Understanding crypto's limitations and focusing on its unique strengths

I have written about these topics before, and have in the past come to a conclusion crypto is great for coordination that only require objective outputs. To that end, the two key usecases are identified as objective money and objective identity, of course with applications that use one or both, or remix them. Here, I’ll talk more about why this is the case, and why “replace everything with crypto” hopium is a distraction. Instead, we must focus all our efforts on where it actually makes sense and makes things better for world’s people, and is a very valuable niche. I say most because there’ll always be an outlier for whom everything I say below does not apply. But for most of the world, these are critical features crypto cannot deliver. The key reason is simple - they are subjective processes requiring social comprehension and cannot be replaced by code. And no, I’m not going to talk about hypothetical AGIs till they are at least theoretical.

I’ll acknowledge that many of the points below will be seen by hardcore cryptobros as bugs not features, but it’s important to acknowledge these are critical for a vast majority of the world’s population.

1. Democratic voting: Over the millennia, democratic nations have developed strong processes for the most decentralized form of decision making. Despite many attempts at “proof-of-humanity”, there’s no system that exists that can reliably enable democratic voting. Turns out, the only entities who can prove humanity without caveats are humans themselves. Now, it’s certainly possible for a crypto-based community to implement the same systems as democratic nations, but that’s not a benefit of crypto. I’d also address that there are non-democratic nations out there - China being the massive example - but are the plutocratic voting standards adopted in crypto any better? Arguably not. Lastly, I’ll note that some identity systems can be objective in nature - like, say, social graphs - but these are insufficient for democratic voting.

2. Credit and fractional reserve: These and related concepts have been immensely successful over the last century in driving unprecedented economic and technological growth and development. Once again, crypto protocols may implement tradfi credit scores etc, but it’s not what crypto is best at.

3. Subjective policies: Likewise, some may call it a bug, but it has also led to unprecedented stability over the last century or so. COVID is the best example - the entire global economy shutdown ought to have been a catastrophe, but due to subjective monetary and fiscal decisions, we made through it with just a scratch (i.e. a couple of years of higher than target inflation).

4. Dispute resolution/reversibility: I’m a power user, but I simply wouldn’t make any significant transactions via crypto. The same is true of all of my friends or family. Sure, there are degens and crypto-native institutions that are brave enough to do it, but for most of us it’s not an option. Of course, these layers of custody and insurance can be built on top of crypto, but that’s once again just tradfi.

5. Antitrust/redistributive regulations: Without regulations, free markets tend to lead to monopolies and centralization of wealth, and crypto is no exception. We have seen many usecases devolve into monopolies or oligopolies, while most crypto protocols are effectively controlled by a few whales (mostly VCs). For a healthy society, we need fair and equal opportunity for all, and to accomplish these subjective antitrust and redistributive mechanisms are key. (Of course, one can get political about this, but I’m just looking at the most developed countries in the world and what has worked for them.)

There are many more subjective things crypto cannot do, but I’ll stop here, and instead focus on what crypto does best, uniquely:

Objective money and objective identity. These things don’t require subjective decisions, and while they have very strict limitations, they offer a great hedge for the one downside of subjectivity - human error. To be clear, we have gotten tremendously good at it, and over 99 out of 100 times we have built systems to make great decisions. But once in a while, there’ll be mistakes, and crypto is a great hedge for it. At the same time, it’s important to understand this is a low probability. Doomers coping “oh the last century is just an exception, global economic collapse imminent” are lost souls bereft of reason.

Thus, it’s very valuable building an alternative financial and potentially identity systems. It’s always going to be very inefficient relative to traditional finance, which is always getting better, more stable, and more efficient, but choice is great, and for those who want to opt out it’s perfect. Some countries have very poor financial infra, and for them it’s a boon. It also allows for many who are otherwise using tradfi to have a hedge, for the low probability scenarios.

To get the best out of crypto, blind hopium “it’ll replace everything and result in a new world order” ain’t the way, it’s understanding its limitations and building for its strengths.

As a side note, “smart contracts” are a pretty funny misnomer, because for a contract to be truly smart you need subjectivity (e.g. rule of law) which code cannot do. What crypto applications are, instead, dumb contracts that blindly follow code, blind to the complexities of humanity.