Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. Let me cut to the chase. Matt Levine,
Speaker 1: my colleague on the Bloomberg Opinion side of the house,
Speaker 1: is perhaps the greatest finance blogger ever to do it,
Speaker 1: and in what is both a flex and a service,
Speaker 1: He's just written tens of thousands of words on the
Speaker 1: subject of crypto for a special issue of Bloomberg Business Week.
Speaker 1: Matt's gone deep into the blockchain to break down its origins,
Speaker 1: it's possible, futures, and the current state of a technology
Speaker 1: that's showing up everywhere in industries ranging from finance to
Speaker 1: shipping too, of course video games. And we're going to
Speaker 1: be bringing his exploration to you in audio form thanks
Speaker 1: to the talents of Bloomberg editor and professional voice actor
Speaker 1: Mark Ledoff. You'll get weekly chapters of the special Crypto
Speaker 1: issue of Bloomberg Business Week. Welcome to the seventh chapter
Speaker 1: of the special audio edition of the Bloomberg Business Week
Speaker 1: Crypto issue, written by Matt Levine and narrated by Mark Ladoff.
Speaker 1: If you need to catch up on a previous chapter.
Speaker 1: You can find episodes right here in the Bloomberg Crypto
Speaker 1: podcast feed. Part four Trust Money Community. Let me tell
Speaker 1: a couple of stories about crypto and society. A trust
Speaker 1: one story goes like this, We live in a world
Speaker 1: of trust, that trust pervades everything we do. We're spoiled.
Speaker 1: The institutions we deal with every day are trustworthy. Not
Speaker 1: all of them, not all the time, not in every way,
Speaker 1: but quite a lot of them to a high degree.
Speaker 1: We put money in the bank, and when we go
Speaker 1: to take it out, it's there. Crypto Satoshi Nakamoto and
Speaker 1: his disciples said no, no, no, trust is bad. Don't
Speaker 1: trust your bank. Use immutable code, verify every transaction for yourself,
Speaker 1: or download open source code and verify that it works correctly,
Speaker 1: and then use it to verify every transaction for yourself,
Speaker 1: or at least use a network in which that's possible
Speaker 1: and in which economic incentives demonstrably make it likely that
Speaker 1: it will happen. And do all of this in a
Speaker 1: system that's resistant to changes, that can't be controlled by
Speaker 1: governments or banks, that's immune to the rules of wider society.
Speaker 1: This had an appeal, and crypto became very valuable, and
Speaker 1: people looked to put their money to work in crypto,
Speaker 1: and they trusted people over and over again. They trusted
Speaker 1: Quadriga and Terra and Voyager and Celsius and dozens of
Speaker 1: other projects that failed or ran off with their money
Speaker 1: or got hacked. They just fell over themselves to trust people.
Speaker 1: Why did they do this, Well, there's a common thread
Speaker 1: in these kinds of things. The people who are easiest
Speaker 1: to pull in are often the ones who think they're
Speaker 1: the most independent minded and cynical. Either the bank is
Speaker 1: lying or Celsius is lying. Celsius told people flattering their
Speaker 1: unjustified belief that they know the real score. But there's
Speaker 1: something else too. The people who trusted Celsius weren't tripped
Speaker 1: up only by their belief that they were outsmarting the system,
Speaker 1: though there was that. They also they thought Celsius was
Speaker 1: a bank. It looked sort of like a bank. It
Speaker 1: did things with crypto that were banklike. They were familiar
Speaker 1: with how banks work. They understood that banks are safe,
Speaker 1: that if you put money in a bank you can
Speaker 1: get it act. They looked at Celsius and thought, well,
Speaker 1: this is a big thing. It has a nice website.
Speaker 1: It's available to Americans. Surely, if it was a problem,
Speaker 1: someone would have done something about it. Why didn't anyone
Speaker 1: do anything about it? Why were these platforms allowed to
Speaker 1: take money from retail customers, run high levels of leverage,
Speaker 1: and blow themselves up. I think the basic answer is
Speaker 1: that regulatory authorities are still very much catching up to
Speaker 1: how crypto works and who should regulate it. There's a
Speaker 1: very well understood system for regulating a bank. There are
Speaker 1: bank examiners who know how banks work, and who visit
Speaker 1: banks regularly to make sure they're working properly. In crypto,
Speaker 1: big platforms are often decentralized and vaguely stateless, and even
Speaker 1: in the US, there's a lot of jurisdictional jousting over
Speaker 1: which regulators get to regulate crypto and how they should
Speaker 1: do it. If you launch a terrible crypto platform, it
Speaker 1: might take regulators a long time to get around to
Speaker 1: understanding what you're doing and figuring out how to stop you.
