At the Crypto Crossroads

In my view we are at something of a crossroads in the crypto space, where major players in the “legacy” economy are starting to take more of an interest in blockchains. This is inevitable and I think there are two ways it could go broadly, we will likely see both happening for a while. The first is for established companies to make their own version of the it, the second is for them to find an area of the crypto commons to make their own, or terraform some portion of it to suit their needs.

Corporate Base Layer

Facebook has been the most visible proponent of building a corporate-backed blockchain payments network, with Libra (now called Diem)¹ receiving a frosty reception in 2019 when it was announced as a multi-currency stablecoin. After a year of discussions with regulators, Diem is now planning for a more limited launch of a dollar-backed stablecoin in early 2021¹ - the basket of backing currencies was one of the aspects regulators took exception to. A bill introduced in December 2020 ² would require stablecoin issuers to secure bank charters and regulatory approval before releasing these - this is widely seen as a response to Libra and the threat of similar launches.

The Telegram messaging app ICO raised $1.7 billion³ in private investment for TON tokens, but they were sued by the SEC for issuing unregistered securities, Telegram opted to give the ICO money back and pay a penalty⁴ to resolve the matter.

We can anticipate that other corporations will learn from these events and manage to launch products without getting entangled with regulators. JP Morgan have already shown how to do it with their own JPM Coin blockchain toy for internal use, although that wasn’t a very ambitious use case. By October 2020 JPM coin was being used for the first time ⁵ and the JP was setting up a unit with 100 staff members, described as “close to making money”.

Corporations on the Commons

For corporations that don’t have such grand ambitions as a blockchain of their very own, the question is whether they’re interested and looking to carve out a space somewhere on the crypto commons.

Michael Saylor, CEO of MicroStrategy, a publicly listed company which has been on a Bitcoin buying spree in 2020⁶, is one of the more interesting characters to emerge on crypto twitter this year. MicroStrategy announced in August that it was going to make Bitcoin its primary reserve currency to hedge against dollar inflation, and has since then bought 70,470 BTC, putting it one place ahead of the United States government as the fifth-largest holder of Bitcoin - although I don’t think this considers that US Gov just added to its balance with a seizure of $1 Billion worth of Silk Road era BTC.⁷

Saylor was quickly adopted by many Bitcoin fans as a new champion who was preaching the message of escaping inflation with fixed-supply Bitcoin within circles where people have more money at their disposal and more weight to push the Bitcoin price higher if they add demand to the market. Saylor has reciprocated with poetry and tweets singing the praises of the Bitcoin Maximalists, and echoes their talking points. With more companies announcing Bitcoin positions, this seems to be a major catalyst driving Bitcoin’s price to new highs.

Paypal is now offering Bitcoin for sale to its users,⁸ but not allowing them to withdraw it or send it to each other, yet at least. A number of companies now offer similar “paper crypto” services like this where the customer is not really buying the asset but more like a “contract for difference” instrument from the seller.

The other big financial sector disruptor is Square Inc., and they have been even faster to embrace cryptocurrency, with a purchase of $50 million BTC in October 2020 ⁹ the latest in a long series of pro-Bitcoin moves from Square.

There are also a number of crypto-origins corporations that serve as a bridge between the legacy economy and crypto. In the ICO era that bridge was made of pre-sale deals which gave the fiat investors a preferable rate to enter the crypto pool at - the corporation may also have paid for liquidity that made it easier for the investors to dump their tokens at a profit. In 2020 we saw Uniswap evolve this concept as an airdrop and liquidity mining, where the tokens weren’t being sold in an ICO but given to users - with 21% of those tokens going to the corporation and 18% to its early investors.

The combination of significant VC funding and a big role for the VC-backed entity serves as a way to transplant the established players and ways of doing things (and their capital) onto the crypto commons.

In my view the VC-style approach is ill-suited to the crypto commons. Projects that grow organically and build out their commons-based infrastructure as they do so have a natural advantage because it is easier for them to become (more) decentralized. SushiSwap are have put this logic to the test by cloning Uniswap’s code and creating a competitor built upon its shoulders - lacking the skilled contributors who wrote the code originally, but also buoyed by the absence of a requirement to give 40% of tokens to some corporation(s).

This way to the walled garden

Once the institutions are Bitcoin holders, and there’s a version of Bitcoin which suits them, where do people go for p2p electronic cash? This could still be Bitcoin, at the margins, but there are some good reasons to think it won’t be.

