So I've wanted to write something like this for some time, but was discouraged by the very real chance of getting downvoted into obscurity by cryptocurrency fans. I hope that in the face of the FTX debacle, people will at least consider the good-faith arguments put forward here. The title is a reference to this recent astralcodex post, which I critique in this article.
Introduction
In the wake of the FTX debacle, there seems to be a small but sizeable minority that believes that there was absolutely no way to see this coming. A massive company, the number 2 crypto exchange in the world, just collapses into nothing due to incompetence and/or fraud? Surely this is just a black swan event?
Just like Celcius, three arrows capital, Voyager, and Terra/Luna, all of which collapsed in the last year. Go back to previous downturns, and you'll see the downfall of exchanges like Quadriga and mt gox, the latter of which was by far the largest crypto exchange in existence at the time when it collapsed. And the collapses are just getting started, with the fall of FTX taking out Blockfi, and threatening to take out Genesis and Grayscale. Tether, the largest stablecoin and the third largest crypto-coin, has been caught out lying about it's reserves. If they are as fraudulent as many suspect, the repercussions for the rest of the crypto industry could be disastrous.
For an event to be a black swan, it needs to be outside the realm of normalcy. But the collapse of FTX was a fairly predictable event. Even true believers will admit that the crypto industry as a whole has significant problems with speculative bubbles, ponzis, scams, frauds, hacks, and general incompetence. The potential for a collapse was warned against on this forum, months ago. (I agreed with the prognosis in the comments at the time, for what it's worth).
Note that I'm talking about collapse, and not specifically fraud. It was indeed hard to predict the precise mechanism by which FTX could fail, but I don't think that let's anyone off the hook. If FTX had failed due to incompetence, hacking, or exposure to other fraudulent companies, their investors would have still been screwed over, and the financial and reputational damage to EA would still occur, just with slightly better optics.
The fundamental problem with cryptocurrency at the present time is that:
A) Almost everyone involved with crypto is using it to try and get rich.
B) Almost nobody (in relative terms) is using crypto for anything else.
As long as this continues to be the case, crypto as a whole is still in the middle of a massive speculative bubble, and participating in said bubble is inherently dangerous.
A. Crypto is infested with speculative bubbles, fraud, and scams (and everyone knows it)
The crypto market is "rife with frauds, scams and abuse"
-- SEC chairmen Gary Gensler, August 2021
We’re just seeing mountains and mountains of fraud
--Ryan Korner, IRS criminal investigator, Jan 2022
During this period, nearly four out of every ten dollars reported lost to a fraud originating on social media was lost in crypto, far more than any other payment method.
-- Federal Trade commission, June 2022
Other than a speculative asset with a glorious whitepaper and an impressive "ex workers" of big name companies all around the world, they all promise the Moon but underdeliver. I have yet to see something that has an actual use in realife that is using any of those tokens/coins technology.
-- r/cryptocurrency post with 13k upvotes
Matt: (27:13)
I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.
Joe Weisenthal: (27:27)
At no point did any of this require any sort of like economic case, it’s just like other people put money in the box. And so I'm going to too, and then it's more valuable. So they're gonna put more money in, and at no point in the cycle, did it seem to like, describe any sort of like economic purpose?
SBF: (27:42)
So on the one hand, I think that’s a pretty reasonable response, but let me play around with this a little bit. Because that's one framing of this. And I think there's like a sort of depressing amount of validity…
Interview with Sam Bankman-Fried, April 2022
You don’t need a useful application to get rich off crypto. All you need is a plausible-ish sounding idea and a skill for marketing hype. You write a fancy looking whitepaper, create millions of your own coin (let’s call it CRP), and claim that it will be the basis for “dog-walking on the blockchain” or something. You then hype the coin up and put out an ICO, and if you were clever enough, CRP coins which were previously worth 0$ because they didn’t exist, suddenly are worth like 1$, making you instantly a nominal millionaire. If it goes up further, the initial investors also make a killing, and other speculators get jealous and jump in as well, pumping the price up further. None of these people need to actually believe in “dog-walking on the blockchain”, they just need to believe that they can make money off it before the thing collapses, leaving the last investors holding the bag.
Now, as with virtually all similar pitches, “dog-walking on the blockchain” is actually a terrible idea which will fail, so the value is inherently unsustainable. CRP will crash and burn, either with a rug-pull (where the founder sells everything at it’s peak and walks away), a hack, a market crash, etc.
The social dynamics become interesting here. If you’ve invested your life savings in CRP coin, then if the hype dies down, so does all your money. So if an external entity points out the obvious flaws with CRP (spreading FUD) and causes it to drop in price, it’s like they are literally pulling money out of your pocket. It’s no wonder that crypto boosters often seem like spammers or cultists.
This is all aided by the loose regulations and anonymity inherent to crypto. If someone hacks your bank account, you just call the bank and they reverse the transactions. For most crypto, this option does not work by very nature. This makes it a prime target for scams, fraud and criminal activity.
Now there certainly are bigger and more respectable crypto projects out there. FTX was meant to be one of them. As an exchange, it was making money off of trades, in effect taking a small cut of the entire crypto ecosystem. But where was that ecosystem money coming from? In the traditional economy, money flows into companies through customers paying for goods and services. In the crypto space, this amount is relatively miniscule. The vast, vast majority of incoming funds is financial speculation. This makes crypto something of a zero-sum game: you can only get rich (in real money) at the expense of someone else. And eventually people are going to realize that they are at best gambling, and at worse being scammed, and stop, and at that point the entire crypto field will completely run out of money.
Now, the above isn't necessarily the case. Perhaps a brilliant use-case for crypto is just around the corner, that will justify all those billions in speculation?
B. There might never be sufficiently large applications for crypto
The blockchain is a brilliant invention. But most cool inventions do not end up revolutionizing the world.
Blockchain is not a new technology. It was invented in 2008, when smartphone usage was barely off the ground. It is 14 years old, predating the iPad and instagram. People still try to compare blockchain to the "early internet", but the web was 14 years old in 2005, and already half the developed world were internet users. Blockchain has been around for a full 40% of the lifetime of the web. And in that time, billions of dollars have been poured into it, trying to find useful applications.
