Tech Won't Save Us - Web3 is a Scam, Not a Revolution w/ Stephen Diehl

Episode Date: December 9, 2021

Paris Marx is joined by Stephen Diehl to discuss why technologists are divided on crypto, what’s wrong with blockchain, why crypto assets are scams, and why web3 is a rebranding effort.Stephen Diehl is software engineer and crypto skeptic based in London. Follow Stephen on Twitter at @smdiehl.🚨 T-shirts are now available!Tech Won’t Save Us offers a critical perspective on tech, its worldview, and wider society with the goal of inspiring people to demand better tech and a better world. Follow the podcast (@techwontsaveus) and host Paris Marx (@parismarx) on Twitter, and support the show on Patreon.Find out more about Harbinger Media Network at harbingermedianetwork.com.Also mentioned in this episode:Stephen has written about how to understand crypto assets, the problem with “decentralization”, the speculative mania inherent to crypto, why web3 is bullshit, and more on his blog.Some guy bought a beer with crypto and it showed one of the big flaws with using crypto as a means of payment.Andreessen Horowitz one of the main players lobbying for lax crypto regulations in the United States.How Albania’s pyramid scheme crisis in the 1990s holds lessons for the today’s crypto mania.David Golumbia was on episode 67 (July 1, 2021) and Olivier Jutel was on episode 75 (August 26, 2021).Support the show

The cryptocurrency space looks like a giant regressive tax that transfers money from the poor and technically kind of illiterate to sophisticated investors and early adopters and technologists. Hello and welcome to Tech Won't Save Us. I'm your host, Paris Marks, and this week my guest is Stephen Diehl. Stephen is a software engineer and crypto skeptic based in London, and he's been writing a fantastic series of blog posts on cryptocurrencies, Web3, and related topics from a skeptical perspective, naturally, but also informed by his work on the technology side of things and the recognition that these technologies do not stand up to the narratives that are

built around them and really just don't work in a fundamental way. Stephen and I had a great conversation going through a number of those topics, including the divide that exists among technologists when it comes to crypto assets, you know, those who are supportive versus those who are critical, like Stephen, the fundamental problems that exist with blockchain, the technology that underlies a lot of this sector, the issues with this narrative of decentralization that comes up time and time again, that just leads to a false technological utopianism, this belief that, you know, just by using technologies to decentralize or democratize power, which isn't really what happens, that technologies alone can

solve the many social problems that we're dealing with. The scammy nature of cryptocurrencies, you know, why there's some kind of mix of like a Ponzi scheme and a pyramid scheme. And of course, Web3, this new term that has, you know, really been emerging and growing lately, and how this is just kind of a rebranding of a sector that is increasingly being associated with scams and frauds, and so needs some kind of a different narrative around it for investors and for the people who are making money off of these schemes to keep growing their bank accounts at the expense of much of the public, and in particular, the people who, you know, get suckered into these schemes. I'd highly recommend going to

check out some of Stephen's blog posts after listening to the episode. I'll have links to them in the show notes. And you can also find Stephen's Twitter there as well, where he is frequently, you know, giving critical opinions on cryptocurrencies and these other technologies. Before we get into this week's episode, just a quick note that the Harbinger Media Network, which I'm sure you have heard me refer to many times, and which Tech Won't Save Us is part of, is having a fundraiser this month, you know, to keep doing the work that it's doing to promote critical left-wing perspectives in Canadian media and Canadian podcasts in particular. Harbinger plays an

important role in bringing together left-wing Canadian podcasters, you know, to collaborate, to share skills, knowledge, advice, and to try to push back against the right-wing dominance of podcasting that exists. So if you are Canadian, you want to find out more about what Harbinger does, or even supporting the fundraising campaign, you can go to harbingermedianetwork.com where you can find out more. If you like this week's episode, make sure to leave a five-star review on Apple Podcasts. You can also share it on social media or with any friends or colleagues who you think would learn from it. And hey, who knows, maybe you know someone who's a real crypto supporter who could benefit from hearing a conversation like this. And luckily, this week's episode, like every episode,

is free for everybody because listeners like you support the work that goes into making the show every single week. So if you like the show and you want to ensure I can keep having more critical conversations about cryptocurrencies, blockchain, and these other technologies, you can join supporters like Joey Ayub from Lebanon and Ada Bolton from Leeds by going to patreon.com slash tech won't save us and becoming a supporter so I can keep making the show having these critical conversations and pushing back against the usual boosterism, crypto excitement and narratives of VCs that you typically find in tech podcasting. So thanks so much and enjoy this week's conversation. Stephen,

welcome to tech won't save us., Paris. Thanks for having me on. I've been a longtime fan of the podcast, and so it's great to be on today. Thanks so much. You know, it's obviously great to speak with you. You've had a fantastic series of blog posts that you've released recently on, you know, cryptocurrencies, blockchains, NFTs, Web3, all of the things that seem to be in the conversation these days, and that naturally don't get enough, I think, critical analysis, critical perspective. And so I naturally wanted to dig into these topics with you today. Because, you know, in the past, I've talked to

journalists about this, I've talked to academics about this, but you, you know, work in the tech industry, you know, as a software engineer, you know, the technical side of these things. So I think you can give us a perspective that maybe I didn't get from those other people to kind of give the listeners a fuller understanding of what's going on here. And so I was hoping to start with a division that I guess exists among technologists that you talked about in one of your blog posts, where you wrote that there's kind of one camp that is critical of these technologies that sees the deficiencies with them. But then there's another camp that, you know, kind of buys into the hype that wants to believe in what is being

promised. And, you know, naturally, you are on the more critical side of that. That's why you're on the podcast. So can you talk a little bit about this kind of divide that exists and why you find yourself on the critical side instead of the, you of the side that's buying into all the hype? Absolutely. That's a great question. So you're right. Cryptocurrencies are probably one of the most divisive concepts in technology that I've ever seen in my entire career, actually. I mean, there's a lot of things in technology that kind of draw a lot of debate, like things like artificial intelligence and the efficacy of introducing biases into algorithms

and those things. And, you know, there's a kind of ambient level of debate about these things, but, you know, they're kind of thoughtful arguments on both sides about like, oh, you know, we should probably put more controls on these technologies and we should better regulate, you know, social media. These are all debates. And then there's the cryptocurrency debate, which at least among technologists that I know is like Marmite. It will kind of like divide a room. You either absolutely hate it or you absolutely think it's the messiah. You know, come and save us all from everything.

