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Kindle Notes & Highlights
by
Neel Mehta
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January 26 - February 7, 2022
A diagram of the tangle, with newer transactions on the right. Each new transaction verifies two randomly-chosen transactions before it. If a transaction was verified by many later transactions, you can be more certain it was legitimate.
In short, the tangle has no mining, no fees, infinite scalability, strong security, and less reliance on a perfect internet connection. This makes it ideal
In short, most people want a monetary system that just works: it should be stable, forgiving, and easy to use. On all these fronts, crypto loses to our current system.
So it doesn’t make economic sense for a country to lose its ability to moderate the economy.
While most countries wouldn’t want to abandon government-run currency in favor of cryptocurrency, countries with very weak currencies may be an exception.
In normal economic times, most citizens wouldn’t want to switch from a government-backed currency to a non-governmental cryptocurrency like Bitcoin, and most national governments wouldn’t want to either.
But during economic or currency collapses, though, we might start seeing cryptocurrencies being used for unofficial digital transactions.
For all their flaws, cryptocurrencies can serve as an easy-to-access last resort for anyone, anywhere. This wasn’t possible before cryptocurrencies came around, so they deserve a lot of credit for that.
In our minds the two places where cryptocurrencies are the most useful: payments and investments.
So, while cryptocurrencies are too slow and expensive to overthrow credit cards, they have a lot of use for high-value or international payments. We think that, eventually, most remittance platforms will use stablecoins under the hood.
According to Tokenomics author Thomas Power, it’s not likely that a single cryptocurrency will rise above the rest for payments. Because each type of payment is different, it’s more likely that we’ll see six to ten specialized cryptocurrencies at the top.
Even JPMorgan, whose CEO famously called Bitcoin a “fraud,” announced it would start trading Bitcoin futures,[941] which are contracts saying a buyer will buy a certain number of items for a certain price at a certain time.
it’s sensible regulation that prevents emotions or sudden newsflashes from sending the market on a “roller coaster” trajectory.
Many have also said that KYC and AML laws — which force exchanges to know who’s buying cryptocurrencies from them, thus reducing the risk of money laundering — have “saved cryptocurrencies” by reducing their value to criminals.
According to Power, the UK’s Financial Conduct Authority is thinking hard about the necessary regulations to make cryptocurrencies proper investments, and he thinks that once the FCA is satisfied, the rest of the investment world will follow suit.
Nasdaq is also waiting for the right regulations to fall into place; it has said that it’s open to becoming a cryptocurrency exchange when the space “matures” and is properly regulated.
But, on the flip side, all the regulation makes it harder for everyday investors to get into crypto. This undermines cryptocurrencies’ goal to become an investment vehicle for everyone, says Novogratz.
Since ETFs average out the performance of several cryptocurrencies, investing in an ETF means you’re betting on the cryptocurrency market as a whole, not one particular cryptocurrency — a much safer bet in an era when cryptocurrencies can boom or bust overnight.
The challenge for ETF investors remains that most cryptocurrencies’ prices move in tandem — when Bitcoin surges, everything else surges, and when Bitcoin plunges, everything else plunges.
This influx of institutional investment may help reduce Bitcoin’s volatility, thus weakening one of the biggest barriers to its mass adoption as an investment.
One reason why gold has remained such a popular investment is that it tends to move inversely to the US dollar;[953] the price of gold (measured in dollars) usually goes up when the price of a dollar (measured in euros, yen, or a basket of other currencies) goes down, and vice versa.
Bitcoin’s price also moves inversely to the US dollar, and during the COVID19 economic crisis, it became clear that Bitcoin rose along with expected inflation in the US,[957] thus making Bitcoin an inflation hedge too.
The trouble is that, with each passing year, making anonymous and private cryptocurrency payments gets harder and harder. This is because most regulation, from anti-money-laundering requirements to the SEC’s STO laws, has focused on tying real-world identities to crypto addresses.
This is all deeply ironic: the reason cryptocurrencies will succeed (in terms of how much they’re used) is because they’re abandoning a lot of their original philosophical goals. The technology designed to upend the monetary system and cut out banks and governments is being integrated with the monetary system, adopted by banks, and regulated by governments.