In all that time, the number of blockchain applications that are actually in widespread use and not just used a vehicle for financial speculation, is incredibly small. It's not zero, it has been useful for remittances and other cross-border transfers, for example, but these days blockchains are things like gaming NFT's, which are mostly there to grab speculator money and are widely despised by actual customers.
I think it’s time to to take stock and wonder if maybe the reason there has been no widespread adoption is because the technology just isn’t very useful?
I don't want to make this a big technology post, but the essential argument I would make is that is:
- Decentralised verification systems like proof-of-work are costly and inefficient.
- Almost no applications need decentralised verification systems.
For example, reddit did not need make it's avatars be NFT's using the blockchain. The avatars are only used on reddit, therefore it is much more simple and easy to just verify them using the existing reddit website.
Almost all applications will run into similar problems. If your blockchain dogwalking runs on an app, then you can just put the verification on the app. This gets compounded by the oracle problem. If you want to update your blockchain whenever you make a delivery, for example, the blockchain needs a way to actually verify that the delivery has been made. The easiest way to do this is verification through a trusted third party... But if you have a trusted third party, you don't need a blockchain.
Don't get me wrong, there are clever ways around all of these problems, with highly advanced oracle software, consensus mechanisms, decentralised decision making, etc. The problem is that at the end of the day, the average person or company does not care if their shipping or dog walking is decentralised. They'll go for the cheapest and most efficient option, which in pretty much every case is the centralized one.
An amazon AWS developer has related their tale of looking for blockchain projects worth funding:
The key moment was when we got in a room with the CTO of this one startup, in Tribeca I think. When I heard their VC funding number I thought it was the valuation, not the investment dollars. The customer list was blue fucking ribbon and don’t you forget it. These guys were razor-sharp.
They presented some of the systems they’d built and yep, we were impressed. Then, with the startup CTO in the room, one of my fellow engineers asked the key question: “All these systems, are there any that wouldn’t work without blockchain?” The guy didn’t even hesitate: “No, not really.”
I think that pretty much sums it up. Right now, crypto is almost all hype, and has been for 14 years. You should at least entertain the possibility that it will remain that way.
C. What about the actual, real use cases, like remittances and third world banking?
I have been careful not to claim here that crypto is entirely useless. Indeed, there are real world applications currently being used. This is the basis of the defence of crypto put forward recently by Scott Alexander, who points out that developing countries tend to have more crypto adoption, which he attributes to their unstable banking systems. I definitely agree that remittances and banking are a legitimate use case.
However, there a few problems with these arguments. For one thing, being in a developing country does not, in fact, make you immune to get-rich-quick schemes. Is Vietnam the highest adopter because it has the weakest bank, or because people are jumping on the Vietnamese game axie infinity to try and make speculation money on gaming NFT's? The US has a stable banking system, so why is it's crypto adoption on par with unstable states like Venezuela?
The issue is that while crypto can be used for remittances and banking in the developing world, so can a lot of other methods that are arguably better. Banks in developing world might be unstable, but as long as they're less unstable than unregulated crypto exchanges, they'll win out. If your indian bank account gets hacked, they can probably reverse the transaction and get your money bank, but if your bitcoin wallet does, you're shit out of luck. Digital payments using mobile money are already widespread in the developing world, and are arguably much more robust and convenient than crypto. The government of el Salvador tried to directly push bitcoin onto the population, making bitcoin legal tender and giving everyone a bitcoin wallet. Despite that, el Salvadorans conducted a mere 2% of their remittances using crypto.
When you account for competition, there is not enough money in the failed state and remittances business to justify the massive speculation around cryptocurrency.
The top three crypto coins have a total market cap of around half a trillion dollars. Wise, on the other hand, one of the biggest companies for individual international payments, has a market valuation of 5 billion dollars. Now, obviously the two figures can't be compared exactly, but I think it's clear that if crypto actually is only useful for these two things, plus some cool toy programming projects, it is overvalued by at least an order of magnitude. The current prices simply are not backed up by the current uses. The difference between the two is made up of hype and speculation.
C. Fool me once....
Even if FTX was not fraudulent, working with them was still ethically dubious. For one, the climate damage from proof-of-work crypto is massive. The arguments trying to justify this damage are all incredibly weak, usually coming from false comparisons between bitcoin and things that billions of people actually use on a daily basis. The Ethereum switch to proof-of-stake is certainly welcoming, but FTX was boosting it well before then, and was still trading and encouraging the use of proof-of work coins in the exchange when it went down.
For another, they deliberately targeted retail investors with celebrities and high profile superbowl ads, who promptly lost their hats in the subsequent crypto crash. This wasn't just VC's, this was actual people with families that were suckered into gambling their life's savings.
I believe the EA org leaders when they say they had no idea that fraud was going on at FTX. But they obviously did know that crypto was a highly volatile industry, and that fraud and speculative bubbles were extremely common. The reasoning for going in anyway was that they thought they had enough information and expertise to wade into the snakes den and not be bitten. Sure, there is a high degree of volatility and fraud in crypto, but FTX was a highly reputable company with a seemingly sound business model, run by a trusted personal friend of many.
Well, they were wrong. The question “does the EA leadership have the expertise to pick out non-flameout crypto companies” has been answered with a definitive no.
EA is still in the charity business, and the charity business is extremely dependent on reputation. Most charitable foundations do not get embroiled in Enron scale financial fraud.
I don’t think many people understand the reputational risk that comes from continuing the status quo here. When someone is considering donating to the EA movement, they are naturally going to ask “How do I know this won’t happen again”. Is an answer of “we made a few administrative changes and slightly diversified our assets” really going to cut it?
But the real danger here is that EA does some shuffling of leadership and some revisions of decision making protocols, and then wrongly decides it is now ready to wade into the snake pit, and embraces FTX 2.0 with open arms.
FTX 2.0 might not go down the exact same way. Maybe instead of an exchange, it’s a stable coin, or a web3.0 project, or a new volatile asset outside of crypto. It could be a massive bubble pop, or a hack, or a matter of extreme incompetence rather than fraud. Reputationally, it doesn’t matter. EA will forever be the movement that “keeps getting scammed”.