I'll just say on the Marmite question, not a fan. Neither am I myself, actually. But then, you know, like the conversations I have with other software engineers, the way we talk amongst each other when nobody's kind of listening, I just think most of the people in our industry kind of view these technologies with a great deal of skepticism because they're very much solutions in search of problems. And when you ask people the most basic question, like, what is it useful for? You're either going to get two answers. You're going to get some long, decentralized technobabble, or you're going to get libertarian politics. The state is debasing the money supply, and we need to put this technology in place that's going to safeguard us against the evil Fed or something. And as a technologist, I can see through the techn techno babble. That's fine. But what I find very strange is that it's a very political technology. It's hard. And that's very hard to reconcile because a lot of us in the technology sector, we don't happen to share those kind of conspiratorial views about monetary theory. So it becomes kind of hard to reconcile. What is this technology actually useful for?

Is it having a good impact on the world? That's the big divide I see among technologists. Yeah, you know, I think it makes a lot of sense. And when I had David Columbia on, I believe it was earlier this year, you know, he kind of talked about some of that kind of conspiracism, I guess, that exists around these ideas that are associated with cryptocurrencies and these other technologies that we're talking about. David Columbia's book is absolutely brilliant, Bitcoin, the Politics of Right-Wing Extremism. He really kind of goes into a whole history of the ideas that kind of led up to the development of cryptocurrency, all the way back from the Austrian economists to kind of the cypherpunks in the 90s, to kind of more right-shifting kind of attitudes amongst metacapitalists in Silicon

Valley. And that all feeds into the kind of narrative that's kind of morphed into what has become the cryptocurrency movement yeah and you know as you say beyond the tech industry there are also opinions by other people who are kind of involved in this conversation and naturally you know some of those big players would be investors who are putting a lot of money into this area, but also tech journalists who are covering it and who are giving the public kind of the context to, you know, try to understand what is going on here. And as you write in your blogs, you know, they also have certain incentives coming in to, you know, I guess, buy into the narratives that are being formed around them. Because they can either be good stories, or they can, you know, produce an opportunity for people to make a lot of money. So what do you see in their kind of approaches to the issue of, you know, cryptocurrencies, blockchains,

and things like this? It's an astute observation. And this is something that kind of struck me when I started to start writing about cryptocurrency skepticism, is I saw that the narrative that was being pushed by kind of mainstream journalism around like Bloomberg, how Bloomberg covers blockchain technologies or, you know, say CNBC or kind of the traditional kind of outlets. It's always very, very optimistic and it's always very, very short on the technical details. And as a technologist, I would read these articles and I would just be scratching my head about like, what are these people talking about? They're talking about things that are, you know,

like perpetual motion machines and like, oh, we're going to build the square circle and it's going to like, you know, build things that are just completely logically incoherent. And all the time, like kind of the narrative of the project is always, oh, and also there's a token attached to it that you should buy because, you know because this project is going to go to the future. And these kind of crypto companies have been around for like 13 years now. As far as successful businesses that have been built around this technology, you're looking at like exchanges. So companies that literally, whose sole purpose is to bring more people in to trade more crypto

tokens, right? There's not a whole lot of use for any of this technology except speculation. There's not a whole lot of businesses being built. And the fundamental question and the disconnect I see in how these things are being reported on is that there's almost like no there there.

It's like if the iPhone was developed 13 years ago and it was being sold as kind of a coupon that you could eventually redeem for an iPhone at some point in the future after 13 years. And that's the way I see all of cryptocurrency. We're still waiting for the killer app because I have not seen it yet. And that to me, this disconnect between the presentation, the marketing and the technical reality is a very strange phenomenon. Yeah, you know, it's like you imagine the iPhone.

There are no apps. It doesn't even work as a phone to store a phone value. Now, right? Yeah, absolutely. You know, so you've talked about how, you know, I guess all of these technologies are kind of solutions in search of a problem to solve, right. And I think the technology that kind of underpins a lot of this area is the blockchain, right? And the idea that all of these things should be on the blockchain, that this should be kind of the foundation for, you know, how we develop these kinds of technologies in the future and everything

should be developed on the blockchain, their own blockchains, whatever. So can you talk a little bit about what the blockchain is, you know, how it actually works and what the problems that you see with it are. So the blockchain is a very simple thing. I mean, in computer science terms, it's what's called a data structure. So it's a way of aggregating a bunch of transactions in a way that they can be stored and kind of reduced down to a single number called a hash. And then you combine that with something called a consensus algorithm, which is a way of basically reconciling changes to this ledger structure over time. And it introduces this kind of game theoretic mechanic by which

different participants can add additional transactions to this ever-growing data structure. And that gives rise to something that you can kind of use to sort of simulate financial transactions. You can give it like a bank ledger that evolves over time that kind of says who owes who. And it's all denominated in this sort of native currency of the blockchain,

which is something like a Bitcoin or their token, right? So blockchains work in the sense that they're kind of a one-trick pony for building cryptocurrencies.

