Disclaimer: I think I’m supposed to say none of this is investment advice so I don’t get sued. So— none of this is investment advice.
I am going to write 3 posts exploring and trying to explain Web3 to a normal person in order to try and understand it myself.
Web3 is the name for the new ecosystem that people either love or hate built on Blockchain technology.
The first post will be on Crypto, the second on NFTs and the third on DAOs.
I believe all these things are simultaneously the future, but have aspects of a bubble and are riddled with scams. Adam Davidson puts it best–
“There are a bunch of arguments against web3, most of which--I think--are rooted in a circa 2010 understanding of the tech or are focused, solely, on a handful of extreme use cases. It’s just a pyramid scheme, or a money laundering tool, or a general scam! (The answer, I think, is: it is all those things, but not just those things.)”
First,
What is cryptocurrency?
It’s currency whose ownership is kept track of on a Blockchain.
So what is a Blockchain?
It’s a database of transactions that is entirely public and transparent. Secured through crazy math that makes it impossible to cheat (in theory).
Now that’s cleared up, let’s examine some common claims about crypto.
CLAIM 1: It’s not real.
Well, money isn’t real. What’s real is goods and services. What’s real are the skills and talents of people.
Money just facilitates the exchange of these things. We could use anything for money, and have through history.
Fiat currency is what we have now. The history of it is long, but where we’re at is– the only thing backing our money is the belief we can trade it for things we actually value (goods and services).
If people believe Crypto has value, then it does. You may think that’s stupid. But there are lots of things I think are stupid that have value (diamonds, baseball cards, Gucci loafers, Ferraris, etc.)
If someone is willing to pay for it, it’s worth money. So crypto is just 1s and 0s on a blockchain, but your money is just 1s and 0s kept by a bank. As long as people agree to trade things of actual value for them, then these 1s and 0s are money.
PREDICTION: Cryptocurrency as a whole will never go to zero.
Certainty of this prediction: 95%
Crypto Market Cap over time
Source: https://www.readthegeneralist.com/briefing/the-decentralized-country
CLAIM 2: It will never replace the dollar as the USA's currency.
This is probably correct.
National currencies have a huge advantage over crypto in that they are used to pay taxes. As long as the government can force me to pay taxes, then I’ll need dollars.
Further, the dollar will remain preeminent as it represents the world’s largest economy. Also, it is currently the world’s reserve currency, which gives it an added boost.
Prediction: In ten years, the Dollar will still remain the world’s reserve currency. This is partly a bet against China (sub-prediction China will face a series of economic crises due to their awful recent economic reforms), and partly a bet on the able management of the Federal Reserve.
Certainty: 50 percent
CLAIM 3: A cryptocurrency will become the dominant currency somewhere.
Not all national currencies are created equal. Many countries have suffered bouts of high inflation (and indeed we may see such a bout here soon) where faith in the currency cratered. Prolonged repeated inflationary episodes undermines the government’s ability to maintain a currency.
In Brazil they had to invent a whole new currency to replace their old one.
Here is where crypto comes in, it gives people in these countries a different option.
Bitcoin was widely mined and used in Venezuela after that country’s regime ruined their currency. Further, crypto is already pretty useful now to send money to people in poorer countries.
And El Salvador has already adopted it alongside their national currency (and are building a bitcoin city inside a Volcano, so totally normal behavior).
However, there are serious issues with using crypto as a currency.
1) it is incredibly volatile. You want your currency to be stable, you don’t want milk to cost a dollar one day, 4 the next and then 50 cents the following day. And unstable currency makes planning very difficult.
2) The transaction fees are still quite high. This makes small purchases cumbersome.
Both of these issues are probably solvable. There is an effort to make stable versions of crypto and there is a lot of effort around reducing transaction fees.
Think about it this way. Money is just a piece of technology invented by humans. As I stated above, money just facilitated transactions of the things we actually care about: goods and services. If someone can come up with better money, it will be adopted.
Right now, the dollar is a pretty good technology, relatively stable (although we will see if inflation keeps clocking in at 7% ), accepted almost everywhere, and has low transaction fees. Other countries aren’t as lucky, and crypto will be a superior technology soon, once that happens it will be adopted in the places where it provides a better option than the national currency.
Prediction: Within 10 years, the majority of some country’s transactions will be in crypto. And that crypto will not be bitcoin as bitcoin’s blockchain is cumbersome (I’m pretty sure this is true, but maybe some crypto lord will correct me).
Certainty: 80 percent.
Claim 4: Crypto will unfairly redistribute wealth to early Crypto adopters.
Early crypto adopters will surely become very rich in a world where crypto is more prevalent.