Speaker 1: You and crypto has been very much in a move
Speaker 1: fast and break things mode, so it broke a lot
Speaker 1: of things before the regulators could catch up. There's something
Speaker 1: a bit alarming about all this Crypto is in a
Speaker 1: way about rejecting the institutions of society, about being trustless
Speaker 1: and censorship resistant, But it quietly free rides on people's
Speaker 1: deep reservoir of trust in those institutions. People are so
Speaker 1: used to trusting banks that when Celsius told them not
Speaker 1: to trust banks, they said, ah, yes, okay, then trusted
Speaker 1: Celsius to work like a bank, to be regulated like
Speaker 1: a bank. They didn't worry about celsius opacity and leverage.
Speaker 1: They didn't do their own due diligence on its loans
Speaker 1: and audit its defied positions, and demand irrefutable proof of
Speaker 1: its soundness. It promised to pay them back, and that
Speaker 1: was good enough for them. But there's something hopeful about
Speaker 1: it too. Trust in institutions is so strong and resilient
Speaker 1: that all of crypto's bluster can't stamp it out. Not
Speaker 1: your keys, not your coins, Put your trust only in
Speaker 1: verifiable code. Crypto evangelists yelled, and people heard them and said, yes,
Speaker 1: that is nice, but I'm busy. I'm going to trust
Speaker 1: these nice strangers with my bitcoin. Crypto in its origins,
Speaker 1: was about abandoning the system of social trust that's been
Speaker 1: built up over centuries and replacing it with cryptographic proof,
Speaker 1: and then it got going and rebuilt systems of trust
Speaker 1: all over again. What a nice vote of confidence in
Speaker 1: the idea of trust. One thing crypto has done is
Speaker 1: show just how valuable trust is b money. There's a
Speaker 1: related story about money. One way to think of money
Speaker 1: is that it's a system of social credit. Society has
Speaker 1: mechanisms capitalism, politics, etcetera to allocate resources with a rough
Speaker 1: heuristic of the more good stuff you do for society,
Speaker 1: the more good stuff you get for yourself. Money is
Speaker 1: a rough way of keeping track of that. If you
Speaker 1: do good stuff for other people, they give you money
Speaker 1: which you can use to buy good stuff for yourself.
Speaker 1: Another way to think about money is that it's some
Speaker 1: sort of external objective fact. If you have money, it's
Speaker 1: your money, and society has nothing to say about whether
Speaker 1: you can keep it or what you can do with it.
Speaker 1: Crypto starts from the second view. Your bitcoin are yours immutably.
Speaker 1: They're controlled only by your private key, and no government
Speaker 1: or bank can take them away from you. But the
Speaker 1: history of crypto since Satoshi has undermined this view. If
Speaker 1: you got your bitcoin illegitimately, the government can trace them
Speaker 1: and stop you from spending them. There are still gatekeepers
Speaker 1: crypto exchanges and FIAT off ramps and banks that decide
Speaker 1: what you can do with your money. Crypto might be
Speaker 1: immutable and censorship resistant, but its interactions with the real
Speaker 1: world are not. Not just that crypto isn't even immutable,
Speaker 1: not really. In twenty sixteen, an important smart contract on
Speaker 1: the Ethereum blockchain called the Tao got hacked. Dow is
Speaker 1: now a generic term, but this was the DOW, the
Speaker 1: first of its name. There was a flaw in the
Speaker 1: contract that allowed a hacker to drain a lot of
Speaker 1: money from it, and he did. Ethereum was a new technology,
Speaker 1: so the hack was a big deal. This hack was controversial.
Speaker 1: There was controversy about whether it was even a hack.
Speaker 1: Some people said, look, if the code of the smart
Speaker 1: contract allowed the hacker to do this, then it was allowed.
Speaker 1: There's no external standard of validity, just the code, and
Speaker 1: if it happened in the code, it's fine. If we
Speaker 1: reverse this transaction, we will destroy the essence of the blockchain,
Speaker 1: which is the irreversibility of transactions. Other people said, no,
Speaker 1: that's nuts. This was a big hack and lots of
Speaker 1: people lost money. It was clear enough to humans anyway
Speaker 1: that this was not how people intended the smart contract
Speaker 1: to work. Even if it was in fact how the
Speaker 1: smart contract worked, sometimes the code is wrong. The Ethereum
Speaker 1: network decided to roll back the blockchain and reverse the hack.
