to scale them bigger and cheaper. They do, there is no doubt, have aspirations to eventually provide a structural alternative to nation states themselves. With this being the case, it’s obvious why the government is utterly intent on shutting them down. Crypto could be seen as “the fifth estate”, an entirely unprecedented competitor for economic value and mindshare. Alternatively you could characterise the space as “open source finance”. An open market of opt-in financial products based around the open source ethos of public contributions and composability.

But what has come out of Web3 already should, at the very least, inspire people to ask which of these features could, in time, be transferred across into regular finance. Imagine a global financial system where even the most powerful network participants were held to a basic ruleset that even they could not turn off when it inconvenienced them? In the current world, for anyone who has looked into the Panama/Pandora papers, that would be an unbelievably powerful tool to undermine corruption, collusion and coercive behaviour from the executive class.

If your understanding of this space up until now has been FTX, hacks and Ape pictures, it’s a good idea to reflect on why only the most egregious failings are the ones that get the headlines, and why incredibly sophisticated financial primitives, the blue chips of Web3, get almost zero public attention. The reason is that dishonest market participants do not want a system that forces them to be honest. But everyone else does. Every honest person does. I certainly do.

This whole space has a long, long way to go, but the opportunity is there to literally build a world where parallel systems with a sort of guaranteed fairness that is completely unprecedented in human history can empower billions of people who would otherwise be at the complete mercy of the existing power disparities of global society. And the thing with this sort of potential is that it’s a pandora’s box. This dream of provably fair value exchange is bigger than every single cryptocurrency today. Bitcoin could fail, Ethereum could fail, every single one could go to zero. And there would still be an immense opening for talented developers to build a system that used consensus and cryptography to eliminate counterparty risk, and to allow the weakest participant in the system to be able to prove to themselves that the rules were universal and fair.

That is why this is, to me, inevitable. There isn’t a single person, company or institution on the planet who actually wants counterparty risk against themselves. So as soon as the market provides a system with stronger guarantees that the risk has been ameliorated or removed, people will flock to it. Certain conspicuous failings like 2008 or GameStop show the need for this, but even without those critical moments, freely acting market participants will always gravitate towards a system that has stronger guarantees of fairness. That what is written in the contractual agreement will be executed exactly as written.

Few innovative technologies have been ascribed as much of a pariah status as crypto. This is, I will admit, not entirely uncalled for, given the absolute preponderance of scams, grifters, charlatans, criminals and clowns who were drawn, like moths, to the penny stock casino that currently runs on the early versions of this tech. But underneath the circus there is an unstoppable movement towards systems that aren’t just fair, but that are provably fair, to everyone, in a way that has never before been possible in human history.

And I think it’s a shame how few people currently see that potential under all the regulatory attacks, critical headlines, and general hostility.

Honestly if you made it this far, even if you think it’s all absolute nonsense and you haven’t reconsidered a single thing, thank you very much.