And cryptocurrencies do work. You know, obviously, the networks are all running around. It's kind of impossible one-trick pony for building cryptocurrencies. And cryptocurrencies do work. Obviously, the networks are all running around. It's kind of impossible to deny that they don't actually exist and they do work. It's just unclear what they work to do because the narrative of these things was pushed as a peer-to-peer payment system. Well, basically, most people scrapped that idea about 10 years ago when they realized that the technology doesn't actually scale up fast enough to run more than a small supermarket. These things are just incredibly slow. Thinking you're going to spend three days to confirm a transaction on some of these chains. And every single transaction is going to consume a vast amount of computational power to confirm the addition of one of these transactions, because that's part of the consensus algorithm, which is this method by which you solve math

puzzles to basically form a lottery in which people compete in this sort of game to add new transactions. But this is an insanely wasteful process. Basically, it's wasteful by design in order to give the world this kind of global lottery in which the tokens will be distributed out to the participants who confirm transactions. So this is a terrible way to basically build a currency. In fact, there's a strong economic argument that these things could never possibly function as money themselves. But if we just look at the technology, yeah, you can build cryptocurrency. You can build speculative investments that are censorship resistant on top of them. And that does work. However, that's not a terribly useful thing for the world. A speculative investment, which exists to basically

arbitrage financial regulation around the world, in which people can kind of gamble on the random price movements of an asset that has no underlying value. Yeah, it works. It's a cute trick. But I'm not sure what the societal value of that actually is. And then when people try to apply blockchains anywhere outside of the realm of cryptocurrencies, you end up with a solution which is effectively either completely pointless, doesn't scale, or is strictly worse than just using a centralized database. And that's the big problem I see with these technologies, they don't really work. You know, what you're saying on the time that it can take for these

transactions to work, it reminds me of a video that was circulating a few weeks ago of a guy in El Salvador, who was trying to buy a beer with cryptocurrency. And like he was kind of standing at the beer stand for like 20 seconds, like, you know, waiting for the transaction to actually go through. And it was like, you know, if he just used his like credit card, it'd be immediate, it'd be done. And I think it's also a good point to point out, you know, the issues with these blockchains. In one of your articles, you wrote that Silicon Valley kind of ran out of ideas and created blockchain, and you called it a simulacrum of innovation. I think it's a good term. And I wonder if you can go into that a little bit more, because as you as you just said

there, you know, you know that many of these kind of applications that blockchains are applied to could be better solved through centralized databases. And, you know, the kind of worries and issues that can come out of that, you know, if people want to know more about that, they can go back to my conversation with Olivier Joutel, where we talked about, you know, how blockchain is applied in the global south and how, you know, it's used to kind of marketize and create land databases, like it's a very neoliberalized kind of politics. So can you talk a little bit about that element of it? Yeah, I mean, it is kind of a simulacrum,ized kind of politics. So can you talk a little bit about that element of it? Yeah, I mean, it is kind of a simulacrum, this kind of postmodernist term of innovation, because it's a technology that precedes its use case.

It's a development that was invented, and then it was in search of an application for itself. That's a very strange thing, because usually innovation kind of proceeds the other way around. So as a technology, I think the use case about the beer is actually quite relevant because it's much slower technology. And if you just kind of picture yourself as a, you own a pub, right? And you want to theoretically transact in Bitcoin, you're going to have to go to the brewery and you're going to have to source kegs of beer and bring them to your pub, right?

And then you can ultimately serve them to customers. And if all of these transactions are being done in Bitcoin, like this hyper-volatile speculative asset, the time between the shipment between the brewery and the time between a payment being confirmed from one of your customers, if the price of the asset is going to change or draw down like 80%, you're losing money on the time between you paid for the beer, when you pump it into the pint for the customer, and then when they actually settled their payment, right?

And that means you have to constantly update all of these prices, constantly. Because the underlying payment can change 80% in one day. If Elon Musk had a bad day and tweets two emojis, right? Suddenly your pub loses 90% of its inventory. This is not something you could ever run an economy on. And there's no reason to think that these kinds of currencies will ever stabilize because there's no central bank or any kind of issuer controlling the supply relative to domestic goods. And so when people talk about trying to apply these technologies, it's got to be a widespread treasury layer for some theoretical techno-libertarian utopia. They just don't really think through the end state of what that would actually look because this is a technology that by design could never function that way. And yet people kind of are convinced that we need to keep selling it

as a currency. And that's part of the narrative. It's kind of this sleight of hand between saying it's a currency when it's beneficial to call it a currency, and it's a speculative asset when you want to tell people they're going to get rich off of it. But those two are diametrically opposite. They're logically incoherent. They're logically inconsistent with each other, right? You don't want a currency that's going to go up or down 80% in a day because you can't run an economy on that. But you also don't want a speculative asset that stays at 2% growth for 10 years, right? Because you're not going to get rich off of that. And I can't reconcile the fact that people kind of like to hold both of those thoughts in the mind at the same time about these assets. And that kind of internal logical inconsistency is what really

bothers me about the technology and the kind of financial narrative around it. Yeah, you know, I think that makes a lot of sense, right? Especially when you consider that, like, something like Bitcoin is, you know, not used by a whole hell of a lot of people right now, especially when you think about like regular transactions that aren't used for kind of speculation. And so if you were to expand that and have like, you know, every shop accepting Bitcoin, like the time that it would take for those transactions would only increase because of the pressure on the network to process all of these transactions because it's not designed in an efficient way. And so, you know, it's just

fundamentally not something that is going to work in the long term if we're thinking about how to build like a proper financial system that is actually going to work in any meaningful way. The only way these things scale is ultimately by becoming the very centralized systems that they were designed to replace. So the best way to run a great payment system is you recreate Visa and you recreate a bank. And at scale, the problem I see with these technologies is they're kind of based on this whole decentralization sort of libertarian narrative about not having any kind of intermediaries or third parties. Yet the very way that they would ever possibly be used is by becoming the very thing that they were designed to replace. And maybe there is a place for some of these things

to kind of exist alongside the traditional financial system. But the only way that I possibly see that they would become that is by becoming kind of very inefficient versions of technologies that already exist. Like wiring money across the world is a solved problem for the most part. I mean, we know how to move two digits in a computer. Two banks basically credit one account and they debit another account and that can be done as fast as you can update a database, right? If there are any inefficiencies in this kind of processes, they're entirely related to regulation, compliance, just the brute facts. If you have two nation states with two separate laws

and two separate jurisdictions and two separate sets of consumer protection, and those are the roadblocks that most consumers hit up against in the traditional financial services system. But those are not necessarily baked into the technology in any way. And if crypto technology is solving any of those problems, it's because it's basically just ignoring all the regulation. It's basically a means to arbitrage capital controls or KYC,

know your customer requirements, or sort of terrorist financing restrictions and stuff. And having worked in the financial services sector, those are very important things to be doing as a financial institution. And they're in the financial services sector, those are very important things to be doing as a financial institution. And they're there for a very good reason. Because if you remove them, then literally all sorts of criminal elements start using your service to launder money and all manner of bad things happen. And the truth is that the financial services system has never been perfectly able to block all of those things.