Speaker 1: That's hard to do. You couldn't just amass a bunch
Speaker 1: of computer power yourself and hack the Ethereum blockchain and
Speaker 1: reverse transactions. But if everyone in Ethereum agrees to do it,
Speaker 1: they can, or if enough of them did. In fact,
Speaker 1: a minority of dissenters split off, forking the Ethereum blockchain
Speaker 1: and starting their own network, now called Ethereum. Classic cryptocurrency
Speaker 1: isn't money that's totally immune to censorship, that's atomic and
Speaker 1: individual and immutable. It's money that's controlled by consensus, much
Speaker 1: like dollars are. It's a different form of consensus, proof
Speaker 1: of work, mining, proof of stake, validation, decentralized communities, dows,
Speaker 1: discord chats. But the thing that gives you the money,
Speaker 1: and that makes the money valuable is that consensus. Money
Speaker 1: is a social fact, even when the money is bit
Speaker 1: point or ether see community. Here's another more speculative story.
Speaker 1: The most valuable thing in human life. This story begins,
Speaker 1: is connection, being with your friends, making friends, feeling esteemed
Speaker 1: by your peers. These are the things that give life meaning. Sure, sure, sure,
Speaker 1: whatever you say, because this feels fuzzy and fake. But
Speaker 1: look how rich Mark Zuckerberg is. If you'd said a
Speaker 1: giant contributor to us gross domestic product is the friends
Speaker 1: we made along the way, that wouldn't have made any sense.
Speaker 1: Now Facebook is worth almost half a trillion dollars, though
Speaker 1: to be fair, it's changed its name to meta platforms,
Speaker 1: to markets pivot away from friendships and to markets pivot
Speaker 1: to the metaverse. I don't know what the metaverse is,
Speaker 1: but I gather that the metaverse means something like our lives,
Speaker 1: our social lives, are intellectual lives, are professional lives, are
Speaker 1: esthetic lives. The things that we do all day and
Speaker 1: that give our lives meaning will take place increasingly on
Speaker 1: interconnected computers. Our reality will be intermediated increasingly by computers
Speaker 1: and the Internet. Human social life moving to the Internet
Speaker 1: has economic value, it turns out, though, if you explain
Speaker 1: the mechanism, it seems remarkably trivial. If people talk to
Speaker 1: their friends about vacuums and you show them an ad
Speaker 1: about vacuums. They'll probably buy a vacuum. If we intermediate
Speaker 1: between people's friendships, we can serve ads. A key lesson
Speaker 1: of crypto is a bunch of people can get together
Speaker 1: online and make their community have economic value and then
Speaker 1: capture that value for themselves. If you explain the mechanism
Speaker 1: for that, it sounds even worse. Well, see, there's this
Speaker 1: token of membership in the community, and it's up this week. Also,
Speaker 1: the tokens are JPEGs of monkeys. But look, pretty soon,
Speaker 1: what are we going to sell each other? Online communities
Speaker 1: are valuable. There's money to be made. Why shouldn't the
Speaker 1: community members get the money. We'll be right back with
Speaker 1: more from Bloomberg Business Week Special Crypto issue, written by
Speaker 1: Matt Levine a narrated by Mark Leedoff d Finance. There
Speaker 1: are lots of online communities, though one is board Ape
Speaker 1: Yacht Club, a self selected club where you become a
Speaker 1: member by buying an expensive membership token. The value of
Speaker 1: that community is I guess you feel cool and exclusive.
Speaker 1: Maybe you befriend a celebrity or a venture capitalist. Bonding
Speaker 1: over your apes or their social networking Facebook is valuable.
Speaker 1: Make a neo Facebook. Give people a token, let them
Speaker 1: keep the value for themselves. Advertise can get your data
Speaker 1: only if they pay you in tokens you tell them.
Speaker 1: Or you can earn tokens for posting, which you can
Speaker 1: then use to pay other people for posting why not.
Speaker 1: Or gaming. If you buy a laser in this game,
Speaker 1: it's an n f T and it's yours to keep forever.
Speaker 1: Maybe you can use it in another game why not.
