Crypto's silver linings playbook

Presented by CCIA: How the next wave of technology is upending the global economy and its power structures

May 17, 2022 View in browser   By Derek Robertson Presented by CCIA Haseeb Qureshi speaks during a panel at the Permissionless conference. | Derek Robertson/Politico WEST PALM BEACH — The gloomy week in the crypto world presented an awkward subtext for this week's "Permissionless" conference, an event pitched as "the largest Metaverse and DeFi event in history, designed to celebrate the new era we're entering into." Over 7,000 attendees in solidly business-casual attire gathered at the Palm Beach County Convention Center to weather the bad industry news and hype their various projects. For all the industry's talk of radical transformation, the event, while exciting, felt surprisingly like any other conference — except instead of selling medical devices, or speedboats, they're selling freedom. Chris Dixon , Andressen Horowitz partner and crypto-world celebrity, served as ambassador for that hype during an opening panel Wednesday, where he said "I believe we're in the golden period of Web3." But what's the basis for that optimism when one of the most high-profile conceptual projects of that "golden period," Terra — whose founder, Do Kwon, canceled his scheduled appearance at the conference — just publicly, spectacularly imploded? Haseeb Qureshi, managing partner at Dragonfly Capital, asked during a panel: "Where do yields come from? We now know the answer. It comes from risk." "Risk" is a polite word for what the Web3 universe has been grappling with lately. Billions of dollars in notional value have been wiped out. A significant experiment in stable blockchain investment has essentially collapsed. So the crowds gathered here — idealistic technologists, entrepreneurs with big-money dreams, actual holders of big money — are now trying to convince skeptics, and even themselves, that their whole ecosystem isn't just a form of "regulatory arbitrage" at best, as one panelist winkingly put it, or a Ponzi scheme at worst. To understand why the majority of the attendees I encountered today were not only eager, but downright cheery about tackling that problem, one has to understand how this crowd's ambitions differ from those of the Bitcoin maximalists probably more familiar by now to readers of this newsletter. The Web3 rallying cry isn't generally one of "regime change," or to end the Fed. It's to decentralize the technology underlying, well, everything, from your bank account to even old-school record labels, in theory freeing our internet experience from the stranglehold of big tech companies. Through that lens, even a market crash like this month's isn't a referendum on, or rebuke of, the blockchain and crypto. It's just part of the natural market cycle — and, yes, serious risk — associated with any burgeoning technology. Dixon presented from a report he published this morning with several co-authors on the "state of crypto," which argues that despite the seemingly chaotic nature of the crypto market, it actually operates on a fairly predictable cycle of price spikes and the increased interest and innovation that follow, which has resulted in sustained growth over the past decade. Which might sound persuasive, but also sounds very much like the crypto world's other major currency: Hype. It's all well and good to raise billions of dollars, and to book Matt Damon and Tom Brady for your commercials, and to draw thousands of attendees to a conference in beautiful South Florida. But what's the case that people actually want a "decentralized" internet, especially in the middle of a slump like the current one? "The infrastructure here itself didn't break. What did break was the model, and the assumptions that came with that model," said Josh Goodbody , the COO of Qredo, a crypto fintech company, describing the Terra collapse. For a panel near the end of the day titled "Investing in an On-Chain World," the raw reality of the market downturn was harder to dismiss. "From an institutional perspective you're talking about your Fidelities, organizations that have been tracking these cycles… they diversified knowing exactly what they were getting into, and once that genie's out of the bottle you can't really put it back in," said Soona Amhaz , founder and general partner at Volt Capital.   A message from CCIA: A dozen groups sent a joint letter urging lawmakers to address the economic harms that antitrust legislation - S. 2992 and H.R. 3816 - would have on American consumers and businesses. The widespread concern comes after a NERA economic study found the antitrust bills would cost the U.S. economy up to $319 billion, harm Amazon Prime subscribers by $22 billion annually from lost services, and fail to provide any quantifiable benefits for consumers or small businesses.   