But it's a best effort, and it does so in a way that protects most consumers far more than they probably understand. And the big issue with the cryptocurrency system is it's kind of like capitalism, but with all of the brakes and all of the controls basically just removed in this kind of complete anarchic system in which everybody has to be their own bank and you have to run your own information security and you have to safeguard your private keys against anybody who would kidnap you and torture you to get them. And I can't possibly expect a world

in which my grandmother has to become her own bank and defend her private keys from armed robbers who would want to steal her own bank, you know, and defend her private keys from, you know, armed robbers who would like want to steal her pension. You know, I just don't see this as utopian vision of the world. I see it as a dystopia. In that way, you can see like it's a vision that only really works for like the kind of really technologically savvy people who are behind this in the beginning and kind of forming the ideas behind it and like not thinking about how it applies to everyone else. But, you know, I think what you were saying early in that answer about, you know, the only real kind of goal with these technologies are the only real kind of endgame is really to recreate the system that already exists, but with new players controlling it. And you know, I think

that gets much closer to the reality of this than a lot of people who are kind of putting out these narratives are admitting. And like, I think you can start to see that with what some of the major kind of crypto companies are doing when they're trying to lobby for favorable regulations in the United States right now. And for me, what it does is kind of remind me of the story of PayPal, which also kind of emerged with all of these promises of, you know, disrupting the financial system and giving everyone their own bank account and like all of these grand promises. And then when it came time to actually make money, they started working with the government. They

started following the financial rules so that they could be just another one of the big kind of middlemen who are making a ton of money in the sector instead of all of the kind of libertarian ideas that were associated with the brand early on. And so I think if you look back at that history, you can see something similar playing out with cryptocurrencies today. And that if there is going to be like a business, a use case, it's not going to be this kind of decentralized libertarian utopia. It's going to be, okay, they're just going to be this kind of decentralized libertarian utopia. It's going to

be, okay, they're just going to become like the new major company that is working in this space. And so, you know, you mentioned the decentralization aspect of this, and that's kind of the next point that I wanted to get to, right? Because in one of your blog posts, you explain that these ideas of decentralization really work to justify a lot of kind of technological utopianism that occurs in the space, but around these technologies in particular right now. So can you talk about that issue of what these ideas about decentralization create and, you know, also how they misunderstand the idea of decentralization itself? That's a really good point.

So my industry in particular in software, we kind of fetishize this word decentralization in. That's a really good point. So my industry in particular in software, we kind of fetishize this word decentralization in a certain way. And it's sort of used kind of analogously to the word like democratization. And I think the conflation of the two is often the kind of fulcrum on which a lot of sophistry rests.

So decentralization is kind of a term that comes from like network topology, basically talking about the distribution of like data and how it flows through a system of computers. And there are certain networks that are decentralized. You could probably use things like Tor or BitTorrent. Those are examples of decentralized technologies where there's no single point of failure in the system. And these are very cool technologies in a way. BitTorrent was like a successful protocol, even though it had kind of use cases

that were kind of extra legal. But ultimately, it was very useful as a pure technology. So decentralization tends to be the kind of catalyst by which a lot of people kind of pitch new ideas. And they kind of use that word interchangeably with democratize, that we're going to basically treat people as if they're computers, right? You know, instead of taking data as it's being distributed through a network, we're going

to actually diffuse power through a network of people. And that's kind of the implicit assumption. And generally, from what I've seen with the centralized network so far, and we see this manifest everywhere in crypto, is that who is actually getting rich off of these things? And the answer is usually billionaires, people that have resources to allocate toward the development of these technologies and to understand them enough to profit off to continue their existence. So these are things like the miners, the exchanges, all of the billionaires that are stockpiling crypto. And this is the exact opposite of democratization. This is plutocracy, distribution of wealth to the wealthy, already wealthy. And my fear about cryptocurrency is it is itself this kind of plutocratic technology that wraps itself in

this populist narrative about, we're going to liberate the people from all of the perils that led up to the global financial crisis. We're going to fix all the problems with the banks and we're going to decentralize them and remove all the middlemen that are causing all of your problems in your life. And if you just invest in this coin today, it's going to solve all of your problems tomorrow. And what actually happens is it's kind of, as macro level the cryptocurrency space looks like a giant regressive tax that basically transfers money from the poor and technically kind of illiterate to sophisticated like investors and early adopters and technologists and for a lot of people in my field that's great i mean they've gotten fabulously wealthy uh on the back of issuing these things but if you have have questions of like,

what is that actually doing for the world? It's kind of reverse Robin Hood. It's stealing from the poor to give to the rich. And I don't see a way that these technologies morph into the kind of populist narrative because there's this kind of logical and technical inconsistencies at their heart. I think you've really hit the nail on the head with that. And as you were saying that, it really brought to mind something that I hear on the crypto left as well, right? The kind of people who say that they're socialists, but who say that, you know, cryptocurrencies and blockchains are a means to some kind of liberatory politics that has like a left wing slant to it. And, you know, what I often hear is that they make the argument that these technologies are offering this like unique opportunity toward, as you say, like democratization through decentralization.

And also, you know, to empower people in these ways that they haven't had before because they're, you know, getting away from these big gate to interrogate that question and critique that question, like when you start to point out, as you just did, that so much of this is controlled by really rich people and they're the ones who are making the money off of it. All of a sudden they start to say, yeah, but you know, this is already a really unequal system. We can't expect this to actually change anything right now without changing something greater. And it's like, okay, so now you are admitting that these technologies are not actually creating the benefits that you are saying. And that ultimately, to have those benefits, we're going to need to change larger social structures. So then why would we then base that change around these really libertarian technologies that are not delivering the benefits? Anyway, like, you know, it just seems like a circle that like keeps going around. It

doesn't make any sense. Like, yeah, I don't i don't know yeah i mean you see that narrative all over it on the kind of like crypto left as well that somehow these these technologies are a shortcut to basically not engage with the political system and not actually interact with people and engage the political bodies and effect reform but we can do it with technology itself. And like, we can just fix social problems with technology problems. And the history of technology has always taught us that you cannot fix human problems with technology, right? If anything, technology tends to introduce more human problems at the end of the day. So yeah, I remain very skeptical because number one, these arguments are very lacking in details. They're all very hand-wavy, like how is Bitcoin going to liberate the world?