D. Some further crypto skeptic reading
There is an informational imbalance between crypto boosters and skeptics. As I detailed earlier there is a huge financial incentive to hype crypto coins and get rich off the inflated prices, so there will always be money available for pro-crypto arguments. Whereas the main reason crypto skeptics write about crypto is "someone is wrong on the internet" energy. For this reason, I think it's important to read up on the anti-crypto case, even if you disagree with it, to correct the imbalance.
Line goes up - youtube documentary criticising NFT's and blockchain
r/cryptoreality - community of crypto skeptics. (theres also r/buttcoin, if you want something with more memes)
Web 3 is going great - detailed list of disasters in the crypto space
Attack of the 50 foot blockchain - Blog detailing crypto disasters over several bubble cycles
Stephen diel - A collection of crypto-critical posts from a software engineer
E. The proposal
Here is my radical proposal :
EA orgs should stay away from cryptocurrency until the industry becomes stable.
By "stay away", I don't mean "shun everyone in crypto like the devil". I mean "avoid being significantly associated with the field". Don't invest assets in crypto or crypto companies, don't put them on your board, don't boast about your ties to crypto insiders.
Maybe some day, the crypto industry will find a widely useful use case for blockchain, or improve the existing uses to the point where they properly compete. One day, the coin market cap might be sustained with a steady income of people actually willingly paying for goods and services.
My question is this: Why not get involved with it then? Why be involved in it now, when the field is full of potential ticking time bombs like Tether, and the reputational and financial damage from the next collapse could be catastrophic?
At the very least, if you disagree with me, and partner up with another crypto company, and it blows up in your face again... Don't say you weren't warned.
titotal - thanks for a detailed and fairly balanced critique of crypto. You're accurate in many of these points about the crypto industry as it currently is.
However, I think it's important to view crypto in the broader historical context of centralization versus decentralization, and the global catastrophic risks of ongoing economic centralization.
A major civilizational challenge we face is that within about 10-15 years, our entire financial ecosystem may be centrally controlled by powerful nation-states and central banks, using central bank digital currencies (CBDCs) that allow them to track every transaction made by every citizen, and that allow them to block any transactions, confiscate any assets, and censor any communications, that they don't like. This won't just be happening in China. It will be happening in the US, the UK, the EU, and most other advanced economies that are eager to adopt CBDCs as one of the most powerful authoritarian technologies ever developed.
Within a few years, people in many countries will face the very real possibility that if they post anything on social media that their government's AI surveillance bots don't like, their social credit score (or functional equivalent) will be penalized, and their access to all money, assets, financial records, legal records, voting privileges, transport, health care, etc will be curtailed, censored, suspended, or banned.
The only feasible alternative to this CBDC dystopia is, IMHO, crypto. I haven't seen any other feasible technologies that could challenge CBDC hegemony.
EAs often write about an authoritarian lock-in of bad values and abusive power as a global catastrophic risk. If we're serious about this risk, we should at least understand that CBDCs will probably play a central role in authoritarian lock-in, and that crypto is one of the only alternatives.
Governments, central banks, and traditional centralized finance institutions understand that a decentralized crypto ecosystem would threaten their existing power, and would undermine this emerging CBDC hegemony. So they've fought crypto by every means possible, including legislation, regulation, propaganda, and money supply manipulation. Their attacks have been relentless, and have often been successful.
Everything is at stake for them. If crypto rises and the US government loses dollar hegemony over the world economy, then its ability to print money, to engage in deficit spending, to enforce favorable terms of trade, to project military force, and to spend on domestic social programs, would be severely handicapped. US prosperity depends partly on the US government's ability to project military, diplomatic, and economic power to force other countries to use the US dollar as a global reserve currency. If crypto threatens the US dollar's status as a global reserve currency, that's an existential threat to the US government's stability and power. The US Federal Reserve banks have been very explicit about this.
So, when we ask questions like 'Why hasn't crypto been adopted as quickly as the Internet was?', its important to consider relative strength of governmental and institutional headwinds against adoption for these technologies. Governments were largely blindsided by the Internet in the 1990s and early 2000s. They didn't quite understand how the Internet would undermine their control over public opinion, commerce, news, etc. They put up some token resistance against the Internet (framing it as a domain of money launderers, pornographers, tax evaders, scammers, etc.), but they quickly saw the economic growth benefits of e-commerce, and the military and surveillance benefits of the Internet, so they didn't impose strong headwinds against Internet technology.
However, governments quickly understood that Bitcoin, and then crypto in general, was a serious threat to their monopolistic control over money. Just as secular democracies allowed separation of church and state, crypto threatened to allow separation of money and state. States didn't want that. Central banks didn't. Traditional finance didn't. So they fought back.
The anti-crypto attacks by the government have been relatively light so far in the US, but extremely strong in other major countries such as China. China's complete ban on crypto mining and trading in Sept 2021 was arguably a major factor in the end of the recent crypto bull run, the subsequent 80% drop in the values of many crypto coins and token, and the intense financial pressures that exacerbated the Terra/Luna collapse, and then the FTX collapse. Crypto's volatility is partly endogenous to the cyclical nature of speculative bubbles, but it's partly engineered by nation-states imposing vague, threatening, inconsistent, and/or draconian regulations against crypto -- in order to discredit the only alternative to their CBDC hegemony.
So, we shouldn't be naive about crypto. It's a weird, young, speculative, volatile industry. But we also shouldn't be naive about why governments, central banks, and trad fi institutions hate crypto, want it to fail, and will do anything they can to discredit it.
If we're serious about fighting authoritarian lock-in as a catastrophic risk, then we should be careful not to prematurely reject, avoid, and disparage one of the few technologies (crypto) that could resist authoritarian CBDC control over all of our money, assets, property rights, communications, etc.
Disclosure: I'm a heavy investor in crypto, partly for ideological (libertarian) reasons, and partly out of intellectual curiosity about the psychology and game theory underlying crypto consensus protocols, but partly for financial/speculative reasons. So there's probably some motivated reasoning going on. I've tried to be objective, but would welcome any criticisms and comments on these points.