Speaker 1: These are standard claims about web three that leave me
Speaker 1: mostly cold. I don't want to be in the advertising,
Speaker 1: data selling, or computer game arms dealing businesses, but other
Speaker 1: online communities are defy like in some crude sense, what
Speaker 1: decentralized finances is a big community of people who get
Speaker 1: together to pretend to trade financial assets, or rather who
Speaker 1: trade financial assets in a sort of virtual world. They've
Speaker 1: built derivatives exchanges and secured lending protocols and new ways
Speaker 1: to do market making. But instead of trading stocks or bonds,
Speaker 1: they trade tokens that they made up, and those tokens
Speaker 1: are value able in part because they're linked to other
Speaker 1: online communities. You can use defy to buy ether that
Speaker 1: you then use to buy n f T s to
Speaker 1: become a board ape owner, but also in part because
Speaker 1: defy is itself an online community or cluster of communities,
Speaker 1: and the tokens it trades are points in that community.
Speaker 1: If you build a cool trading platform or execute a
Speaker 1: cool trade, you'll earn tokens, which you can spend on
Speaker 1: other cool trading platforms or trades. Talented financial traders are
Speaker 1: willing to work on projects to get those tokens. If
Speaker 1: you had some of those tokens, you could hire those traders.
Speaker 1: A problem and an advantage of crypto is that it
Speaker 1: financializes everything. What if reading your favorite book made you
Speaker 1: an investor in its stock. It's a story that only
Speaker 1: a venture capitalist could love. On the other hand, it's
Speaker 1: a story that venture capitalists love. A minimalist case for
Speaker 1: crypto is it's an efficient way to get venture capitalists
Speaker 1: to put money into software projects, or it's a ponzi.
Speaker 1: The Web three vision of having the customers of every
Speaker 1: project also be its investors works well in times of
Speaker 1: speculative excess, but is disastrous in a crash. All our
Speaker 1: customers have a stake in our success is great when
Speaker 1: token prices go up, but it also means that all
Speaker 1: your customers become poorer when token prices go down, which
Speaker 1: makes it hard to attract customers. But we've only really
Speaker 1: seen the boom. The problem with making every product also
Speaker 1: a ponzi is that you can't be sure if your
Speaker 1: customers are there for the product or the ponzi. But
Speaker 1: when it collapses, you can if they're still there. If
Speaker 1: they still use your product without getting rich off the token,
Speaker 1: then that means your product is promising. If not, well,
Speaker 1: you ran a ponzi. The great speculative frenzy of crypto
Speaker 1: and Web three over the last few years drew a
Speaker 1: lot of money and attention and talent into the crypto world.
Speaker 1: A great deal of that money and attention and talent
Speaker 1: went strictly to optimizing the speculative frenzy, to tweaking the
Speaker 1: token omics and leveraging the bets so that people could
Speaker 1: make as much money as possible without actually building anything.
Speaker 1: Some of it probably went into building, though now the
Speaker 1: speculative frenzy has, if not disappeared, at least cooled. Now
Speaker 1: if you're trying to raise money for a Web three project,
Speaker 1: it should probably do something besides issuing a token that
Speaker 1: goes up. If it creates value for people. If the
Speaker 1: product is something that people want, then the tokens will
Speaker 1: take care of themselves. Crypto people have a lot to
Speaker 1: prove on that front. One reason Crisis and Crypto didn't
Speaker 1: spark a contagion is that it has so few connections
Speaker 1: to things that matter to people. They play games and
Speaker 1: gamble on the blockchain, but they don't have mortgages there.
Speaker 1: Perhaps this is all a self referential sinkhole for smart
Speaker 1: finance people, but honestly, it would be weird if that's
Speaker 1: all it ever turned out to be. If so many
Speaker 1: smart finance people have moved into the crypto financial system,
Speaker 1: if they find it so much more enjoyable and functional
Speaker 1: and productive than the traditional financial system, surely they'll eventually
Speaker 1: figure out how to make it, you know, useful. Here's
Speaker 1: another way to tell this story. There's the real world,
Speaker 1: and people do stuff in the real world. They grow
Speaker 1: food and build houses. Over many centuries, a financial system
Speaker 1: grew up as an adjunct to the real world. That
Speaker 1: financial system enabled people to do more stuff in the
Speaker 1: real world. They could build railroads, or semiconductor factories or
Speaker 1: electric cars because they could raise money from strangers to
Speaker 1: fund their activities. They could buy bigger houses because they
Speaker 1: could borrow money from banks. They could also trade out
Speaker 1: of the money call options on game stop because that's
Speaker 1: fun and you can make memes about it. But that's
Speaker 1: an accidental feature of a financial system that mostly does
Speaker 1: serious stuff in the real world. By two thousand and
Speaker 1: eight or two, that system looked pretty abstract. When you
Speaker 1: think about modern finance, you often think about things like
Speaker 1: those game stop options, or the system of payment for
Speaker 1: order flow that enables their trading, or synthetic collateralized debt
Speaker 1: obligations referencing other c d O s, referencing pools of
Speaker 1: mortgage backed securities. There's a house there somewhere under the
Speaker 1: CDO squares. All the sophisticated modern finance can be traced back,
Speaker 1: step by step to the real world. Sure it's a
Speaker 1: lot of steps now, but the important point is that
Speaker 1: sophisticated modern finance was built up step by step from
Speaker 1: the real world. The real world came first, then finance,
Speaker 1: then the more complicated epiphenomena of finance. Crypto, meanwhile, has
Speaker 1: built a financial system from first principles, pure and pleasing
Speaker 1: on its own, unsullied by contact with the real world.