It seems to be doing the opposite. And there's this kind of reductive quality to a lot of those arguments, is that people see kind of deep issues with our financial system. And don't get me wrong, there are some deep problems with the way the current system,

especially in the United States, with how it's set up and banking access and income inequality. And these are financial phenomenon, but I think it's overly reductive to say that they're monetary phenomenon. And those phenomenon arise out of, in my opinion, the kind of neoliberal policies for the last 40 years that have basically gutted the middle class and the dissolution of labor unions and the non-increase of the minimum wage. And these are things that I think have largely given rise

to the kind of despair and the income inequality we see in a lot of Western countries. To reduce that down to like monetary policy, though, is I find a very reductive argument. It's a very seductive one to say that, oh, there's this one root cause, you know, and if we just and if we just fix that, then we're going to fix all of society. And the interest rate does affect macroeconomics in people's lives. But there are probably six or seven other factors that I would say are largely contributing to the degradation of people's lives

far more than quantitative easing on the dollar, for instance. And I think we really have to kind of defy reduction down to monetary policy, because it's a simple answer, but it's also probably the wrong one. Yeah, absolutely. You know, it also stands out to me that, you know, there's this really strong, like technological utopianism that comes with this, right? This kind of belief in that these technologies will deliver what the narratives say, ignoring the history of every other time that those narratives have been used in history and not delivered. And then, you know, especially when we think of like a crypto left, like then the solution is to adopt these kinds of technologies instead of like, you know, have public banking and actually design a banking system that like serves, you know, the public instead of, you

know, just hoping that these technologies are going to deliver something beneficial in the end. Yeah, it just seems wild. But, you know, as you were talking about there, and as you've talked about through this conversation, you know, I think that there needs to be this kind of deeper kind of understanding of cryptocurrencies. And you've already talked about them in relation to assets rather than currencies and why they don't work well as currencies themselves. I wonder if you can maybe draw that distinction a little more, because in one of your essays, you talk about them not as cryptocurrencies, but as crypto assets. So can you talk about that distinction? Yeah.

So cryptocurrency, for good or for ill, has become kind of the term that the public has used to kind of refer to a lot of different tokens, basically. And if you look at the way the finance people and the policymakers talk about these things, they usually refer to them as crypto assets. So if you go read a white paper by the Bank of International Settlements, where they do the traditional financial analysis of these things, the term most people call it is they're an asset. They're not a currency. So there's a space of financial instruments that we have to understand. You have the monetary and currency instruments, which is like one category.

So there's things like the dollar, the yen, sterling. They serve as a function that kind of fulfills three different purposes. It's a medium of exchange to store a value in a unit of account. And so things like the pound sterling satisfy that because they're the mechanism by which an economy sustains itself,

by which we transact in. I go to the pub and tap my car and I get a pint of beer. It all just kind of works. They function in that capacity. And you don't have to wait a few minutes for it to work. Yeah. It's like magic.

It's contactless. Visa settles it in three days. It's like magic. Yeah. So monetary instruments are much different than, say, commodities. So a commodity would be something like a cow, gold, or wheat, or petrol or something, right? So these are physical goods that are used as inputs to other economic processes

to produce downstream consumer products, right? So they're priced in terms of their intrinsic value, right? Because you can eat wheat, you can make bread out of it, you can burn petrol, it produces energy, you can turn the cow into steak. There's a process by which we can value those things in terms of their impact on human lives. So those are commodities.

And then we have securities, which are financial instruments, which are kind of a fiction, right? They don't actually exist, right? So these are things like stocks, bonds, derivatives, swaps, futures. They're a shared delusion about a contract that exists between different parties, which gives certain parties legal rights to certain cash flows based on what the contract specifies like an underlying asset. So they're a way of basically distributing money between people based on a kind of a formula or description right so things like stock in a

company are securities for instance and then you have a fourth class which is kind of alternatives and things like art so these are kind of very difficult things to value like a it's the value of a monet or something right economics doesn't have an answer to that question um it's it's the value of a Monet or something, right? Economics doesn't have an answer to that question. It's a piece of art that's on the wall, and it has value by whatever someone will pay for it. But economics, it doesn't concern itself with what should we price a Picasso or a Monet, right? It's kind of a weird asset. So those are four things.

So if you look at cryptocurrency, we talked about why it didn't satisfy the monetary category, because it can't function as a store of value or a medium of exchange. So that's out. As a commodity, there's nothing inside of a Bitcoin that can be used for any human process, right? There's no non-circular use case for a Bitcoin or anything inside of a Bitcoin that can be used like a cow or a gallon of petrol can. So it's not a commodity. Then you're left with securities. And if you value cryptocurrencies as securities,

they end up being very pathological because they're a security who, if you apply the kind of traditional valuation models to, it's an asset class that has no income, right? It doesn't have an underlying thing that's attached to, and it has no external cash flows. And this is a really important thing to know about cryptoassets is that they are what's called a zero-sum game, which is a game theory term, which says that the only money that pays out investors is money that's from new investors

paying out old investors. Or to put it another way, if you bought low and sold high, somebody else bought high and sold low, right? So there's no money coming into the system that's not by bringing more investors into the system. So if you apply the kind of traditional quantitative finance models to these things, like this kind of cash flow model, you get answers that say that these things should basically be worthless, right? They have no income. Their entire terminal value depends on an infinite chain of fools that will just keep

buying this thing forever, which are absurdities. They can't possibly have a non-zero value as a security. And securities are very regulated in the States for a good reason, because you can construct them out of thin air, just like cryptocurrencies. They're a fiction. They exist to basically give people rights to cash flows on economic enterprises. But with Bitcoin, there's no economic enterprise. With Ethereum, there's no economic enterprise. It's purely a investment whose value is derived from the theory of the greater fool, that if I buy an asset, I have to pass this on to another fool. So it's an infinite hot potato, right? So by deductive reasoning, you end up with these

