Burning the Tallysticks
Burbles from the Future of Decentralized Finance
(Photo by Lucius Felimus: https://www.luciusfelimus.com/ FT Street scene in Monumento's redlight district. Purchased as NFT on Hic et Nunc)
Oh! Lenin probably wouldn’t have enjoyed cryptocurrency at all, but he did say there would be ‘decades where nothing happens and weeks when decades happen’… and so it goes with crypto: last week was a week when decades passed.
Vitalik Buterin, the 27-year-old creator of Ethereum, casually and without warning made transfers worth about $1.5B into the accounts of an Indian coronavirus charity (Crypto Covid Relief) and Gitcoin, an open-source project funding ecosystem.
It was a preview of a massive wave of philanthropic funding that’s about to hit traditional institutions, think of it as the cream skimmed from the formation of a $2.6 trillion marketplace, and it’s about to transform traditional institutions like universities and museums forever. So they say. Full disclosure, I work for one of these organizations. But it wouldn’t be crypto if this charity weren’t also extremely weird and personal, and the source of this donation turned out to be from unwanted transfers into Buterin’s account.
All transactions on the Ethereum network are visible to anyone who wants to look, and people watch Buterin’s wallet, hoping to catch a glimpse of the next big thing in crypto, so apparently, developers have gotten into the habit of transferring substantial portions of their tokens into Buterin’s wallet to feign his interest and spoof potential investors. Most of these tokens are absolutely wretched and little more than pyramid schemes that people “ape into” in the hopes of getting out before getting “rugged.” (A rug-pull is really more of a yield farming swindle, technically this would be more of a pump and dump.) Sometimes these little schemes blow up.
Dogecoin, which was an old fork of Bitcoin created as a joke, has generated enormous interest over the past year and swollen in value from less than a penny per coin last year to almost 75 cents. There are something like 14,000 Dogecoin wallets worth over $100,000 now, including a couple of lucky investors who turned hundred dollar investments into tens of thousands.
Dogecoin’s success inspired imitators: Shiba Ibu and ATIKA, which are tokens created on Ethereum’s network, and also named after dogs swelled up in value as investors were priced out of Dogecoin, until Shiba Ibu peaked at $0.0000388, giving it a market cap of over $13.5B for the 394,796,000,000,000 tokens in circulation.
The developers gave Buterin 50 percent of them. He has a history of making charitable donations and simply transferred the Shiba Ibu and Atika out of his wallet and into the charities and the watchers saw. Naturally, the price plunged.
If this wasn’t the biggest private donation in history, it must be close.
Enter Elon Musk.
When I worked for a despicable geopolitical volatility hedge fund and later when I attempted to model military strategy for a computer game company, the single most difficult factor was assessing the sanity and intelligence of a foreign leader.
We didn’t have access to the good stuff. Our intelligence agencies do a very good job of convincing us that people like Saddam Hussein or Kim Jung Un are demented, bloated buffoons making policy decisions on cruel whims. But are they really? It’s difficult to tell. We get such a curated view of them that it’s impossible to judge. And so it goes with crypto billionaires.
Cryptocurrency markets are gradually getting some regulation--mostly on the part of the SEC making sure token issuers comply with the various Securities Acts and Banking Security Act of 1970 and that the IRS gets its beak wet from payment gateways--but by their nature, these markets are essentially unregulated, unstoppable, and subject to the whims of a burbling cauldron of sentiment.
All markets are subject to ‘Animal Spirits’ but without circuit breakers or regulation it’s a wild rumpus.
My current boss tells us he cut his teeth community-building in a notorious space mining game, Eve Online, he won’t admit which campaign it was, but I’m guessing it was the one that destroyed $2mm worth of virtual property, consisting of 2900 virtual spaceships. He admits he was guild leader and coordinated a massive war with an online forum full of pranksters. He’s not the only Eve Online veteran in crypto. Many other crypto notables learned their trade in hyper-adversarial virtual worlds filled with the forerunners of the arbitrage bots plaguing decentralized finance, sinister state actors trading virtual gold across borders, and Chinese miners grinding away creating gold to sell.