Minor object-level objection: you say we should predict that crypto exchanges like FTX to fail, but I tried to calculate the risk of this in the second part of my post, and the average FTX-sized exchange fails only very rarely.
I don't think this is our main point of disagreement though. My main point of disagreement is about how actionable this is and what real effects it can have.
I think that the main way EA is "affiliated with" crypto is that it has accepted successful crypto investors' money. Of people who have donated the most to EA, I think about 5-7 of the top ten names made their money in something crypto-related (even counting all the FTX people as one donor). Some of those people (example: Vitalik Buterin) are well-liked, honest, and haven't done anything to embarrass us. I think it would be practically bad to stop accepting their people, and morally bad (as a betrayal) to denounce them and writing them out of the movement based on guilt by association. (CoI note: I have benefited from non-FTX crypto money)
I see you're not recommending that EA stop taking crypto money. But then I'm not sure what you do want, other than what's already happening:
Although the point of "don't invite random crypto scammers to serve on your board and become the public face of EA for no reason" is obviously correct, I don't know of anyone actually doing this, and so I worry that the real effect of posts like this will be to slowly make crypto so toxic in this community that EA leaders feel pressured to refuse crypto donations for PR reasons, and then we lose > half of our potential money. I'm especially worried about some kind of purity spiral, where after crypto is toxified, the next level is people arguing that Facebook has also been a pretty evil company at various points and so maybe we shouldn't accept Dustin's money either. I don't see a good Schelling fence here and would prefer not to start down that slope. I think we should avoid associating with (including taking money from) anyone who seems likely to be an outright fraud or breaking the law, and maybe some extremely harmful industries like tobacco, but not try to more generally be the arbiters of which industries are vs. aren't socially productive.
I see more possible action points from the original post, mostly having to do with brand risk management and risk containment. I think it's hard to deny that the crypto sector has much higher-than-average risk of causing reputational damage, and that EA just got a concussion from crypto. So, it is at particular risk of something akin to second concussion syndrome (SCS) if there's another crypto concussion before this one heals.
So my additional possble action points based on the original post:
Might I introduce you to the post announcing an EA funds spinoff website called "effectivecrypto.org", where the authors openly state:
The website has since been deleted, but if you look at the archived version, you can see a big splash banner of SBF himself endorsing the project. In the "learn more" page, you then see another big post tying crypto to EA:
They then uncritically repeat speculation that bitcoin will hit $200k (whoops). At no point in the website, or in the announcement post, did anybody mention that crypto was in the middle of a massive speculative bubble due to crash any minute.
(edit:)Theres also a direct quote from the Q&A section:
So I think that settles that point.
EA and SBF were undeniably affiliated. The ties between CEA leadership and SBF have been documented extensively, and used to beat the movement over the head with in pretty much every major newspaper of note. I mean, just look at the FTX foundation website, with the effective altruism logo prominently featured as "grantee and partners".
I mean, I guess my main point of note is: Don't do it again? I'm sure there will be a period of caution for the next while, but if another crypto bubble forms, I expect there will be a temptation to exploit the speculative mania by affiliating with another crypto firm, with predictable results.
The other main point is: Stop pretending crypto isn't in a speculative bubble. It is, and will remain so until an actual use-case exists that generates revenue commensurate with the ridiculous market cap. (or if the field collapses enough to be sustainable by the few niche applications that do exist).
If EA sacrifices it's reputation to chase after unregulated crypto money, theres a very good chance it will be left with nothing, if, as I suspect, crypto eventually fizzles out completely, and ends up just a niche hobby thing. Whereas a reputation for responsibility and caution will actually pay off long term. And even if they do find the mysterious crypto application that makes it a genuine hit, you can always get involved with it then. You're not missing out on all the future crypto money, all you're missing out on is the current speculative mania.
I’m mostly in the midst of the refi/regen cluster of the crypto community, so I’m constantly surrounded by all the good stuff that people try to do with crypto. I’m mostly thinking of the Funding the Commons conference series, projects by Protocol Labs, projects I’m a bit less familiar with like Ixo and Commons Stack, and the general cluster of things that Vitalik Buterin might get excited about. It’s all not as impact-focused as we are, but it’s good people.
I’ve been musing whether we could come up with something like “blockchain but without the money” to keep away the scammers. What’ll remain will probably not have a $1t market cap, but it’ll be web3 stripped down to its most valuable core elements. (Sadly, I have no idea, at this point, how “blockchain but without the money” would work.)
Those are the side of crypto that I’m most exposed to.
Preventing s-risks from AI, which can result from coordination failures, is the highest priority in my mind. So the general field of innovation of coordination mechanisms seems plausibly extremely valuable to me, at a high level. (Plausibly even more valuable than enabling people to conduct financial transactions without having to fight with the corrupt or inefficient systems in their countries.)
Whether all the concrete stuff that is being trailed in the various crypto communities is at all relevant to s-risks in the end is difficult to answer. But I’m only trying to defend the thesis here that all the innovation that is happening in the blockchain space is highly valuable, not that it can compete with (s-risk-focused) AI safety. It’s much too unfocused for that, and I don’t yet know the particular blockchain projects that might be more focused.
That said, I don’t know whether I agree with your conclusion. Usually people go like “Here’s a cool solution for incentivizing carbon capture,” and the response is, “Crypto is a scam. Blocking you.” But just now I saw an EA tweet something and someone replied, “EA is a scam. Blocking you.” That’s a new one to me. So I’m afraid the public perception of crypto might be infecting EA. I feel a lot more protective of EA than of crypto, so I kind of want to shield it. Then again that goes dangerously far in the direction of doing things because of their “optics,” which is also cringe.
One solution could be to just wait a few more years to allow defi solutions to mature to the point where the usability rivals cefi. Maybe then we’ll be able to draw on all the blockchain innovation and collaborate with companies in the space without looking distinctively cryptoesque while doing so. The best typeface is the one that the reader doesn’t notice, so I hope defi will be like Linux Libertine soon.
