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Thursday spellbinding mailbag

Q: Are we making much progress yet?

Well, let’s review.

Satoshi pitched Bitcoin as a “peer-to-peer electronic cash system.” Fifteen years later, cash is indeed electronic, but controlled exclusively by banks.

Vitalik invented Ethereum and smart contracts to protect his in-game assets. Eleven years later, our in-game assets remain securely in the clutches of Big Gaming.

And Anatoly invented Solana to be a decentralized Nasdaq because he wanted to do high-frequency trading from home. Seven years later, Solana is now the Nasdaq for memecoins, but not much else.

That might be a weird way to measure things, but I think it’s fair when progress is so hard to discern that people are pointing to “tap-to-earn” games on Telegram as a use case for crypto.

The current crypto cycle was kicked off by the bitcoin ETF (which isn’t even crypto) and has not as of yet expanded much beyond that.

Whereas previous cycles were defined by innovative “metas” like ICOs, DeFi and NFTs, this cycle (if it ended today) would be defined by memecoins, which is disappointing.

For me, though, the underlying use case for crypto is permissionless capital markets. And we are making progress there — the crypto market is getting faster, cheaper and more scalable.

This does not appear to be the cycle that we find something very productive to do with those markets, but there will be many more cycles to come, so many more chances to do better.

Like a lot of people, I’m about ready to give up on this cycle — but that’s not at all a reason to give up on crypto.

Q: Are prediction markets crypto’s big use case?

People are excited about rising volumes on the crypto-based betting site Polymarket, but I don’t know. I think that tells you more about the calendar (it’s an election year) than it does about crypto adoption. 

Also, $245 million of bets on something that billions of people have an opinion about seems a little underwhelming to me. 

Q: Why has crypto decoupled from Nasdaq?

The easy answer is that Germany has been selling a horde of seized bitcoin (sloppily), but I think the issue is more structural than that.

Nasdaq is up mostly because mega-cap tech earnings are up — and you can’t say the same about crypto tokens.

If Nasdaq was going up because of quantitative easing (i.e., money printing), you’d expect crypto to keep pace — a rising tide of liquidity should lift all long-duration* boats.

(*Crypto is history’s longest-duration asset class.)

But when tech is going up because companies are making money and the economy is good, I don’t think we should expect crypto to keep pace.

Q: Should I wait until Germany is done selling before buying more bitcoin?

My colleague David Canellis estimates that Germany is more than halfway done selling. If that’s what has been pushing bitcoin down, I’d guess that now might well be the time to buy.

One thing I learned in equities trading is that when there’s one large seller pushing a stock down, if you wait until they're done, it’ll be too late — you want to be buying when they’re about two thirds of the way there.

Germany is not the only seller the market is worried about — there’s also the $8 billion of bitcoin starting to be delivered to Mt Gox creditors and the $12 billion of bitcoin still held by the US government.

But the former may not come to market any time soon (Mt Gox creditors are probably diamond-handed), and the latter will come to market so sporadically it’s unlikely to make much impact on price — $27 billion of bitcoin traded over just the last 24 hours (according to CoinGecko).

So, yeah, if the overhang has had you worried, now might be the time to stop worrying.

Q: Should the dollar be backed by bitcoin?

Some people seem to think so, including some who might soon be in a position to do something about it. 

But it seems arbitrary to me. Why bitcoin? Why not a productive asset like, say, equities?

Imagine if the US dollar was backed by NVIDIA shares — we’d be rich!

(Or the US government would be rich, I’m not sure how that would work.)

But really, that’s not the point of currencies.

Currencies are simply a means of exchange and only meant to store value long enough for you to know roughly what you’ll be able to exchange them for in the near future. 

In fact, the point of currencies is that they’re not backed by anything.

The backing is just to give people a point of reference for a new, untested currency.

Once a currency has been in circulation for, say, a century or two, and everyone has had time to agree on what they’re worth, the point of reference is no longer necessary.

Backing an unbacked currency is, well, going backward.

Q: Can you catch me up on the latest buzzwords?

Not all of them — the buzzwords come and go quickly in crypto. I don’t usually spend too much time on them. 

(I’d very much like to have back the time I spent trying to figure out, for example, what layer-3 blockchains are for.)

But there are two current buzzwords that I think have a chance to stick: “permaweb” and “real-time Ethereum.” 

Permaweb: AO, built on Arweave, is a “hyper-parallel” computer that promises “infinite scalability” and permanent storage (for a small upfront fee) without sacrificing decentralization. (Vitalik’s Siphon Life spell would be safe here, forever.)

I’m not exactly sure how it works, but I’ve spent enough time on it to know that it’s highly ambitious and, most hopefully, different from everything else I’ve spent time on in crypto — there’s a lot of copy/pasting in crypto and the permaweb is not that.

Real-time Ethereum: A new layer-2 blockchain, megaETH, aspires to be capable of “processing transactions as soon as they arrive and publishing the resulting updates in real-time,” which, if successful, would “blur the line between Web2 servers and blockchains.” 

That seems to defy the iron logic of blockchains that, by definition, need time to reach consensus.

But some of the very smartest crypto people think it might work — two of Ethereum’s co-founders, for example, are among megaETH’s early backers.

So, if nothing else, it’s good to know that Vitalik is still out there battling to siphon the life out of centralized services.

— Byron Gilliam

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