absurdities if you try to price them as securities. and then you can say that they're like art so basically bitcoin is like a piece of libertarian performance art uh that's split into 21 million parts right and it wouldn't be the first time somebody's actually done that in history but that's a kind of significantly kind of less coherent story that the bitcoin is a performance art it doesn't drive with the kind of narrative we keep hearing about that's being treated as a financial instrument, but it's actually kind of this piece of performance. So I kind of reject that one outright. So then you're kind of left with the logical conclusion

that you have these kind of like valueless penny stock assets that are kind of being traded purely on the theory of the greater fool. And that looks like a speculative bubble. And those things have to happen in economics uh it's just they always have one outcome though and i think you know ultimately the history of these things ultimately transferred one place to zero exactly and i don't think we

need to go into it too deeply but there are you know very clear you know relationships you can draw to historical events you know one that i have noticed a lot that that keeps coming to mind whenever I read about these stories is the Wall Street crash of 1929. But in one of your essays, you also mentioned the Albania pyramid scheme crisis in the 1990s, where post communism, Albania seemed to be having this economic miracle, but it was just like, you know, half the economy got involved in pyramid schemes, and then it ultimately collapsed. I wonder if there's anything that you want to say about either of those examples. So both of those are actually really great historical analogs about kind of what we're living through. And the lesson about history is that history repeats itself, first as tragedy, then as farce. And so I think what we're seeing is kind of the farcical version of those two events

kind of repeating. And I guess we're kind of is kind of the farcical version of those two events kind of repeating. And I guess we're kind of doomed to repeat the same cycles of history. So to go back to like the 1920s, and every journalist I talk to right now says, oh, it's like the 1920s again. And they're right. What you're seeing right now is what happens when you have a kind of wild speculative media. And we saw that in the 1920s when America was kind of first building its kind of market economy. We were still figuring things out about how to actually build a stock market um these have been around for a while since like

the 1700s but they kind of reached a fever pitch as the kind of u.s kind of industrialized and kind of entered the early 19th century uh and so things like the new york stock exchange kind of exploded in popularity and there was a cambrian explosion of companies and all sorts of new financial instruments and all this financial innovation, if you will. And the retail public, which is like everyday citizens, started investing very heavily in financial instruments in companies that they didn't understand. And this created a massive sort of bubble, which ultimately led up to the Great Depression and the Great Market Crash of 1929, when the entire house of cards ended up falling down because all of this was based on hot air.

But there was a very interesting set of laws that came into effect in the States, which were called Blue Sky Laws, which were explicit prohibitions on the type of securities that cryptocurrencies are most like. So blue sky laws were basically a restriction around trading securities that were backed by nothing more than the blue sky of Kansas. So they were instruments that had no underlying fundamentals. People would just sell these things and they were like the Dogecoin of the day, basically. What's the value of the blue sky of Kansas? What's the value of a dog meme? They're asking the same kind of questions back then in 1929 right and ultimately the u.s decided oh these things were probably bad because how do you price these things you know like uh what's the value of blue sky right and so most states basically ban these things and this kind of got codified into um what became the securities

act of the 1930s where it turns out you probably don't want to actually have these things because they're basically predatory instruments. And I think you're seeing all the historical analogs repeat themselves as farce again now, basically. These things look like securities, full stop. Like most cryptocurrencies, and the SEC sort of agrees on this, they look like blue sky securities, blue sky contracts. And since the US has decided not to regulate them at the moment or has not stepped up to do that you're

seeing exactly the same patterns repeat themselves and ultimately it's going to take something like you know securities act for cryptocurrencies to ultimately come in and kind of clean up the mess um unfortunately though i think like most of those securities probably just appear because they're backed by nothing. What's the value? Dogecoin or something. History totals what happened to most of those. They went to zero when they became illegal. And the second one was the

pyramid schemes of Albania, which is actually a really interesting story. And the Financial Times actually just did a story last year about this, which was really very good. So to kind of summarize it for people who don't know the story albania came out of the communist bloc and kind of left the ussr and transitioned from a like a centrally planned economy into a market economy and so the people of albania they don't live their life under communism and so they were not they didn't have the same kind of institutions and some kind of cultural norms around what to expect from interacting with the market economy.

It was basically like a libertarian paradise in Albania at the time, where there was no regulation. Anybody could start these large investment funds, and that's what people did. They started these large, basically, infrastructure development funds that people would pile in, and they would promise things like five, 6% return initially. And then they would allegedly take the funds and invest them into infrastructure, which would then generate a yield and they'd pay that back to their shareholders. Except they forgot to do the investment part of it because it turns out if you take people's money and there's no regulation, there's a perverse incentive just to run off with that. That's exactly what happened. So these things became massive pyramid schemes, which basically ended up consuming large chunks of the GDP of the entire country to the point where the government was basically in on the action. All of the government officials were like, well, we could regulate this or we could just pay ourselves.

And so by the end of this farce, these funds were promising like 50%, 60% returns. I think they got up to like 120% returns because they were just robbing Peter to pay Paul. They're paying out a smog for people to kind of keep the illusion going under the hopes that most people would not withdraw their money. Well, what happened eventually? People wanted to withdraw their money. And then what always happens with this kind of schemes is that outflows exceed inflows, and then the entire structure becomes insolvent, and it goes poof. And that took down the entire economy with it. And then the country descended into civil war for several years. And that's a kind of cautionary tale about the size that large financial frauds

can get if left unchecked. And when government fails to do its job, when there's no clear role of the state to kind of step in and be the kind of guarantor of last resort against systemic risk. And Albania should be a very, very cautionary tale for cryptocurrency because left unchecked, I see the same patterns repeating themselves. Yeah. It just seems like such important analogs to remember. And, you know, especially when you think back to the 1920s, and what you said about, you know, the regulations coming in later, one of the great things about technology is that it just pretends that existing regulations don't apply to it, unless, you know, it's actually forced on them. And usually that takes a long time for governments to come around and do it, at least, you know, in this period of time. You know, I think it's also interesting, you say, like, especially as you can see, in the case of Albania, that you constantly need more people to come in. And that's why you see like, you know, people like the Winklevoss twins on Twitter all the time saying, like, you know, you have to get into Bitcoin, you have to put everything you have into cryptocurrencies, because, you know, this is