Or put differently: Using an acoustic coupler in a phone booth to post on the usenet might’ve come off as a distinctly nerdy thing to do. So if you don’t want to appear nerdy, that’d be something to avoid. But commenting on TikTok today is much less distinctively nerdy. So maybe we can have our EA cake and eat it too once defi becomes more like TikTok.
You can either:
(1) take a smart contract platform and remove the currency and financial applications.
(2) take a smart contract platform and replace the native currency by a fully fiat backed collatoral. You keep the money, but at least the issuance is state-controlled.
What remains is a permissioned blockchain system (hyperledger, multichain) where you can still reach consensus on state. Multichain has a lot of great articles on this: https://www.multichain.com/blog/2016/03/blockchains-vs-centralized-databases/
This seems like a massive overcorrection to me and seems to be using the FTX crisis as an opportunity to push a preconceived anti-crypto bias.
Many people think crypto could be revolutionary, like the Internet in the 90s and 2000s. The Internet had many fraudulent and scammy companies arise and many people lost lots of money but I think looking back on it, we'd be absurd to say that EA should stay away from the internet since there is a lot of nefarious behaviors. Suggesting that EAs should stay away from this could be sacrificing some of the most important interventions on global poverty and/or coordination problems with relevance to AI safety. Furthermore, we could miss our opportunity to have an impact on a multi-trillion dollar industry.
Many people don't like crypto. That's fine. They may be correct that it won't have much technological importance. But it very well might. It seems bad for EA to steer clear of it.
The original poster's bottom-line conclusion seems rather modest to me: <I mean "avoid being significantly associated with the field". Don't invest assets in crypto or crypto companies, don't put them on your board, don't boast about your ties to crypto insiders. >
That doesn't even seem to be saying that everyone should stay away from crypto in their personal capacities. I read it as more about trying to minimize entanglement in an EA capacity.
Yeah, I don't think there's anything wrong with people trying out cool blockchain ideas in a personal capacity, as long as you avoid getting sucked into the speculator orbit. And I wouldn't object to someone donating lottery winnings, so I similarly can't object to people who just gambled on memecoins and donating the winnings or whatever. (I can advise against crypto investment on the grounds that there's a good chance you'll lose your money, however).
Where I draw the line is in encouraging other people to jump into the speculator bubble, which FTX undoubtedly did with it's atrocious superbowl ad. This goes quintuple for charity orgs, where reputation is everything.
I really dislike comparisons to the internet here. When the web burst onto the scene, it became useful almost immediately, and not just to people trying to make money off of it. When the dot com crash happened, a third of the developed world was already using the internet, and the growth in internet usage was not affected at all.
The dot com crash was a speculative bubble, yes, but it occurred because everyone knew that the internet was taking over and about bring in an obscene amount of paying customers. If crypto becomes as revolutionary as the internet, we'll know, because it'll be obvious to everyone, not just a handful of insiders.
I would suggest that crypto's socially-valuable / non-speculative uses are largely inconsistent with the existence of a significant degree of speculation. Notably, the first function of currency is as a store of value; the second is as a medium of exchange (because it depends on the first). Non-speculative users will have zero interest in using a currency that cannot meet these metrics due to heavy speculation.
I wonder if some of crypto's popularity in some EA circles partially reflects a certain theory of how EA should get funded --basically a variant of the Dustin Moskovitz story. Someone generally in their 20s enters the "hot" field at the right time, VCs are willing to throw hundreds of millions at said unproven 20-something because the field is so hot, and the field experiences such massive growth that the founder can cash out with mid-10 to 11 figures within 10-15 years. The reality is that there are few niches in the economy for which that narrative is feasible at any given time. Among other things, there can't be a lot of competitors with deep war chests to overwhelm less-funded entrants, the profit margins have to be quite high, the capital requirements have to be moderate, etc.
I haven't been trying to amass 10-11 digits of wealth in the past five years . . . or ever . . . so am not sure where people have thought the best niches were in the last five years (other than crypto). But if you're committed to this theory of funding, it would (be / have been) very hard to write crypto off as an appealing option. Where else can you print so much "currency" out of thin air?
[edited typo]
Cryptocurrency is all bad.
Cryptocurrencies immediately self-organize into Ponzi schemes from the moment they are created, because when you create a speculative asset with no value other than speculative value, a Ponzi scheme is all that it can become.
The necessary incentive structure exists right from the start: people will want to buy low and sell high, but the asset's value is entirely imaginary (unlike that of land or gold, for example). So they speculate until the bubble pops and everyone tries to cash out in panic, and because the asset's "value" was literally 100% bubble-hype and 0% tangible economic value... well, that's a straightforward description of every Ponzi scheme ever.
I got in a discussion about this with another forum user here; rather than rehashing any more of what I've already said, I invite anyone reading this to check out the exchange as it happened: https://forum.effectivealtruism.org/posts/dQuaxGRkvEDXQLSNm/?commentId=ir9ihgeBkx4NTAvGD
One could imagine crypto that wasn't amenable to speculation and possessed guaranteed real-world value. Imagine the US Government issued 10B "USG Coin" for $1 each, and one of the perks was that the US Government would accept 1 USG Coin as payment of 99 cents in US taxes. Imagine further that the system was set up so that the US Government could issue additional USG Coin at will with the same perk. USG Coin has a clear non-speculative value and should never fall below about 98 cents. It also should not be the target of speculation or rise about $1.01 or so, because the US Government would just be motivated to issue more. Or imagine something similar with Amazon, its A-COIN could be guaranteed to be worth 99 cents on Amazon.
Of course, no one is getting crazy rich off of USG Coin or A-Coin (other than maybe the USG or Amazon?) But it might be a useful in some use cases, e.g., as a replacement for high-cost credit card networks like Visa/MC for small purchases. It would basically be a true electronic version of the US dollar.
OK. Without evaluating your proposal for its pros and cons... there is no reason why the thing you propose should be implemented as a cryptocurrency.
You're describing something which is in no way dependent on or enabled by blockchain tech.
Blockchain tech allows for a sharply reduced role of the middleman -- who you might not trust or who might charge unreasonable fees. The other way I can think of for truly electronic currency requires the transmitter to send to the middleman, who verifies it, destroys it, and reissues the same amount (less fees) to the recipient. Direct transmission without blockchain wont work because third parties will have no way to know whether the transmitter has already transmitted the money to someone else, creating multiple copies of it.
