Crypto’s bad incentives are dying

Jill Gunter is a co-founder of blockchain company Espresso Systems. Previously, she was a venture capitalist focused on crypto. She started her career as a trader at Goldman Sachs.

Charlie Munger is very quotable. Some of the things he has said that have stuck with me are “crypto is an investment in nothing” and “crypto is like some venereal disease”. Ouch.

To be honest, Munger’s assessment of the crypto industry as it has developed over the past five years doesn’t actually strike me as unfair. The Hindenburg of Sam Bankman-Fried’s FTX is only the latest in a long succession of digital-asset disasters that have burnt investors.

However, these catastrophes have not been a result of the underlying technology being fundamentally bad or broken or evil. Rather, they are the result of another Munger maxim: “Show me the incentive and I will show you the outcome.”

Since the early days of the crypto industry, the incentives have just been about making money. These incentives have, unfortunately, held the industry back from focusing on creating actual, real utility.

In many cases, making money means quite literally “creating your own currency,” as Munger has also derisively called crypto. While some looked at bitcoin and said, “wow, someone invented digital gold” a lot of people just looked at it and said: “Wow, someone just made up their own money. I could do that too.”

Dogecoin is a rebranded riff on bitcoin’s codebase, which on paper today has a valuation of almost $10bn. It is one of the earliest examples of someone making up their own token. Perhaps fittingly, the man who created Dogecoin as a joke has gone on to become a vocal crypto sceptic.

The “alt-coins” like Dogecoin that were created in the early days of the industry gave way to the Initial Coin Offering (ICO) hype of 2017 and 2018. These ICOs raised tens of billions of dollars in non-dilutive capital through the creation, issuance, and sale of tokens often without having created or delivered any working product. Some of these enterprises did go on to deliver on their promises and yielded meaningful returns, but many others . . . how shall I put this? They did not.

This is an industry where a person can copy some code, superimpose the image of a good doggy on a yellow background, and create $90bn of apparent market value (at all-time highs). If this is the incentive, what did we expect in terms of outcome?

Of course so much of the energy in the crypto world has gone towards trying to create money out of thin air, whether in the form of dog coins or monkey JPEGs, instead of creating durable utility and real consumer value. For many people, if you can make hundreds of millions of dollars selling digital pictures of primates, you are not going to spend time asking hard questions about the utility of what you are offering. If you can get away with a money grab, you are not going to stick around to try to create value.

There are many who today write off crypto as “dead” because it has not delivered any substantial, mainstream utility despite over a decade of existence and tens of billions in funding dumped into the space. This is not quite fair, though: only a fraction of that time, energy, and money has gone toward a meaningful search for utility. The incentives around the crypto markets have been toxic for years: make token; watch number go up.

It is not all bad though. I’d argue that even amid the grift and money-grabbing, there has already been some real value created by earnest projects. While these efforts have often been more under-the-radar, resisting the temptation to get a quick cash-out or sponsor sports teams, they have made strides to uncover actual applications for crypto’s technology.

At the same time that Dogecoin was being developed as a joke (a funny one at first!), Zcash was making breakthroughs in applied cryptography to enable privacy for blockchain-users. Ethereum raised funding back in 2015 before it had a fully fledged product, but has more than delivered on its promise of creating an open, decentralised developer environment with contracts enforced by code.

Many other projects have made strides toward delivering infrastructure suitable for more mainstream crypto use cases and developing the applications themselves. This has happened despite the industry’s incentives. This helps explain why crypto factions that are not so money-motivated tend to be dominated by ideologues (read: weirdos) and hardcore enthusiasts (read: nerds).

Among the weirdos and nerds of crypto, sentiment over the last two weeks has been mixed. On the one hand, there is a real despondency that so much damage has been done to the victims of the FTX fallout, coupled with a sense of disgust with the state of the industry that rivals Munger’s. On the other hand, there is optimism, because as of last week the party is over. The incentives have changed.

The sinkhole of speculation that has sucked in attention, time, money, users, brainpower, and builders over the last several years is finally closing. Perhaps an opportunity to focus on building products with real utility is emerging — something Munger might actually approve of?


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