The Good, the Bad & the Ugly of Crypto

In the seminal movie of western cinema was movie with the title “The Good, the bad and the ugly” with its signature tune that still rings in mind, half a century after it was released. https://www.imdb.com/title/tt0060196/

The tune and imagery it evoked seemed like a good parallel to the moment crypto arrived on the scene over a decade ago challenging the financial system that was wrecked by global financial crisis. With the hindsight of market gyrations and search of applications for this shining new system during this time, we have a better vantage point now to understand what has happened, and looking into the future. This period has brought into question not just payment and monetary system; the original target of crypto, but also the other pillars of economic system, namely globalization and capitalism,. With that in mind, let us look at the good, the bad and ugly of crypto clearly, non-currencies!

First the good. The unabashed good of crypto is the chief inspiration behind it, that of decentralization. The world has been weaning away from the historical way of organizing, which was hierarchical, to the new way, which is network based over centuries. A book few years back by Niall Ferguson, called the Square and the Tower; who is one of the best minds on money, brings this trend out superbly. Hierarchical systems are by definition centralized, and network based by extension, decentralized. While traditional command and control based organisations, such as armed forces still remain largely so; the newer organisations post industrial revolution, such as corporates are being challenged to become more decentralized, by bringing collaboration, co creation, and co-opetition; effectively the wisdom of the crowds. Crowdsourcing of ideas, crowdfunding of capital are trends that makes individuals create greater stake sharing away some power from the few selected/ elected/ self selected members in the middle or as can be called centralised intermediaries. This is classic network triumphing over the hierarchy, at a special time when the overall changes in the environment accelerate with attendant increases in volatility and uncertainty. An example of ideal final culmination of this evolution is human body that has trillions of cells that coexist with each others, collaborating where needed though still reasonably independent. The loosely connected, or a better way to describe would be interdependent entities that include all of economic agents. Such systems also provide other societal values such as equality, fairness and transparency. Crypto, or more specifically, the underlying technology of blockchain helps re-envision the original ideals of the democracy, capitalism and rule based / rational systems. It provides a window to reimagine future of society and organisations like corporates, banks, potentially governments and nation states (though that’s positively futuristic); but also the underlying fabric of civilisation, such as money, decentralised decision making including voting etc. Coupled with the other innovations such as algorithms, smart contracts, AI, deep learning etc; it can help rewire the entire world to become lot more friction free, democratic, autonomous and fair. One can talk through system by system or industry by industry on how we can see things could change in a big way; but that will be too long a list. A simple example of how crypto/ blockchains can solve a major existential issue can be by creating appropriate products and protocols that make it possible to make green finance truly green and protocols that incentivises responsible behaviour by individuals and organisations promoting sustainability and environment. In a possible 2 degree future that we face and planetary heat death beyond, it could literally rally the whole planet to save the planet.

Obvious question would be if it is so good, then why is there anything bad at all; forget the ugly. The usual bad guy presents here too, which as they say; the devil is in the details. While the overall principle is great, the underlying details are not awe inspiring many times. This can take the form of technologists assuming that they can solve the entire world as if it is a program of sorts, but missing important real world implementation details. So a bitcoin system, while wonderful in terms of transparency, immutability and decentralisation; compromises the other real world needs such as scalability and throughput while also becoming energy guzzling and creating a sense of have not in the tech challenged poor communities. Ethereum, the other biggie, while adds the importance of programmability, gets into a conceptual problem with proof of stake mechanism leading to concentration risk similar to existing systems while solving some of the other challenges. It increases inequality in a big way as the early converts to system are better off as against later joiners, which is by no means democratic. Most of the common implementations currently of other frameworks, while solving for some of the issues, still do not solve for how the technology can be of benefit to masses in a safe, equitable way without being challenged by tech familiarity, similar to exclusion in conventional systems usually by way of status (stake?) or language etc. One could argue that this is early stage of the evolution of this new tool and like internet or electricity before that, would take several decades before the existing systems are rewired and completely new applications are implemented, such as internet or a mass produced car that came a few decades after electricity with the right factory organisation. Pending such true real world innovation, to be called the new money without having proven ability to be first medium of exchange because of limited supply based store of value argument is premature for any token. And as history of pegged currencies over last 50 years shows, stablecoins need to prove their stability in real world; before claiming to become de-facto exchange standards or gateways to new finance, or defi.