As this has unfolded, I’ve been ingesting information from two rather august sources: the first is Peter Frankopan’s THE SILK ROADS: A New History of the World, the second is the world’s first course on Decentralized Finance, taught by Berkeley’s Dawn Xiaodong Song and Christine Parlour. If you’re interested in the latter, I encourage you to check out the course’s website and begin by reading Campbell Harvey’s overview.
Frankopan is trying to reorient world history around the Silk Roads and the Middle East instead of Rome. It makes sense, he describes the roads as a great arterial circuit coursing between Asia and Europe, propagating ideas like Christianity and Islam, bringing invasions and goods, pestilence and learning. For most of history, the West was a backwater, a pimple with little going for it other than a propensity for warfare and fortification-building, which Frankophan eventually credits with inspiring a kind of societal toxic masculinity that--along with nearly unlimited funds from gold plundered from the Americas and slaves snatched from Africa--that was really responsible for the rise of Western Europe. He’s probably right, after all the older I get, the more indoctrination I uncover, yet it seems so materialist to think of; to reject the idea of a renaissance and the idea that there could be sudden flowering of ideas and art and philosophy and freedom and that it could take over the world and inspire revolutions (England, France, American...) far grander than anything Lenin ever sparked… well, it’s a bummer.
Dawn Song’s course at Berkeley was thrilling. The academic equivalent of an explorer’s expedition into uncharted territory: the first Decentralized Finance course at a major American university; and an attempt to bring the cartoon sushi rolls and galloping unicorns into the academy. A remarkable number of founders and chief scientists showed up to guest lecture.
The gist was that most financial industry functions can be automated using cryptocurrencies. Anything that can be rendered as math can be turned into code, compiled, and executed. Finance is all math. Trades that took days to settle can be done in seconds. Pricing models and market-making that used to go through institutions created from centuries of tradition and atrocious tangles of legislation can run with a spreadsheet and a couple of simple functions balancing prices between assets. Pricing oracles sieve information “off-chain” and bring them onboard.
Of course, there are problems: since decentralized finance is completely transparent, trades can be spotted before they’re executed and loans can be made within a single transaction. The result is a plague of arbitrage bots and perverse incentives for miners who front-run trades.
Perhaps the biggest difference between crypto and the real-world stock market is that anyone can become a tout for whatever they like with very little consequence. Roaring Kitty Keith Gill was called before Congress for allegedly sprooking Gamestop stock but it’s perfectly legal to do it with crypto. They call it ‘pumping your bags.’
Musk, with his platform of 50mm+ Twitter followers, waded into an unregulated ocean of cryptocurrency discourse and stirred up a maelstrom. Was it a whim? Was it calculated? A mysterious wallet owning $15B worth of the stuff made a single 420.69 Dogecoin purchase the other day. In the past Musk has totaled his own company’s stock by making drug quips about its value, and his behavior toward the diver who stole his thunder during the Tham Luang cave rescue seemed pretty undeniably vindictive and ill-considered, but Howard Hughes and J. Paul Getty were also notorious for this kind of behavior.
I think Musk felt Buterin was leaching away attention on the eve of his Saturday Night Live debut.
Buterin is an incidental billionaire. He doesn’t care about the money. He’s highly ethical, and far from neurotypical. There’s a video of him in mittens wearing a cartoon cat head purse strolling around the Swiss Alps. In another, he’s ferociously picking his nose. The biggest flaw with Etherum, the decentralized money computer was that Buterin didn’t factor the bad actors in while he built it. He means to do good, or by all accounts seems to want to. There’s a squishy squiggly cartoonishness to everything he does and it’s spread to the markets.
Decentralized finance is all about cutesy Japanese inspire kwai unicorns and baked goods. It is to repel normies and it isn’t anymore. Traditional“Tradfi” investors think they smell weakness and are circling like sharks.