When you’re thinking about the future of blockchains, it’s helpful to look at public and private blockchains separately, since they are used for very different purposes and encounter very different challenges.
Private blockchains, at a high level, help organizations optimize the flow of information and goods through processes they control.
In all these cases, the organizations owned the whole process — Walmart’s supply chain, Xbox’s royalty payment scheme, the UN’s aid program.
Public blockchains, at a high level, aim to track the ownership and movement of assets held by the general public.
In all these cases, the blockchains’ creators tried to go around centralized power brokers: cryptocurrencies want to cut out banks and governments, BandNameVault wanted to go around national trademark offices, FileCoin and IPFS want to avoid giant websites like GeoCities or MySpace, and Namecoin wanted to go around traditional domain registrars.
In short, private blockchains are process optimizations imposed from the top down, while public blockchains are radical new ways to track valuable things, grown from the bottom up.
And all kinds of companies can now build private blockchain apps now that Microsoft’s Azure,[965] Amazon Web Services,[966] Oracle,[967] Google Cloud, IBM,[968] and other cloud computing services now offer cloud blockchain solutions.
Meanwhile, public blockchains’ only major success story has been with cryptocurrencies, and even those are facing increasing scrutiny and regulation as they grow.
First, public blockchains suffer from chicken-and-egg problems. You’d only join IPFS, FileCoin, Namecoin, or other such platforms if other people were already using it, but if everyone thinks like that, nobody will join the platform.
Second, public blockchains have increasingly high technical complexity, making them hard to build.
Meanwhile, private blockchains are generally less complicated; most aren’t much more complex than Bitcoin or Ethereum. Plus, since most cloud providers offer blockchains-as-a-service,[971] companies that want private blockchains can rent them instead of having to build them from scratch.
The biggest, and most interesting, problem facing public blockchains is the challenge of legitimacy. Decentralized agreement over ownership only works if everyone agrees that the decentralized system is legitimate and can enforce their claims to ownership.
Blockchains are just tools, and as such, they shine when they have to solve technical problems like automating a supply chain.
To drive social change, the people behind public blockchains need to do the difficult “people” work of building communities, gaining media attention, and working with governments to create policies.
So far, at least, startups working on public blockchains have been very excited about building the technology but less excited about doing the “people” work.
For this reason, we’re more bullish on private blockchains, which don’t have to deal with “people” problems — they just need to solve technical problems, and they do so admirably.
Mike Novogratz and John Jacobs shared this sentiment: they believed private blockchains, despite being less sexy and ambitious than public blockchains, have more potential to change the world.
Blockchains, cryptocurrencies, and related technologies — that is, crypto — will change the world, not through anarchy (as many people believe) but through sheer efficiency.
The future of cryptocurrencies, it seems, is not in community-run coins that replace banks and weaken governments but rather in highly-regulated coins that are smoothly integrated into the existing legal, financial, and political systems.
Blockchain has had a similar reversal. It was originally designed as a technology that could “record everything of value to humankind”[973] and lead to an era of “decentralized man” where everything — patents, copyrights, art, real estate, stocks — would be stored as crypto-tokens.
These are unsexy problems to be solving, and private blockchains aren’t always perfect tools,[979] but still, private blockchains are making a real contribution to the world.
Public blockchains are closer to what the early innovators of blockchain intended — a decentralized way to track any kind of asset. But the real success of blockchain seems to be coming from private blockchains, which are actually pretty centralized.
Thus, the ultimate irony of crypto, and perhaps the central theme of this book, is that crypto is succeeding by doing exactly the opposite of what it was originally intended for.
The technologists who created blockchain and cryptocurrencies were better at solving the thorny technical problems and not these social problems.
The problem is that Earth is nothing like that: our economic, social, and political systems have formed over millennia. Changing them is extremely difficult and slow, and most people want a system that just works over a chaotic, untested new system.
Perhaps the creators of crypto were too optimistic: you can’t just “disrupt” governments that oversee millions of people, banks that handle billions of dollars, and economies that move trillions of dollars a year.
