In late 2008, the release of the Bitcoin white paper introduced the world to cryptocurrency. In the years since, an entire industry colloquially known as crypto has emerged. Within this industry, people are constantly creating what they claim is the next, better version of Bitcoin. A number of companies have also been created to serve as cryptocurrency exchanges, where people can buy and sell cryptocurrency, giving customers access to these assets and protocols.
Much of the crypto industry has deviated from the principles that were critical to the development of Bitcoin itself.
Bitcoin was a genuine technological innovation. But much of the crypto industry has deviated from the principles that were critical to the development of Bitcoin itself. As the stunning collapse of cryptocurrency exchange FTX highlights, the crypto industry is filled with scams, Ponzi schemes and bad actors. As a result, it has become increasingly clear that Bitcoin must be understood as something outside this crypto industry.
The creation of Bitcoin was not a random discovery, but rather the product of decades of discussion and development by a group of people known as the cypherpunks. This was an eclectic group of individuals concerned with issues of privacy in the digital age, and the way the digital world requires accounting ledgers to keep an electronic record of transactions.
Cypherpunks wanted an alternative: a private type of money. In thinking about how to design this type of money, cypherpunks studied commodity money and free banking. Along the way, there were a number of attempts to implement this idea, but they either never got off the ground or ultimately failed.
To introduce money with the characteristics that the cypherpunks desired would require something that was resistant to censorship. Creation of a new form of money would also have to deal with the incentives of the issuer, since someone who can issue their own money could potentially manipulate the supply to benefit themselves at the expense of others.
Bitcoin solved both of these problems. Anyone can download the Bitcoin software and operate a node on the network. The decentralized network maintains a digital ledger called a blockchain that keeps track of balances of the cryptocurrency known as bitcoin.
To solve the problem of trust in the issuer, the Bitcoin software is programmed so that there is a fixed supply of bitcoin. People don’t have to trust the issuer to be honest. Thus, Bitcoin solved the problem of trusting the issuer by removing trust from the system.
These new projects don’t set out to solve the practical problems that motivated the cypherpunks, but actually just treat blockchain like another thing for the tech industry to tinker with.
Whatever one might think about Bitcoin, it was clearly a significant innovation motivated by a practical problem. It was important not just as a technical issue or curiosity of economic theory but also as an important technology in Cuba, Afghanistan, Palestininian territories and Africa — areas where mismanagement and corruption have plagued mainstream financial systems.
The modern crypto industry, however, doesn’t necessarily share the same vision that motivated the creation of Bitcoin. These new projects don’t set out to solve the practical problems that motivated the cypherpunks, but actually just treat blockchain like another thing for the tech industry to tinker with.
While these alternatives often provide additional “features” that are absent from Bitcoin, they do so at the expense of principles like decentralization and censorship resistance that are central to Bitcoin. The most obvious of these is the second largest blockchain known as Ethereum, which allows people to write computer programs on the blockchain. Shortly after it was developed, someone found a flaw in one of these programs and used the flaw to transfer other people’s ether (Ethereum’s cryptocurrency) to themself. The Ethereum developers responded by creating an alternative version of blockchain that operated as though the hack had never occurred. So much for decentralization.
This is more than a simple difference in visions. Crypto has created an entire industry of get-rich-quick schemes. Beginning in 2017, this manifested in the form of initial coin offerings (ICOs). Various projects sprung up to develop programs that could be written on the Ethereum blockchain. Each project created its own digital token that it would sell to generate funding for the project. Once successful, people who bought the token would be able to use it for the project (although it was often of dubious use) or sell the token for a profit when the project was successful. Most of these projects were failures or scams and the Securities and Exchange Commission went after many of them. The process became so egregious that someone mockingly created something called Useless Ethereum Token. Although the SEC crackdown limited some of this scammy, self-serving behavior, there remain allegations that venture capitalists are still exploiting novice investors.
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This past year, the scheming has only gotten worse. The first domino to fall was a project called TerraUSD, launched on the Terra Network. TerraUSD was purportedly designed to be a stable coin, or a token that trades one-for-one with the U.S. dollar. The creators came up with a convoluted scheme to trade TerraUSD with another cryptocurrency to make sure that 1 TerraUSD always had a price equal to $1. As one might imagine, trading one worthless asset for another is not a sustainable strategy.
Nonetheless, the project became very popular because of a promise that investors could earn a 20% interest rate on their assets. This promise was nothing more than a Ponzi scheme. The current value of TerraUSD is worth mere pennies, which means that anyone who continued to hold it has lost almost all of their money.
As though that was not enough, last week one of the largest crypto exchanges in the world was revealed to be insolvent. Led by the quirky media darling Sam Bankman-Fried, the crypto exchange FTX had experienced a meteoric rise since its founding in 2019. With an unprecedented marketing campaign that included naming rights to an NBA arena and a Super Bowl commercial, Bankman-Fried and FTX became big players in the crypto space. FTX offered people a way to deposit money and buy and sell crypto. It also allowed more advanced traders to speculate using more exotic trading strategies. Bankman-Fried also fancied himself a policy wonk, testifying to Congress about crypto regulation.
It now appears that the company may also have fraudulently used customer funds to speculate for its own profit. The Wall Street Journal and CNBC, citing anonymous sources, reported that a hedge fund owned and founded by Bankman-Fried, known as Alameda Research, was lent billions of dollars in customer funds to use for trading. According to CNBC, this was all being done without the knowledge of FTX’s customers. Billions of dollars of customer money may have simply disappeared.
What this history reveals is that what is commonly known as crypto is clearly distinct from both the cypherpunk vision that motivated the creation of Bitcoin and from the developments in and around Bitcoin itself over the last decade. Whereas Bitcoin was created to be a censorship-resistant, trustless digital form of money, crypto has become a space dominated by get-rich-quick-schemes. Whatever this crypto industry is, most Bitcoin and Bitcoiners want no part of it.