Speaker 1: Coming up next, you'll hear more from Matt Levine's special
Speaker 1: Crypto issue of Bloomberg Business Week, narrated by Mark Ladoff.
Speaker 1: I exaggerate the basic function of sending money using crypto.
Speaker 1: Satoshi's original goal is fairly practical. But otherwise that's interesting
Speaker 1: as an object of esthetic contemplation. And I've enjoyed contemplating it,
Speaker 1: and I hope you have to. And it's attracted a
Speaker 1: lot of finance people who also enjoy contemplating it and
Speaker 1: getting rich. And their task is to build back down,
Speaker 1: step by step, to connect the elegant financial system of
Speaker 1: crypto to the real world. You've built a derivatives exchange, cool, cool,
Speaker 1: but can a real company use it to hedge a
Speaker 1: real risk facing its real factory. You've built a decentralized
Speaker 1: lending platform, awesome, But can a young family use it
Speaker 1: to buy a house? And the answer is, you know,
Speaker 1: maybe give it time. The cryptosystem has attracted a lot
Speaker 1: of smart people who want to solve these problems, in
Speaker 1: part because they're intellectually interesting problems, and in part because
Speaker 1: solving them will make these people rich. But another part
Speaker 1: of the answer might be that the real world growing food.
Speaker 1: Building houses is a smaller part of economic life than
Speaker 1: it used to be, and that manipulating symbolic objects in
Speaker 1: online databases is a bigger part. Modern life is lived
Speaker 1: in databases, and crypto is about a new way of
Speaker 1: keeping databases on the blockchain. If you build a financial
Speaker 1: system that has trouble with houses but is particularly suited
Speaker 1: to financing video games, one that lets you keep your
Speaker 1: character on the blockchain and borrow money from a decentralized
Speaker 1: platform to buy a cool hat for her or whatever.
Speaker 1: I don't know, then that's system might be increasingly valuable
Speaker 1: as video games become an increasingly important part of life.
Speaker 1: If you build a financial system whose main appeal is
Speaker 1: its database, it will be well suited to a world
Speaker 1: lived in databases. If the world is increasingly software and
Speaker 1: advertising and online social networking and good Lord, the metaverse,
Speaker 1: then the crypto financial system doesn't have to build all
Speaker 1: the way back down to the real world to be valuable.
Speaker 1: The world can come to Crypto worth a shot. No,
Speaker 1: thank you Matt Levine, and thank you Mark Ledoff. As
Speaker 1: a reminder, if you're looking for these episodes in the
Speaker 1: Crypto feed, will be publishing them every Sunday through December.
Speaker 1: If you'd like to read this issue in print form,
Speaker 1: you can head on over to Bloomberg dot com slash
Speaker 1: the Crypto story. This is Boomberg Crypto, a daily podcast
Speaker 1: from Bloomberg and I Heart Radio. For more shows from
Speaker 1: I Heart Radio, visit the I Heart Radio app, Apple Podcasts,
Speaker 1: or wherever you get your podcasts. Send us your comments, questions,
Speaker 1: or suggestions for the show to Crypto at Bloomberg dot
Speaker 1: net or find us on Twitter. We're at Crypto. The
Speaker 1: supervising producer of Bloomberg Crypto is Vicky ver Galina. Our
Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Faruk
Speaker 1: and Sharon Barriro. Our associate producers are Ty Butler and
Speaker 1: Moses on Them. Desta wonder At is our engineer. Original
Speaker 1: music by Leo Sidron. I'm Stacy Marie Schmal. We'll be
Speaker 1: back tomorrow