the only way that you can like get rich or help yourself or whatever, right? And so you can naturally see these trends like playing out and continuing. And, you know, naturally, you described cryptocurrencies as, you know, like some combination of like a Ponzi scheme, a pyramid scheme that you said could even be considered a snowball scheme. Do you want to talk briefly about, you know, how you see cryptocurrencies in that way? Absolutely. So cryptocurrencies are very weird because traditionally speaking, they don't fit into any one of the categories of the traditional financial frauds. So the question I always ask is like, what would you call a Ponzi scheme before Charles Ponzi invented it? You wouldn't have a term of art for it. And I think

cryptocurrencies are something that in the future, we're going to have a term of art for it. And I think cryptocurrencies are something that in the future, we're going to have a term of art for it because it's going to be illegal. So I think it's sort of this proto-fraud that we're still grappling with. But you're right, they kind of synthesize different aspects of the kind of major types of financial fraud that we see already. So a Ponzi scheme is basically like an investment fund that robs Peter to pay Paul. So you're basically paying out people in return by basically bringing in more money to pay out out the next person the next person the next person you have to kind of keep this going on and on forever and ultimately that's unsustainable because you know you run out of people or you know outflows eventually exceed inflows or you start making returns that are uncorrelated to the market that's how madoff's fund basically got

busted because they were pretending to give 8% when they were in a bear market, right? This doesn't make any sense. And that's when they eventually got caught. Although they ran it for 20 years. So people don't remember this, but Madoff ran his fund for 20 years. So these things can go on for quite a while.

And then you have pyramid schemes. So pyramid schemes are basically like a form of Ponzi scheme, except they kind of have these tiered layers by which people are recruited and then the payouts are basically a result of you bringing in more people to allegedly buy some utility or some product some utility coin if you will um to basically justify uh the entire structure so you're buying vitamins or you're buying you know leggings or you're buying some phony you know thing to justify the entire structure. So you're buying vitamins or you're buying leggings or you're buying some phony thing

to justify the entire scheme. And you purchasing that bullshit product basically feeds money back up the pyramid that basically pays off people at the top of the pyramid. And that money slowly trickles down fractionally down different levels. Except the problem with this

is that if we do this with like 15 levels of a pyramid, you've basically recruited everybody on earth into the scheme. So it's inherently an unsustainable enterprise. And the sad thing is pyramid schemes are basically rampant in the United States. They're basically called multi-level marketing companies. And for very strange historical reasons under the Nixon administration, these things were let to exist. And they're purely predatory schemes that basically just suck wealth from the poor to do nothing economic in the economy they're cancer honestly but they're let to run and then you have like high yield investment fraud which is like the third type of investment fraud which basically

is kind of like a ponzi scheme but basically it's an investment scheme that sucks in a lot of money from a very small number of investors with a pool of money that's seeded by the initial schemers. And it pays out enormous dividends. And those people basically take that money and they go to their friends and say, look at how much money I just got paid out of the scheme. And then a bunch of people pile in with their money and then people run off with it, basically. The perpetrators of the scheme run off with it. So it's a very ephemeral Ponzi scheme, if you will. And then you have multi-level marketing companies,

which are kind of a form of pyramid scheme, except they're based very, very heavily on recruiting. And so they have a very kind of cult-like mentality. So things like, I can't say this because they're all very litigious companies, but maybe you know some companies in the States that meet this criterion. And so crypto happens to kind of like synthesize like different aspects of all of these frauds in different ways, but it's not subsumed by any single one of them.

So strictly speaking, it's not a Ponzi scheme because there's no central operator, but it has the kind of obscured cashflow mechanisms and the robbing Peter to pay Paul. So basically paying out old investors from new investors, it's very Ponzi-like. It has the kind of recruiting mechanism that you see in pyramid schemes and the kind of downline mechanics to do about early and about later. There are certainly like DeFi products that look like high yield investment fraud or very ephemeral tokens. They're kind of like one pump and dump tokens that look like high-yield investment fraud. And they share the kind of cult-like recruiting mechanisms that multi-level marketing schemes have, where they're not based on financial

returns, but on this kind of culture around the thing that we're all pursuing financial liberation and BRing a boss. And we're going to create generational wealth through, you know, belief in this, this mis-message that has been brought down to us, which is going to bring us into this financial utopia. And so cryptocurrency, I think is a whole new type of fraud. I think the history books are kind of, kind of have a term for this, but it kind of withdraws on all four of those categories to synthesize into this new form of it. Like, and it's a very internet phenomenon. These things could not exist without technology. The scary thing is that these things can grow extraordinarily large.

Madoff ran this fund for 20 years, and it got to around $60 billion. Just to show you how bright these things can grow, cryptocurrency is kind of like Madoff's fund. I think it can just grow to a very, very large point. But ultimately, with all these frauds, at some point, outflows exceed inflows, and there's only one outcome that happens. Yeah, you know, I think that's a really good description of the space and all these different frauds that give us some kind of way to think about cryptocurrencies, even though they don't necessarily fit into each category. And I would just say, you know, on the MLM piece that you that you brought up, you know, I'm not specifically making this comparison, but I saw

someone on Twitter the other day, say that cryptocurrencies were like Mary Kay for young men. So, you know, just a tweet that I saw. Not something that I'm that I'm necessarily saying, right? Not necessarily inaccurate, though. Yeah. And so, you know, we've discussed what technologists think on this, the divide between this. We've discussed blockchain and, you know, the various concerns around that. The belief in decentralization as something more than what it really is. And, you know, the issues that exist with cryptocurrencies. And I think now we're seeing this term Web3 emerge

to kind of provide a narrative to kind of weave all these things together and make people believe that this is like the future of the internet, the future of digital technology and things like that. And one of your most recent blog posts was on the issue with this concept of Web3, why it's this

kind of like inherent marketization, and, you know, a significant problem. So I think we should end with that question, you know, what is web three? And what is the problem with positioning this as the future of the internet? Yeah, so my latest post is called web three is bullshit. So it's subtle, the point that it's trying to get across. Very subtle. Yeah, it's subtle. But Web 3 is kind of a marketing term. If you go to a room of developers and you go in front of them and say Web 3, you're probably going to get laughed at. Because it's like one of those words like agile, like synergy or something.

