Wait, wasn’t bitcoin supposed to solve this?
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.
A popular refrain among crypto advocates over the years has been “bitcoin solves this”. But the same phrase has also become a popular meme among critics of cryptocurrencies and blockchains.
Sceptics offer the phrase in reply to overzealous crypto acolytes who try to apply blockchain technology to everything from salad provenance to social media. “Bitcoin solves this,” they eye-roll, gesturing to the fact that no amount of blockchain will be a panacea to the problem at hand.
Over the last week, as crypto exchange FTX crumbled into bankruptcy amid revelations of misappropriation of customer funds, imaginary marks and risky bets, crypto’s proponents and detractors alike have turned that phrase into a question. “Wait, wasn’t bitcoin supposed to solve this?”
After all, cryptocurrency was invented explicitly to counter Wall Street’s opaque and overleveraged practices. The original Bitcoin whitepaper proposed a system that would end the reliance on trusted financial institutions, reduce fraud and protect consumers. At the moment, this couldn’t feel more ironic.
But not having to trust anyone is a seductive promise! According to Gallup, trust in government, media, banks and beyond has been in a steady decline for decades, but really, all you need to do is log on to Twitter this week and check out the chaos to see that society has a trust problem. It is little wonder that blockchains with their vows to obviate the need for trust have captured the imagination of many.
And to their credit, I think blockchains and their “decentralised finance” (DeFi) applications have actually delivered on this promise. Individuals can custody their own crypto assets, audit the ledger of transactions by themselves, and even participate as keepers and overseers of the whole system. Millions of people now only need to rely on code.
These cryptocurrency users might have lost sleep this week as they watched the value of their assets plummet, but at least they weren’t worried about whether they’d ever get access to their funds again, as they have with centralised crypto exchanges like FTX.
While FTX’s customers scrambled and failed to withdraw their funds, users of major decentralised finance products like Uniswap, Compound, and Aave had continuous access to their assets and benefited from orderly and transparent processing of their trades, transactions, and, yes, liquidations. For the users who hold their own coins and only trade on decentralised finance platforms, crypto came through. It turns out that blockchains can mitigate the risks posed by intermediaries!
Unfortunately, not all crypto holders have taken advantage of these properties. That’s because there are major trade-offs.
In order for crypto users to gain the benefits of blockchains, they must use new and clunky products that carry their own risks. The stakes are high if they make any mistakes, and they will only have themselves to blame. The man who famously threw away hundreds of millions of dollars in bitcoin in a garbage dump was “acting as his own bank”. As he demonstrates for us, there’s a major drawback to being your own bank. You have no recourse, no customer support, and no one to sue if you lose from your own negligence.
DeFi users also take on the risks inherent to an anarcho-utopia (or dystopia?) where code is law. If a user makes a typo in the address to which they are sending their assets, there is no way to undo that. Similarly, if a hacker finds a bug in the code of a DeFi product and extracts user funds, the victims will have little protection. It is like the ultimate “finders keepers.” The technology is still in a state where these types of hacks happen all the time. For many users, it is not worth the inconvenience and the risk to gain the benefits of “trustless” systems like those of DeFi.
Users who do not want or need to hold their own crypto can do it the old fashioned Wall Street way: they can trust a custodian. Custodial exchanges not only enable crypto users to cash in and out of coins and tokens, they also hold on to users’ assets as deposits. Of course users who hold and trade on exchanges are not really using crypto. They aren’t deriving any of the features crypto was designed to offer, like self-custody and censorship-resistance and transparency. They are just holding or speculating on whether “number go up” or “number go down”.
Still, it’s fair to say that millions of users benefit from the convenience of holding their assets on these exchanges. Today it turned out that at least a million of those users — namely the ones who used FTX — would have been better off if they had taken advantage of crypto’s value proposition and held on to their funds themselves.
And the grim reality is that despite bitcoin and other blockchain products offering alternatives, as of today, the cryptocurrency market has created more intermediaries than it has eliminated. For the last several years, no one has really cared about the genuine utility that may be found in crypto.
With global floods of easy money pouring into asset classes of all kinds, and pushing people further out the risk spectrum, entrepreneurs, developers, and investors found themselves incentivised to play into the building of a large speculative bubble as opposed to delivering durable value.
Too much of the time, energy, money, and attention that has gone into crypto over the past few years has gone toward building gambling markets around magic beans — instead of creating products taking advantage of the openness, transparency, and autonomy that the tech offers.
FTX and its violation of user trust serve as the starkest reminder the industry could ask for in returning it to its original vision. The demise of FTX feels like the end of crypto at the moment, but it may become the catalyst to drive the industry to the areas where cryptocurrencies and blockchains can solve real problems.
Already, many more custodial exchanges have announced that they will take advantage of the transparent nature of blockchains to provide the public with a cryptographic “proof of reserves”. This is a great example of leveraging the technology for its true utility: improving accountability.
It feels optimistic in this hour of shame and darkness, but one can hope that crypto might actually deliver on a more open and transparent system so that in a decade we will look back and be able to say: bitcoin solved this.