So now that we agree that the good is the the inherent potential and the bad as the current embryonic stage of development; is there really scope for the third, the ugly? There is unfortunately a lot of activity that falls into that category. This is usually when some blindly motivated, deluded or simply get rich quick schemer comes with some fancy idea that fires up people, often with insufficient understanding or greed; or both, that leads to unsustainable situations such as anchor protocol on top of recently failed Luna that provided 20% APR (interest rate). Like there are fundamental laws of physics that make defying gravity near large bodies pretty much impossible, a 20% risk free return over money defies basic laws of economics of a sustainable system. Even assuming that some of the participants: contributors/investors in such schemes are savvy enough to understand the true risk and what they are doing, a vast proportion do not, usually caught by the juicy headline promises based on insufficient understanding coupled with falling for propaganda of crypto being the new shiny tool that can change everything and make every wrong ever done right by waving a magic wand. This is where society has to come up with some guard rails. It seems even before key frameworks that guides the path to decentralisation is in place, massive amount of efforts are going into some specific micro asset classes, generally driven by speculative booms and busts. While we want to have innovation and experimentation in this nascent tool and technology, it should ring fence common people, especially those who are vulnerable, either due to age, financial means or the understanding. The guard rails could be regulatory, self regulatory and could be better disclosures, coupled with education and most importantly a system that while incentivises honest innovation by accepting failures, disincentivises dishonest products, people and protocols.

The challenge before the society therefore today is separating true innovation from sophisticated scheming: to help ramping up beneficial effects while damping down honest failures. Long term players as well as enterprising startups that are willing to experiment and face failures without compromising the wider system should be supported to make the potential new world real in the fastest way with least damage.

So where do we go from here? Forecasting is very difficult, especially about future! I am obviously no expert, but have had an interesting record in predicting trends.

In 2008, I wrote about how US is becoming increasingly anti immigration; and Trump came in eventually and Brexit.

In 2011, I wrote about india being at the cusp of massive revival, which some may agree was prescient.

In 2013, I wrote about gold being a doomsday asset and it has given subpar returns since then

In 2016, I predicted the biggest network in times to come won’t be fb or Google, but GST in India; and it’s on course.

In 2019, I wrote about future of Finance being all digital, followed that up with a book in 2020 called Fintech Future and have been trying to understand various aspects of digital money ever since.

So I can say I know a thing or two about crypto, especially when it claims to be the next generation of money. The above track record does not include some brushes with products like iphone, tesla or alexa long before they became commonplace and delivered 100x to their investors, but that i guess is true for a lot of early adopters.

Looking into future, some say crypto is going through a dot.com like bust of heightened expectations of early internet, which at the turn of the century created a huge bubble essentially by overvaluing the eyeballs for websites, the likes of pets.com. However, from the bubble to rubble rose giants like Google, Amazon which occupy the entire tech world today. I think it is like the early battles between AC and DC current after electricity was invented; the legendary rivalry between visionary Tesla and Edison. Ultimate applications of electricity need both, DC for end use and AC for transmission; sort of like decentralised at the end but scalable in the middle. The world will see a change in economic guardrails eventually, but it will probably need a killer app that comes handy to solve a crisis. Like the protocol of internet, and many others after such as public digitisation projects in Estonia on small scale or in India at a massive scale, the winner will be framework that is super easy to use thereby making it native viral; so no tech babble and solves some critical issue, say climate collapse or space collaboration. Once the use case is established in one critical application, other parts of life will quickly adopt the new framework if it is open and non discriminatory against new entrants and builds trust by promoting collaboration beyond all boundaries. This obviously is a very generic forecast, more of eliminating a few wrong choices; but that’s because it looks like the right choice is yet to emerge! Will certainly like to revisit this in 2025 to see whether we see some clarity emerge from current chaos!