Crypto is Stupid; Everything is Stupid; It's All Okay

NFTs are stupid. I don’t feel compelled to make this case. Enough people have already flaunted their opinions (as well as their ignorance).

But how stupid is the conventional fine art world? Fairly stupid:

The drab free port zone near the Geneva city center, a compound of blocky gray and vanilla warehouses surrounded by train tracks, roads and a barbed-wire fence, looks like the kind of place where beauty goes to die. But within its walls, crated or sealed cheek by jowl in cramped storage vaults, are more than a million of some of the most exquisite artworks ever made.

Treasures from the glory days of ancient Rome. Museum-quality paintings by old masters. An estimated 1,000 works by Picasso.

…Swiss officials initiated an audit in 2012, the results of which were published two years ago. The results revealed a huge increase in the value of goods stored in some warehouses since 2007, led by an increase in high-value goods like art. Though the audit did not specifically measure the increase in stored artworks, it estimated that there were more than 1.2 million pieces of art in the Geneva Free Port alone, some of which had not left the buildings in decades.

Or more succinctly from MSCHF [1]:

We bought a Damien Hirst and the first thing the seller asked us was “know anybody in Connecticut to ship it to?” for who in their right mind thinks of anything, upon acquiring work by one of the 21st century’s most name-recognizable artists, than to flinch from the waiting blow of New York sales tax?

Bitcoin is stupid too. Thanks to the University of Cambridge, you can see that it’s energy costs are somewhere between Argentina and Ukraine, and over 0.5% of all energy consumption globally.

That’s just the negative externality. Bitcoin is stupid for its users too, and can only handle a maximum 7 transactions per second.

Altcoins are better, and Ethereum 2.0 will get up to 100,000 tps, but as a whole the ecosystem is still stupid. Here’s Alameda Research CEO and crypto billionaire Sam Bankman-Fried:

The problem is we didn’t actually have any [Tether] sitting around, so we had to wait for the blockchain, and that took a while… we did not happen to have any Tether on Binance right now, and so you know, it took us basically 20 minutes just to get anything there.

But how stupid are conventional stores of value? Fairly stupid:

The largest gold repository in the country is the Federal Reserve Bank of New York, on Liberty Street, which holds two hundred and sixteen million ounces of gold—worth more than two hundred and ninety-three billion dollars at today’s prices—for thirty-six foreign governments and organizations… And the city’s basements are pocketed with old gold-vault spaces, left over from the days, in the nineteenth and twentieth centuries, when the dollar, like most major currencies, was tied to the gold standard. Banks were required to keep gold in reserve, since anyone with an account could request his savings in gold coins to, say, settle a debt in a foreign country. “People really did this,” the financial historian Richard Sylla said last week. “They’d take gold out of the vaults, and take it a few blocks and put it on a ship.”

But that was the past, surely today’s system is more sophisticated:

Gold bars are moved between the compartments whenever one account holder pays another. Staff wear steel-toe footwear to protect their feet in case they drop one of the gold bars weighing 28 pounds (13 kg). Every time the compartments are opened or gold is moved, three Fed staff members are required to oversee the transaction. Each compartment is further locked behind a padlock, two combination locks, and the seal of the Fed’s auditor.

Or in Europe:

How does one move 14,000 gold bars and 1,000 boxes of gold coins across the city without losing anything along the way? This might sound like the set-up of a joke, but it was the very serious challenge facing the Dutch central bank in Amsterdam as it shifted some 200 tonnes of gold worth around €10bn (£9.1bn) to a new vault outside the city.

The result was a meticulously and closely guarded operation that included an army and police escort with motorcycle outriders and helicopters following overhead. The slow overnight convoy carrying the precious cargo took some 22 hours to travel 20km (12 miles) away at the weekend.

What about Decentralized Finance? The 2014 Mt Gox. hack resulted in a loss of 850,000 bitcoins, equivalent to $450 million at the time, or $47 billion at today’s value.

But that was just one of many exchanges to get hacked. Binance lost $40 million in 2019. Most recently, $275 million was stolen from Ku Coin in September last year.

It would be hard to imagine a worse system, but centralized finance is trying. The Wikipedia page for AIG reads like a bad anti-capitalist parody. In 2004 they had to pay the SEC $126 million for selling a “non-traditional insurance product” which “would appear to be insurance and accounted for as insurance, but did not involve any actual risk transfer”. In 2006 they paid a $1.64 billion settlement for “bid-rigging schemes”, “securities fraud” and “sham reinsurance transactions”. And then 2008 hit and AIG collapsed, propped up only by a $180 billion bailout from the federal government.

Though work on Bitcoin had begun before the financial collapse, the genesis block does include the line “Chancellor on brink of second bailout for banks”. DeFi isn’t the solution to all problems, but it was intended as the solution to at least one.

During the weed legalization debates, the rhetoric technique of inverting the Schelling point served to remedy failures of the imagination. In essence: “if weed were legal and alcohol were not, how could anyone justify legalizing it?” In contrast to weed’s relative safety both short and long term, alcohol results in an estimated 95,000 deaths per year in the US alone and accounts for 28% of all traffic-related deaths. Globally, the WHO estimates 3 million annual deaths. Not to mention being “involved in a majority of intimate partner assaults, and over a third of murders and sexual assaults”.

None of that necessarily means weed should have been legalized, but it does force you to question your intuitions, and wonder how much of your rationalizations are just the result of status quo bias.

You can use this same technique to improve your thinking about crypto. If Bitcoin was already the defacto standard, moving to gold would seem ridiculous. If DeFi already worked, no one could credibly suggest greater centralization.

None of that is to say that crypto will win. The existing Schelling point does matter. It matters because it hides the stupidity of the existing system, and blinds us from clear headed comparison.

Crypto is stupid. Everything else is also stupid. It’s all okay.

See Also
Gwern - Bitcoin is Worse is Better

I own some crypto assets.