decentralized, together What does it really mean to be "decentralized," anyway? A recent essay in Wired argued that Web3 enthusiasts' fervor for a decentralized internet has led them to focus on how much new web institutions should be decentralized, instead of focusing on the kind of decentralization that would foster a freer and more open internet. The authors of the Wired essay, including Danielle Allen, a prominent Harvard professor who recently ended her campaign for Governor of Massachusetts, propose a "subsidiary" system, which would use "relationships of online and offline trust and institutions" to open up the internet, a mission they compare to the birth of TCP/IP technology. I called Divya Siddarth, who wrote the essay together with Allen and her Microsoft colleague E. Glen Weyl, to ask her about what Web3 builders tend to miss. Excerpts of the conversation, edited for length and clarity, follow: What was your impetus for writing this? Was it just an accident that it happened to publish as the crypto world is taking a massive hit? The crash was an accident of timing, but something like the crash was going to happen. There are some people in the world who think that cryptocurrency is the worst thing that has ever happened, and just fascism all the way down. And then there are others who say it's going to save the world and is the solution to all of our problems. Being in the middle of those two camps is kind of a strange place to be, as they become increasingly polarized.. There is something to the goals that are at least professed by a lot of people in this space that are good, and that we should work on. But these technologies are just really misguided in terms of us ever getting to those goals. This writing came from that tension. Within the Web3 community, there's a lot of resistance to building anything that is too similar to existing systems. What has the response to your proposals been like? The conversations that you're referring to are like, "But we were in this to get rid of institutions. Why would we do anything that feels like it's building institutions?" An institution is a semi-stable entity with shared norms and goals and processes, which means that you can't get away from building institutions even if you're trying not to. Crypto has tons of institutions. And not just the formal ones like the Ethereum Foundation, but Ethereum itself is an institution, and all these L2 chains are institutions, and the way they interact with each other is inherently institutional. Having that conversation with people has often turned out better than I expected, but much slower than proselytizing for Bitcoin maximalization. What are some model examples of the decentralized institutions you're describing? Some of the pre-blockchain based, fediverse-type social protocols are like this, like ActivityPub; there are a bunch of web-of-trust-based identity systems, and BrightID, and Spritely, stuff coming out of Ink & Switch that are sort of along these lines. And recently, non-transferable governance tokens are probably along these lines. One of the most famous examples is the architecture of the actual internet. That set of protocols, HTTPS, TCP/P, everything coming out of the WCC consortium, those are things that are extremely decentralized and a lot of them are incredibly secure compared to basically many other technologies. They're decentralized, bu they're multi-stakeholder, they have institutional inputs, they have clear processes on how change happens, and they're federated instead of being atomized. So I think the internet itself is probably the best example.   A message from CCIA:   The Future In 5 Links Wait a second: Where are all these so-called "air taxis" supposed to land? Meta is testing end-to-end encryption for its VR chat function. The defense industry is joining the metaverse gold rush. An author of the DOJ's 2020 crypto framework has joined the industry. What is Mastodon, a non-profit Twitter competitor, actually like, anyway? Stay in touch with the whole team: Ben Schreckinger (bschreckinger@politico.com); Derek Robertson (drobertson@politico.com); Konstantin Kakaes (kkakaes@politico.com);  and Heidi Vogt (hvogt@politico.com). If you've had this newsletter forwarded to you, you can sign up here. And read our mission statement here.   A message from CCIA: The antitrust bills – S.2992 and H.R. 3816 – would cause economy-wide harm beyond just tech. A NERA economic study reveals that the use of broad language and arbitrary thresholds that rely on market capitalization will regulate 13 additional American companies in the next 5 to 10 years including Berkshire Hathaway, Visa, JPMorgan Chase, Walmart, Mastercard, PayPal, Home Depot, Walt Disney, Bank of America, Comcast, Netflix, Cisco, and AT&T. By the 2030s, over 100 American companies would be harmed by the bills. The bills would also jeopardize U.S. international competitiveness by applying U.S.-specific size thresholds that would cover U.S.-based online platforms and marketplaces long before they cover foreign competitors. The economic study concludes that there are "no quantifiable benefits from the bills for consumers or small businesses." The bill sponsors have offered no quantitative economic analysis of the bills' impacts.     Follow us on Twitter Ben Schreckinger @SchreckReports Derek Robertson @afternoondelete Konstantin Kakaes @kkakaes Heidi Vogt @HeidiVogt   Follow us

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