Okay, explain to me how I just Revoluted my friend 50 bucks for gas money, with no fees. Or direct transferred my landlord several hundred dollars, instaneously, no fees.
First off, your bank (and landlord's bank) are trusted entities ~ not everywhere in the world has trusted entities like that.
At least in the US, the overall costs to a bank for a checking account are estimated at $250-400 a year. https://www.bankdirector.com/issues/the-profitability-of-the-average-checking-account/ You are getting free transfers, sure, but presumably the bank feels it is getting $250-$400 of revenue off you in some fashion. So the bank is getting "paid" somehow, just not a la carte.
There are five layers of logical error in your argument here, any one of which would invalidate your argument on its own:
That doesn't sound radical at all, I know very little about crypto but I'm convinced. The risks seem likely higher than the benefits, so why touch it for now? Looking forward to counter arguments as well! Hopefully the fanboys don't just vote you down without making the arguments in the comments...
I basically just agree with your post, but I want to build on it a little.
Basically all the reputational damage that EA took when FTX imploded was due to SBF having started the FTX Future Fund. I don’t think people would have looked as askance at some EA leadership being friends with Sam if Sam wasn’t also a major funder of the movement, with FTXFF clearly coded as an “in-EA” organization.
One of the main changes I’d like to see in the wake of this is that new funders can’t just pop in, start a fund, throw money around, and immediately get EA-coded. There should simply be some time that has to pass, maybe 5 years, before that happens.
We can’t enforce that (anybody can call themselves “EA” if they want), but we can explicitly call out funders who refer to themselves as part of the EA movement before they’ve been around for 5 years or so.
SBF was an Effective Altruist for years before he founded the FTX Future Fund, let alone Alameda.
Thanks for your fair, candid take on the industry. I agree with some of what you've said and disagree with other parts.
I work for Glo, an EA-aligned crypto company, so this is near and dear to my heart (or at least to how I spend my working hours! ) I will try to write up a longer response soon, detailing:
1) my personal journey into crypto;
2) how to think about the disconnect between crypto's total value and the comparative dearth of contemporary use cases (we can think of the total market value as representing a distributed bet on future applications, and given how gigantic "money" is as an application, that bet looks good across a pretty wide range of odds);
3) IMO crypto folks trying to build real things have been all-too-willing to free-ride on the speculation train -- Scott's post argues that the worst thing to ever happen to crypto was for Bitcoin to go up a bajillion percent, and I've been mulling that over for a few days -- and we should collectively try to rein in that mania.
(this essay might change in structure when I actually write it)
Looking forward to engaging further,
Hey, thank you for the response! I'll try to give some of my impressions of your post, feel free to wait until your own post to respond.
Glo certainly looks like a cool crypto experiment. I would guess that the project will be modestly beneficial for the world, as long as it sticks to the stated goals and does not drift into the speculation field.
But I'm afraid I have concerns about your stated goals for reaching 11 trillion in market cap.
Mainly, I don't think it's gonna happen. The average person in the developed world can already make instantaneous payments between accounts, pay for things by tapping their phone/card, etc. Digital cash already exists, and everyone is using it already. Stablecoins have inherent disadvantages over cash. If my bank account gets hacked, the transaction can easily be reversed, is the same thing true for your stablecoin? I don't have to wait a whole day to withdraw from a fiat bank account, I can just do it at an atm. Most businesses accept debit card, almost none accept stablecoins, etc. There just doesn't seem to be anything a stablecoin can do that my bank account can't.
The main, perhaps only reason to use a stablecoin instead of regular cash is that it can interface more easily with the crypto ecosystem. But absent an actual use-case on that ecosystem, all the points I made in my post still stand: the average user is going to be a speculator. So the amount of people using your stablecoin is going to just be a direct correlation with the current state of gambling frenzy going on, plus a small handful of altruists supporting the project out of kindness.
Another issue is that since you are initially relying on the crypto community for your growth, you might be tempted to downplay issues in said community. For example, your linked post made very little mention of volatility and danger of the crypto industry.
I'd also ask you to think about the potential reputational risks to EA from your project. If something does go wrong, for example from a hack or vulnerability of some sort, is it going to damage the rest of EA?
I hope these questions give some guidance for your post, I'm looking forward to reading it!
Hi hi! I think I will respond with the Glo-centric points here and keep my own post more of a personal "my relationship with crypto" story. Thanks for giving the Glo post a close read!
Hope this was interesting! I'll follow up when I have my thoughts together about the 'why crypto ain't so bad' thread
I understand the use case for a stablecoin that needs to link with the crypto world -- whatever one may think of crypto, if stablecoins exist, there's a good argument that the organizer should lack a profit motive and the profits should go to something socially useful.
I am struggling to understand the other use cases (e.g., "savers" on the Glo website). For such users, this seems akin to a money market fund owned by a charity that pays 0% interest and instead donates the interest to charity. I am not sure what the added advantage having a crypto element adds to that basic idea (which is probably a good one, by the way). Right now, I suspect the answer is lower operating costs -- but I think there is a high probability that much more extensive regulation is coming for crypto, and that operating costs of companies like Glo will begin to approach costs for banks and other financial institutions.
Indeed, this seems for non-crypto use cases potentially inferior to opening the "GiveDirectly Bank" -- i.e., a US bank owned by a non-profit that donates its profits to GiveDirectly. Because Glo isn't backstopped by the US FDIC (or equivalent), it has to purchase ultrasafe, highly liquid (thus: low-yield) assets to imperfectly simulate that backstop. In contrast, the GD Bank would have a freer hand in investing user capital for higher yield because (up to FDIC insurance limits, which can be creatively stretched to several million dollars per depositor) the risk of loss is ultimately borne by the US Government.
Hi Jason, thanks for the kind words!
Four separate points here: 1) the stablecoin use case makes sense to you; 2) operating expenses for Glo are low today but likely to be higher in the future after regulation; 3) why crypto versus any other way of implementing the core idea, which is turning some portion of a person's "cash on hand" into an automatically-donating vehicle; and 4) in particular why not an EA-aligned bank (re: credit union) that just donates to GiveDirectly?
