Crypto’s Failed Promise

At every party in San Francisco, you’ll hear the same argument from dudes with ponytails: 

Crypto is important because it “financially incentivizes human coordination mechanisms.”

I want to give crypto the benefit of the doubt—I am an unabashed technology maximalist that is all in favor of anything that gives the human species better chance at avoiding extinction—but this statement, so painfully ivory tower that it makes a Harvard professor blush, is a bunch of jello words. They have no meaning or shape to anyone who doesn’t have a severe case of Twitter brain.

But underneath the word salad there is an important insight: society faces many hard problems that capitalism as it currently exists does not seem capable of solving. Perhaps new ways of organizing the flow of value could help?

I’ve watched carefully over the last 5 years, waiting, reserving judgment. And so far…I’ve been disappointed. 

A few random samplings of news stories over the last few months:

• $25B+—yes, BILLION with a b—was lost over the last 72 hours by crypto traders of Terra and Luna. Numerous retail traders have lefts posts across social media contemplating suicide after losing their life savings. 
• $182M was stolen from the Beanstalk protocol in less than 20 seconds without a single hacked password.
• $625M was stolen from Axie Infinity, a play to earn crypto video game that has become the primary source of income for many folks in developing countries.
• A NFT gaming project that charged new users ~9K to mint their initial NFT. They are currently trading for ~$500. This project initially raised ~$90M. 

I recognize that I am cherry-picking the bad things (there have been lots of good things too!) but these incidents taken together, along with the dozens of other concerns, have raised the question: Why isn’t crypto living up to its lofty ambitions? 

Today, I’d like to offer an answer. 

Crypto has failed to achieve its promise because of the flattening of its output. What that means is all the success of crypto gets flattened into one simple metric: IRR. It is that most devilish of metrics, that insidious indicator, the internal rate of return (IRR) that has been the poison at the very heart of Cryptoland. Every single project, from digital art to social organization, is ultimately asked to do one job: enrich its participants.

To explain why this is so bad, we must alter the paradigm by which we evaluate crypto projects. Rather than treating these things like startups, the correct lens is to view them as digital nation-states. When an organization introduces a new crypto protocol, it is not offering a mere technology product. Instead, it is building a series of immutable economic laws that just so happen to be written in code. Thus the phrase, “Code is Law.”

The problem is, code is a flawed means of enforcing the law.

To understand why it doesn’t work, we must turn to a favorite book of Silicon Valley.

Seeing Like a CryptoState

In James Scott’s book Seeing Like a State, he examines why so many large-scale government interventions fail. The basic idea is that the modern administrative state has to simplify problems because the scale of their intervention is so large. This simplification manifests itself as a simple metric that is optimized to hell and ends up giving net negative results.

Crypto is undergoing the exact same problem. There is so much interesting innovation and ideas in the space, but ultimately, all that matters is that it has the highest IRR regardless of what the token is supposed to do. There are trillions of dollars on the line here, there is no bigger intervention than this.

Scott’s argument isn’t perfect, and I think he is overly generous with how powerful his theory is, but it does act as a useful framework for today. He cites examples as diverse as city design in Brazil and German forestry practices to argue that “certain schemes to improve the human condition have failed” because four things happen simultaneously: 

1. Administrative Ordering: To design large-scale systems is to be reductionist. You got to KISS (keep it simple stupid). It isn’t possible for someone creating a policy to account for all of the details, data points, and nuances of local communities. Out of necessity, these policies end up systems of infinite complexity into simple metrics.
2. High Modernism: Accompanying this metric reduction must come a belief, an almost absolute faith, in the system of progress—a belief that a government is offering something that is “backed by science,” that is is the best we have to offer, and must therefore override local objections.
3. Authoritative State: Once you have the metrics and beliefs in place, implementing large-scale interventions requires a strong government. Having absolute power allows an administration to do what it thinks is best. 
4. A Prostrate Civil Society: Equally important, those being affected do not have the power to fight back. Power here can mean both military and intellectual might. 

When you map these 4 conditions over the current state of crypto, it is remarkably similar:

1. The Administrative Ordering