But:
1) all crypto currency is not created equal. Ethereum seems much more useful than Bitcoin (again this is just my opinion, take it with a grain of salt as I also thought the Golden State Warriors would be terrible this year) Some of these weird coins I see advertised on bus stops are surely useless–
It’s a lot like the Dotcom bubble, not every coin is going to become Amazon. So people associated with the truly useful coins (i.e. the ones that have the best blockchain tech) will indeed become quite wealthy. But this isn’t new, every time a transformative technology is invented, the early adopters and innovators become quite wealthy (see the Railroad barons of the 1800s and our tech billionaires minted in the 90s and 00s).
2) Wealth won’t necessarily be redistributed, wealth will be created. Innovation creates wealth. If I invent a drug that cures cancer, I’ve added to human capabilities, the stock of what is possible. To be more concrete, literally– Imagine I invent a way to make 10 times more concrete with the same resources. Now we have more concrete as a society. No one got poorer (except for some concrete companies that I may put out of business), instead as a society we can produce more with less. Innovations are usually labor-saving or resource-saving, meaning they add to society’s wealth.
The blockchain is such an innovation, potentially.
Now some people may lose out. But if you hold actual assets, like stocks or real estate, those will remain actual assets. The Web3 world crypto enables may be bad for some existing organizations or financial intermediaries as Web3 displaces them. But it won’t be some massive wealth shock to most Americans.
However,
PREDICTION: By 2030, 5 percent of the US richest people will have made their fortune in crypto and web 3 technologies.
Certainty: 60%
CLAIM 5: It’s a scam.
When I’m getting random emails about crypto and spam texts, it certainly seems scammy.
When people are buying it, just because they expect it to always go up in value, well, that’s how bubbles develop. And bubbles always pop.
And crypto basically is a ponzi scheme as currently constructed. So scams abound. BTW, check out tether!
So yeah, I’d say there’s a fair chance many crypto assets are overpriced and many of the cryptocurrencies will go to zero as scandals ripple through the ecosystem.
Prediction: Average crypto prices will drop by 40 percent sometime in the next year. (note: I actually wrote a draft of this before the recent 20% drop)
Certainty: 50% In the next 2 years, certainty: 65%
But it isn’t all a scam.
With anything, I try to think about the value added. So a transparent secure cryptocurrency could definitely be valuable to people living in countries plagued by inflation. Also it will definitely be a better way to transfer money to people in less developed countries.
Is that the latest alt-coin, or doge or whatever?
No. It’s also probably not Bitcoin. It might be ethereum, though, and it might be a new coin developed for a specific area.
In the long term, the real value added is the underlying technology: the blockchain. That has some very interesting uses I’ll discuss in my next posts.
Now–
The energy concerns.
Bring up crypto and NFTs and inevitably someone will say, “yeah, but the energy usage, you know…”
This critique has really caught on. Here’s why I think that is.
Sometimes, people are just naturally predisposed to hate things. For instance, let’s say I never liked football, I always thought it was boring. And I never got along with the people that played it in High School.
Then, it is revealed that football causes serious brain damage.
Now, my hatred is justified! I can feel morally righteous. I can tell myself I’ve arrived at my opinion through deep caring and concern. Whereas before my opinion was based on the girls liking the quarterback instead of me.
With crypto, people naturally dislike new things, new pieces of tech. Further, crypto evangelists tend to be pretty off-putting. And there are a ton of scams. This caused a lot of people to dislike cryptocurrency.
Then some articles are written about how much energy it uses. Before, people were reluctant to say, “I hate crypto because I fear change and these guys getting rich off it are douches.” But now, they get to say, “I hate crypto, because I love this planet.”
So what of these energy concerns?
I agree we should definitely use less dirty energy, pollution is really bad, much worse than we previously thought. We should do everything in our power to reduce it. However, I’m not that concerned about crypto’s usage.
First,
The concerns of crypto and energy are likely overblown.
Second,
Ethereum is soon switching its mining technology so that a lot less energy will be consumed in its production.
Third,
We have clean energy: it’s called nuclear. It’s safe, cheap, and doesn’t degrade the environment. Environmental activists killed it.
We also have solar. Also clean and cheap.
If all these crypto haters really cared about the energy usage. they’d focus on getting rid of the regulatory barriers on Nuclear and Solar.
But maybe they don’t actually really care—
Bottom line:
Thanks to engineers (not activists), most of our energy will probably be clean within the next twenty years (US emissions have already started declining), so I’m not super concerned about the crypto, NFT, etc. energy use as I believe we will have clean energy very soon.
MY PERSONAL EXPERIENCE
At the end of these articles, I’ll recount my personal experience in these spaces. I don’t have much extra money, so I don’t have much crypto. But I own some crypto, no Bitcoin. I own mostly ethereum because that’s the currency that seems to have the most uses– so I have some in order to be able to participate in some aspects of Web3 that seem cool to me.
Speaking of which, next up I’ll discuss NFTs.