Exchanges won’t except BTC from certain blacklisted addresses, and many of them retain the services of chain analysis companies who can tell them about any taint associated with incoming coins - I expect that over time it will become increasingly difficult to send coins which have been mixed to an exchange. The Lightning Network could provide a solution to use Bitcoin for regular p2p transactions, but it seems likely to remain fairly exclusive while the technical barriers are high and on chain fees for opening and closing channels are expensive. The privacy implications of transacting on LN are also just being explored.¹⁰

Reasonable privacy is a prerequisite to widescale self-custody and use of cryptocurrency. If people can easily find out how much cryptocurrency you have, it’s not safe for you to have very much. In 2020 we are seeing the outline of this conflict emerging, a wall being built around “safe BTC” and the people you can get it from, with mechanisms in place that encourage leaving it in the custody of some company. This is the agenda of the people behind the new proposed regulation of transfers to “self-hosted” wallets.¹¹

We are also (writing at the end of 2020) in the midst of a delisting of “privacy coins” from exchanges.¹² Blockchains that have some feature for protecting users’ privacy are not being allowed on the same exchanges as assets with a transparent ledger where users transactions can be tracked more easily.

Bitcoin is being sanitised for the institutions, and the network’s more powerful constituents are in the main happy to go along with this because the inflow of institutional capital is expected to drive the price of BTC up.

Walled garden bypass

On the other side are people building around whatever points of centralization they can find, developing infrastructure to deliver their vision of a decentralized [whatever]. If Decentralized Finance can replace financial intermediaries with smart contracts and reduce costs by increasing efficiency that’s great, and doing it on an open accessible blockchain is even better. However, for me personally “decentralize finance”, in the sense of aping the fiat financial system on a blockchain, is a fairly weak rallying cry.

Decentralized Exchanges of various forms are however proving themselves to be a useful addition to the ecosystem. Ethereum users have a variety of liquid decentralized exchange protocols with automated market makers to choose from now, and Decred has recently launched the initial version of DCRDEX, which is running on a client-server model for accessing order books, with traders then completing the trades directly on chain and the server standing by to ensure everyone follows the rules about following through with matched orders.

For every round of new regulation and legislation, there will be people looking for and finding workarounds and loopholes. With open source software they have a flexible medium to work with, and with an open internet connecting everyone the hackers are in a strong position now that the fundamentals of cryptocurrency are being demonstrated over time.

Nurture the Crypto Commons, so they grow up Big and Strong

To the extent that these projects are truly commons-based, everyone is permitted to observe how their experiments play out and learn from their observations. The nature of the commons limits the power of gatekeepers to control who can participate in these projects, although in practice FOSS governance can entrench respected figures in positions of power. These projects also thrive on attention and productive contributions, although they are susceptible to derailment and distraction.

Self-funding blockchains have the potential to bring the idea of a “FOSS movement” into play on new terms, where the issues with funding and incentivizing development are effectively solved. The ideology this time is not so much about the software as the sovereign networks ¹³ it brings into being, each of which has its own specific aims. A community or ecosystem of participants coalesce around those aims and work together to try and achieve them, they stand to benefit both individually and as a group from success.

The digital commons and CBPP are a prerequisite for any of this to be possible, and projects which embrace and make good use of the commons will derive strength from this. I believe that success will be determined by the scale of the ecosystem interacting with how well participating constituencies are aligned and their capacity to coordinate efficiently towards achieving shared goals.

Public blockchains are like digital organisms, composed of code, a social contract about what the network is for and how it works, and a way of incentivizing people to run, maintain and develop the network. They thrive on attention and interest, and for as long as at least some people want to run a decentralized network, it will likely be available in some capacity.

These commons-based digital organisms are going to have to compete with offerings from major corporations (who can leverage their assets in other domains, like social media) and national governments (who can mandate adoption), both of which could deploy significant resources and staff their commons with employees or contractors.

We should be considering which networks we feed with attention, who is providing that attention and input, how those people are interacting with the networks, and what they aim to achieve. The answers to these questions right now are shaping perceptions of what the blockchain and cryptocurrency movement is about - they will determine which of the potential blockchain futures come to pass.

What we learn about decentralization of control and governance on the crypto commons will echo in other domains where these are desirable characteristics.

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