RE: 2: We're gonna have to wait and see what specifics shake out. Our overall hope is that by registering as a non-profit, and establishing formal oversight and governance within the established category of 501(c)3, we'll be compliant with whatever comes by default. But this is speculative.
RE: 3-4 We've had this idea and I even wrote up a version of it in a doc called "The case for an effective altruist credit union" (which I would be happy to share with you if you'd like to DM me an email address). The basic consensus is: stablecoin makes a lot of sense as a first product, because the DeFi market is already huge and, frankly, in need of some better infrastructure (ultimately, stablecoins are infrastructure), so that is a fine beachhead for the overall idea. Second, launching a bank that is broadly available across the world is going to be very, very challenging. Glo the stablecoin is available just about everywhere the moment it's on exchanges.
But yes, the overall idea of "passive philanthropy" -- generating positive externalities automatically -- has broad implications. We dream of 'philanthriopizing' other sectors of the economy as well (though I'm not sure we'll stick wth the term philanthropize'.)
Does that make sense?
I should add that a good bit of my unease with non-DeFi use cases comes from the additional risk to which users "bringing" funds into crypto will be exposed. Even assuming Glo is 100% risk-free itself, there is still either exchange risk (FTX was not the only one to go under) or self-custody risk (e.g., losing one's keys) plus risk from compromise of the user's security environment (e.g., a trojan). For people who needed a stablecoin anyway, these risks are no different than for any other stablecoin; they have made the choice to take the risk for their own purposes. But these risks don't really have any counterpart for someone whose counterfactual was keeping the money in a high-yield savings account at an insured bank. The FDIC will cover you if your bank goes under, and your bank will cover you in most instances of fraud.
So I am not convinced that putting your money in something like Glo is essentially as safe as putting it in the bank. I don't think those risks are trivial, and I think there are concerns with exposing altruistic users to them -- even if they are very clearly disclosed as meaningful risks. We do not, for instance, allow altruistic blood donors to expose themselves to anything but the mildest or most unlikely of risks. As the folks at 1DaySooner could likely attest, we do allow altruists to take somewhat greater risks when the social goal is important enough and there is very strong informed consent. In those situations, we usually also require a plan to provide care for the altruist if something goes south.
One of the pleasures of liaising with EAs on Glo's behalf is how quickly the conversations advance to the "frontier" of issues that we are currently debating or have debated extensively. This is a good example.
Section 3 of the previously linked-to Glo EA post outlines the intended stages of Glo's growth, starting with stablecoin use cases and then moving to savings accounts. I wrote that section and I meant it as a chronological roadmap, meaning the DeFi use case would come first in a sequence. As you observed, that nuance has been lost on the Glo homepage. We're in the middle of redesigning the website to be more CTA (call to action)-focused in light of Glo's impending release. If I had my druthers we would focus more on established stablecoin use cases and less on getting new people into crypto for the reasons you outlined. I didn't feel that way three months ago -- in fact I wrote a Twitter thread on getting started with crypto that we published like two weeks before FTX collapsed. Shows what I know.
I currently own about $30 of crypto. I am lucky to live in a country with trusted (trustworthy?) third parties, which, as you point out in another comment, is not something everyone can say. But it does mean that stablecoins solve no obvious problem for me. So once Glo is released, my plan is to buy up to $100 a month. I'll try to spend on groceries and such, with the intent to not hold more than $100 at a time until I think the risk profile is totally negligible and the utility approaches that of regular dollars. If something like that level of commitment makes sense to you, great. If not, no worries.
As you point out, Glo's risk profile is partly a function of things Glo (the company) does, but also of how/where Glo is available and how people interact with it. So a different way to approach your question is to ask what safety/risk benchmarks you'd have to see both from Glo and the crypto ecosystem as a whole to feel that the risk profiles of Glo and a "high-yield savings account at an insured bank" were broadly similar?
I/we have some speculative answers to this but so long as I've got you on the line, I'm curious to hear your thoughts.
As always, thanks for engaging.
For Glo: I don't fully know what means are available to show how much one has in the bank and in Treasuries. I guess the ideal would be some sort of continuous real-time verification, possibly by a network of the world's largest banks in a custodial role? I am assuming you could prove how much Glo had been issued and how much you held (e.g., from redemptions); from that, it should be possible to show near-full capitalization (perhaps with some lag during heavy redemptions).
I also don't know enough about running a cryptocurrency to express what I'd need to know Glo was secure (e.g., that someone could not steal the metaphorical printing press and start printing new Glo without asset backing, or hack into a wallet holding redeemed or not-yet-issued Glo). I think some of that would involve proving that there was a technological solution whereby several independent authorities (e.g., your auditors, a partner at a mega law firm, whoever) would need to provide authorization to generate more Glo or to move significant quantities out of cold storage.
For exchange risk: Ideally, there would be something like the SIPC (which insurers customers of broker/dealers from losses in the custody function -- not from losses in the value of the underlying securities). I do not think that is particularly realistic -- SIPC is actually funded by a levy on broker/dealers, but the exchange market is too concentrated for that to be a viable model to cover losses. It has a credit line with Treasury, but not full faith and credit.
I don't see a universe with the FDIC/NCUA model for a while -- we would need long proof that crypto exchange regulation was working well before I think putting the USG's full faith and credit behind an exchange insurer would be viable.And to be frank, at least in the mid-term future, crypto exchanges just aren't socially necessary in the way banks and securities dealers are, and so justifying taxpayer backing would be a tough sell.
So the question is whether something like Japanese regulations would be sufficient. I'm not yet convinced that would be sufficient for the standard you set, although they seem to have protected Japanese users at FTX Japan. Maybe I would change my mind after a few more years and more failures that affect other countries but not Japan.
For consumer-equipment risk: I don't think you can get to essentially-insured-bank safety for consumer users without either Glo or the exchange eating fraud losses that a bank would have to eat. Consumers on average are just not savvy enough to keep that risk at a minimal level -- and although you and I could probably do so, it would come at a steep cost for useability.