It doesn't actually mean anything. It means whatever you want it to me um so it's kind of a marketing term that several large investment funds have been kind of pushing and my thesis is that largely it's because the crypto brand is so toxic at this point that's basically synonymous with scams and fraud that people need a new word to talk about their allegedly legitimate businesses and so web3 has been kind of said, oh, well, what if we re-envision the internet? And anytime somebody tells you that they're going to re-envision the internet, you should take whatever they say with a very large grain of salt. In fact, this is sort of the punchline of several jokes.

I don't know if you've ever seen Silicon Valley, the TV show. That's the whole punchline of the entire show is that we're going to reinvent the internet. If you take the biggest innovation that basically humanity has ever done and you start comparing anything to that, it's always going to have this kind of aura effect around it. Like, oh, well, who wouldn't want to re-envision a more egalitarian internet?

What's always lacking in these descriptions about Web3 is the details about how that will actually be achieved. And when I look at the people talking about what they're going to build on top about Web3 is the details about how that will actually be achieved. And when I look at the people talking about what they're going to build on top of Web3, number one, it's not really well-defined because the term's not really well-defined. Number two, it always basically involves some sort of blockchain technology.

And number three, it always involves one of these thinly-veiled schemes by which the company basically launches some sort of product, and they simultaneously launch a token alongside of it. And the thing about these token schemes that people have to realize is that there's a pre-sale that happens on these tokens. There's some very large investors that basically buy up most of the supply

of this token, of the space of tokens that will ever exist. And they buy them for fractions on the penny, right? And they buy this before the alleged company is even ever exist. And they buy them for fractions on the penny. And they buy this before the alleged company is even ever formed. And that gives them an enormous market advantage because you're sitting on 90% of the supply of a token that will allegedly be used for some web application, which will probably fail in the next year and a half. But they'll launch the token and then there's the application and allegedly the token is some sort of like you know it's like a slot machine like it's used to like push into the

machine to get some sort of you know outcome or something or deliver some service but in practice what most people are buying these tokens for is is for price appreciation they're buying them to basically you know to speculate on the price movements of the token. So of all the projects that are basically pushed in Web3, they all look like sort of thinly veiled ways of basically issuing these tokens as sort of a proxy for equity in a company. And that's problematic because equity in early stage ventures is regulated as a security in the States. And it's gated to a very small group of individuals who are basically sophisticated investors who are basically given the risk and return to basically invest in early ventures. And it turns out when you invest in those kinds of companies,

you typically have to wait for about 10 years before you can sell those things to the public. You can only sell equity in a startup until it gets listed in an IPO. So if that's like 10 years, I mean, that's a long time in terms of technology. And it's a long time before the initial investors can actually realize their returns on their initial investment. So what you have is tokens are basically a way of circumventing that whole process. So you can launch a product and it can be the most alpha, early stage thing that basically doesn't even work, but you can launch the token just like you would an IPO. And then you can offload that off the public initially. So people are speculating on what's basically like a six-month-old company, which doesn't

have a product, has no customers, has no revenue, has no semblance of a business model, but they have a token and the token has a market cap of $16 billion or something, or some like DECA unicorn or something in Silicon Valley terms. And then what inevitably happens on these projects is that people trade them on the speculative type of there being eventual product. But usually the founders generally get rich off of the initial pump on the initial offering, and then the exit and the product never manifest. And so this is what you saw with most of these so-called initial coin offering companies. They're basically a thinly veiled way of basically getting around securities regulation and selling securities

to the public directly on companies that were always doomed to fail. So on a macro level, that's basically just a giant wealth transfer from the public speculating on what's mostly nonsense to early investors who bought into this pre-sale. And so I think a lot of people have kind of called the game on this thing. And so like people needed sort of new marketing term, a new umbrella by which we can kind of put this new class of ventures under. And I think web three has become that thing. It's still going to be used as a term to kind of promote decentralized applications, which run on tokens now.

And if I see the kind of arc of where some large investors want to take our industry is they want to turn every single app on your phone into like a pay-to-play slot machine, where you have to purchase a token from this infinite array of rent-seeking token issuers and exchanges to run every single service that you currently use. And then we're basically going to put toll roads on every single aspect of the internet. And basically everything is going to be a pay-to-play slot machine. Because quite frankly, these pay-to-play slot machines, they feed into people's gambling addictions. And they're a very lucrative business for people who get in early on them. Except they're basically a way of crippling everything that already exists and taking the abundance of computer power and gating it and

intentionally slowing it down, introducing artificial scarcity to do the things that we already do for sort of some hand-wavy notion of decentralization, which doesn't actually hold up to water. And that's the way I see the whole Web3 narrative. I think it's mostly marketing to kind of continue the gravy train of securities fraud. Yeah. And I think your description really illustrates to us why Web3 needs to be opposed in, you know, any and all form. I think I want to end with this quote from one of your blog posts, just to leave this with the listeners. You write that Web3 is a rhetorical trick to set up a false dichotomy between the legacy internet world of pop-up ads and Zuckerbergs, which legitimately

does suck, and a fantasy world built on technologically incoherent pipe dreams and phony crypto populism. Stephen, you know, I've really enjoyed the blogs. I've really enjoyed chatting with you today. So thanks so much. Still be chatting with you, Paris. Have a good day. Stephen Diehl is a software engineer and crypto skeptic based in London. You can follow him on Twitter at at SM Deal. You can follow me at at Paris Marks and you can follow the show at at Tech Won't Save Us. Tech Won't Save Us is part of the Harbinger Media Network and it is having a fundraiser this month. You can find out more about that at harbingermedianetwork.com. And if you want to support the work that goes into making the show every single week,

you can go to patreon.com slash tech won't save us and become a supporter. Thanks for listening.