2026-01-07
My views on crypto
Disclaimer
I previously worked in crypto, so I figured I am qualified to give an opinion.
The key success of crypto is regulatory arbitrarge.
- The basic idea of regulatory arbitrage is that if you want to break the laws of country A, you go host the servers in country B and allow people in country A to access them. Since country A can't just firewall their entire internet (China has tried), and country A can't selectively target these users without paying a significant cost (many countries have tried), this can work.
- This reduces the "cost of exit" for those people in country A but dislike country A's laws.
- Example: USDC is held by people of many countries that have regulations on tax and capital control, those people would find it worse to just purchase USD instead.
- You can apply this core idea to payments, to identity, to finance (not just payments), to social media, and so on.
- As of today, it seems unlikely that crypto alternatives will replace the dominant system. But they could continue to exist as an alternative. The very fact that the alternative exists, puts pressure on the dominant system to be less bad for its users (as per whatever its users consider "bad"). The mainstream and alternative system both have pros and cons, and users will pick the lesser evil.
- Examples: Decentralised identity is unlikely to replace Aadhaar or Social Security Numbers. Decentralised finance is unlikely to replace Vanguard. Bitcoin is unlikely to replace Bretton Woods system and the key eurodollar lenders. Mastodon is unlikely to replace Twitter. But the existence of these things can affect SSN or Wall Street or eurodollar markets and so on.
The main reason why crypto could fail in next 5-30 years is geopolitics and the offense-defence balance of cybersecurity and espionage.
- Blockchain system designers assume there are N different actors that they are distributing the system between. In practice, there are basically 9 nuclear-armed countried divided broadly into 2 geopolitical blocs. If both blocs coordinated they could shut down crypto. Crypto relies on both blocs not cooperating at all. Crypto also relies on both blocs not firewalling their internet completely, such that you end up with a world with two different internets.
- Blockchain system designers assume that if no single actor can capture censorship or governance mechanisms in their system, this is sufficient. In practice, unless you also ensure privacy for users, the govt can just go imprison that user instead. The govt doesn't need to touch your blockchain system as long as they can doxx the users.
- As per Snowden leaks, it is obvious that both blocs are spying on almost everything. There are strong incentive pressures for almost all the information to reach the public. (This is discussed in my other post.)
- Even for the information that is most heavily defended, it seems like espionage and cyberhacks can reach it, and the offense-defence balance for both of these is changing.
- If you are a govt actor, implanting backdoors in the hardware and software stacks is easy. If you are a random poorly funded developer collective, finding these backdoors is hard.
- I want to understand the offence-defence balance of cybersecurity more, and especially how AI will change it.
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