That's a tough issue to figure out, because an entity like Glo isn't really in a position to verify or cover those sorts of losses. And for me to be convinced of their safety, exchanges need to play it safe and largely stick to providing safe custody and exchange services . . . nothing that exposes the exchange to meaningful risk. Unfortunately, that approach also limits how much money exchanges can make and thus how much they could be expected to spend on fraud reimbursements.
Note that at least US law gives much less protection to business users -- if your business computer gets a trojan and makes unauthorized transactions on your account, you're often screwed. So if you could fix the exchange-risk problem, this might be an acceptable problem for business users.
Also, current US law does not generally protect customers who are fraudulently induced into losses -- e.g., you get a fake text from the IRS saying to Zelle $5000 to this account or you're going to jail, and you comply. Since these are risks borne by users in the banking system, they can be borne by Glo users as well.
All that is to say that I think truly safe crypto is a ways off. Of course, I am willing to accept a somewhat higher level of risk for people holding crypto to accrue benefits to themselves than for those who hold Glo for altruistic purposes.
For the most part. For (2), I primarily meant stuff like KYC and anti-money laundering measures.
If you haven't already, it's worth thinking about the tax implications as well. My gut feeling under US law is that all of this interest might be taxable as unrelated business income (UBIT) because running a stablecoin might not be substantially related to the charitable, educational, or other purpose that would be the basis of the organization's exemption. It would be a means of generating profit for the organization's charitable mission, which is the point of the UBI tax. The point of the UBI tax is to prevent non-profits from having an unfair advantage over for-profit businesses in commercial activity, which seems to fit here.
Generally, interest is excluded from UBI, but that may only apply to interest from ordinary and routine investments. I can't give you legal advice as to an answer even if I were qualified; I can only say that it is a question that crossed my mind.
I'll DM you an e-mail address.
Unbacked stablecoins like algorithmic coins and (probably) Tether are not hedges, they are a huge source of potential danger for the industry. Although I guess that's an argument in favour of Glo (assuming you're legit).
In general, I think the idea is good, and if it works as planned, well, you aren't gonna make 11 trillion of course, but you could displace some bad actors and generate some money for charities.
However, if I were an EA org, I would still hold off on getting involved with glo for now. The problem is that the FTX debacle involved SBF using EA's reputation to help build his company up, which was then used to harm people. If we get unlucky and Glo ends up doing something similar (even if it's, say, incompetence rather than fraud), then the credibility of EA in most eyes would be pretty much dead. Being fooled twice by the exact same trick is not a good look.
Again, I think you're probably fine, and i think the situation is unfair to you. I think if Glo establishes itself as gold standard, beyond reproach company with full auditing and transparency, then it could be something great and worth endorsing, I'd just advise EA orgs to wait before getting involved.
For what it's worth I think that holding off until Glo is more established is sensible. Others might have a different risk appetite.
I hope that Glo doesn't come across as trying to ride EA's reputational coattails -- rather I would say that EA-aligned thinking inspired the project and we think that it will be of interest to at least some EAs.
And a note on nomenclature: I think the stablecoin label should only apply to coins that can maintain their peg in the event of a run. It was quite the marketing coup that so many not-so-stable coins got folks to call them stable. I think 'algocoin' would have been more appropriate, but the folks in the "exchange coordination" signal group have so far failed to consult me on the matter 😃
I added a caveat about "fully-backed" stablecoins to the comment above in light of your remark, BTW
Yeah, i think that satisfies me for now at least. I expect I'll have more to say on your post about the rest of crypto. Thanks for the conversation!
I pretty much agree with the thesis of this post. I think it underrates the potential value-add of crypto in the developing world, but I don't think that substantially changes the bottom-line conclusion. I appreciated the relatively measured nature of the recommendation to avoid EA being too tangled up in crypto, and roughly agree with it at its current strength.
Great post. For third world banking, I'm reminded of David Roodman's 'Due Diligence', which pointed out the importance of basic, safe financial services for the global poor, especially (micro-) savings and insurance (and the mixed results of microcredit). That seems a more promising direction to pursue on this problem than crypto.
Your insights into the complexities of the cryptocurrency world are spot on. The recent FTX situation highlights the need for careful consideration in this dynamic landscape. Cryptocurrencies offer innovation but also carry speculative risks. The crypto industry's mix of innovation and speculation means it's important to conduct thorough research before investing. Despite the challenges, there are projects with genuine potential, like those addressing cross-border payments. But have you come across the Ethereum Code? It's an AI-driven trading platform that might interest you.
Post summary (feel free to suggest edits!):
The author argues that “the crypto industry as a whole has significant problems with speculative bubbles, ponzis, scams, frauds, hacks, and general incompetence”, and that EA orgs should avoid being significantly associated with it until the industry becomes stable.
In the last year, at least 4 crypto firms collapsed, excluding FTX. Previous downturns have included the collapse of the largest at the time crypto exchange mt gox. Crypto’s use is dominated by people using it to get rich - after 14 years, there are almost no widespread uses outside of this. This all means it’s a speculative bubble, and it will likely collapse again (maybe not in the same way). If we’re associated with it this could lead to a negative reputation that EA “keeps getting scammed”.
(If you'd like to see more summaries of top EA and LW forum posts, check out the Weekly Summaries series.)
For those who care about scalable effective altruism, it's surprising that there aren't more proposals for using coordination technologies, AI, and knowledge networks to rate and review potential charity frauds.
While it's important to warn about the risks of cryptocurrencies and blockchain, we also need to prevent future scams in other forms. Even if we believe that web3, defi, and other emerging technologies aren't just iterations of the same scam, we should at least agree that there are no effective tools for identifying which projects have real open-source activity, privacy policies, links with reputable networks, whistleblower protections, and other features that could be used to measure and identify weaknesses that lead to fraud. Ignoring this issue and prioritizing the promise of fast riches for fast altruism will only lead to repeating the same historical mistakes. However, such an AI would probably not rank EA organizations highly either.
https://youtu.be/d8vyzIkR384
Cryptocurrencies are not all bad. However, in some areas, it is transformed into scams