To name a few from the show Shark Tank: Mark Cuban is in deep into Dogecoin and pumping Non-Fungible Token collectible NFTs based on the Maverics, and Mr. Wonderful (Kevin Smith) is capitalizing on environmental concern and wants to segregate “green energy” Bitcoin from bad old coal variety classic. And there were crackdowns on mining in China, and high-risk, high-return liquidity pools probably crossed some kind of greater-fool threshold of credibility in crypto’s collective consciousness when ‘Pregnant Butt’ began attracting millions of dollars worth of capital--so it wasn’t all Musk’s doing. But he squawked and it tanked. There are plenty of wavelets and froth but the motion of the crypto ocean comes from Bitcoin.
Or at least historically it has: normally it’s around 65 percent of the total market value, today it’s around 45 percent. Ethereum is snapping at its heels. Musk has tanked the price of Bitcoin before. A couple of days after Buterin’s billion-dollar gift, he did it again. Bitcoin peaked at $64,805 per coin in April, and today it’s… well, I’m not sure I want to look.
I deleted Coinbase off my phone. But surely it’ll be back, surely it’s coiling up for another surge to the moon.
The oldest guest lecturer in Dawn Song’s class was the most inspiring. Campbell Harvey, who teaches Innovation and Cyberventures at Duke University’s Fuqua School of Business, gave a harrowing presentation loaded with references to students and presidents of banks and major financial corporations who were gradually realizing that decentralized finance was about to devour their world and furiously making plans to join crypto companies.
Ethereum and Bitcoin are at their core distributed ledgers, eternal records of concatenated truths, not so different than our very first accounting system: neolithic clay tablets are apparently strewn all over modern-day Iran and contain little more than records of transactions. Eventually, priests began recording stories on them (although the first piece of nonfiction writing is apparently a series of banal self-help phrases). I often wonder whether the blockchain will also evolve into a kind of hyper literature.
Art predates writing by a couple of tens of thousands of years (art historians are fascinated with paleolithic handprints) and art has found a home on the blockchain.
Non-fungible tokens are usually just addresses that are connected to the blockchain while the images (or little clips) are hosted elsewhere but contain a reference to the code embedded in the blockchain. A couple of writers have tried to make NFT short stories, where one half is locked behind a very expensive paywall or else they’ve tried selling tiny little chunks of their work as NFTs, but it’s not really the same. It’s just a container. It doesn’t need the blockchain.
Mikhail Bakhtin described the novel as a squirming mass of speech acts, a kind of gumbo of monologue, descriptions, fragments of script, and chunks of philosophy the author has seasoned with. Is there a way to snake a blockchain through it? Chains don’t interface with the world outside of themselves (unless an oracle like Chainlink is feeding in information). But censor-proof chains of truth seem like they should have some use in literature.
Platform building is almost a kind of literature. It’s closer to a scam called the Big House, where a convincing facade is created to swindle a mark into making a big investment. Only in this case these fraudulent communities eventually do blossom into the real thing. Or want to. Perhaps they’re better imagined as reality distortion fields.
It’s probably not a coincidence that Silicon Valley is overrun with weird superstitious practices that all seem to revolve around willing things into existence. It’s what they do.
A popular study of cryptocurrency incentives describes it as a dark universe filled with predators. Certainly, the furies of speculation and conspiracy around blockchain technologies are mostly artificial. Propagating a new currency or token all but demands a prebaked community of enthusiasts. With the possible exception of Bitcoin and Dogecoin, all community building in the cryptocurrency world began inorganically and built on itself until it gathered critical mass.
Three days after the Musk dip, Bridgewater Associates Ray Dalio announced he owned Bitcoin and preferred it over a bond; Goldman Sachs began calling it a new asset class, big funds announced they’d bought the dip, and Musk himself announced plans to meet with American miners and the market went back up.
Manipulating crypto really isn’t much different than cornering the silver market a generation ago, it’s just sillier and a few orders of magnitude larger.
Reciting this year’s Queen’s Speech, Member of Parliament Tom Tugendhat referred to the adoption and embrace of cryptocurrencies as akin to the burning of the tally sticks forcing a new financial order on the United Kingdom (tally sticks were an archaic National accounting mechanism set alight by marauding Irishmen in 1834 that burned down the Houses of Parliament).
Tally sticks never found use as an artistic instrument, but perhaps the blockchain shall. It’s the beginning of something.