The Breakdown - 38 Things We Learned About Crypto and the Economy in the Last Year

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, September 7th, and today, well, we're doing something a little bit special. A quick note before we dive in, there are two ways to listen to the breakdown. You can hear it on the CoinDesk podcast. network feed, which comes out every afternoon, and also features other great CoinDesk shows, or you can hear it a few hours later on the Breakdown-only feed. Wherever you listen, I so appreciate

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Starting point is 00:01:23 All right. So today is my birthday. And I don't know what the exact combination of reasons for it is. I'm sure it has to do with being on a school calendar, which begins at the beginning. of September and the end of summer in the business world, meaning really kind of a mentally new year. But whatever the case, my birthday is much more like New Year's than New Year's is to me. So I thought what would be fun is instead of doing a normal show, which would just be bleak and about why prices are going down, down, down, down, down again, I would do a show about the 38 things we learned over the last year, one for each of the 38 years I've lived. Like the breakdown, this is going to cut from macro to crypto and back again, so let's dive in.

Starting point is 00:02:07 Number one, the U.S. is not going to ban crypto. There was a lot of speculation about this coming into 2022. The president's executive order was one of the most highly anticipated U.S. crypto policy announcements we've ever seen. In particular, people were worried that there would be some rulemaking and actual policy that didn't go through a normal political process, but that wasn't what happened. The final document was much more benign than expected, even positive in some ways. Essentially, it asked government departments to prepare advisory documents to

Starting point is 00:02:37 allow a whole of government approach to the industry. The overarching principle was to enable responsible innovation. So you can think what you want about Biden's approach to crypto, but the fact is the U.S. is not headed towards a ban. At the same time, number two, the U.S. is going to regulate crypto. We have definitely seen an increase in the regulatory discussion. There have been a huge number of congressional hearings over the winter. We've seen numerous bills, including Lumas Gillibrand, ongoing discussions of a stablecoin bill, increasing frequency of Department of Justice and SEC prosecutions, tightening of KYC and AML requirements, and more. So while the U.S. might not be planning to ban crypto, it is definitely the beginning, at least, of the end of the

Starting point is 00:03:19 era of regulatory confusion. Number three, along that same theme, the SEC-FTC battle is going to come to ahead, and it's probably going to come down to Congress. Now, this has been the most clear interagency turf for as it relates to crypto. The SEC sees cryptocurrencies as mostly securities, and frankly, mostly unregulated securities offerings, and the CFTC sees them as something different, closer to a digital commodity. Both of these agencies have stepped up their advocacy efforts for themselves this year, as well as their enforcement actions, but what's becoming clearer and clearer is that it's going to come down to Congress to make this decision. Ultimately, the decision of how to regulate and oversee a new growth area of the economy comes

Starting point is 00:04:01 down to elected officials, not appointed officials. Number four, while those turf wars might be interesting to watch, stablecoin legislation is where legislation is most likely to start. Negotiations around a stable coin bill have been ongoing for months at this stage, but discussions are much older, stemming from precursors like the Stable Act, and even discussions at congressional hearing levels after Facebook announced Libra. Currently, it appears that stable coin negotiations in Congress have hit a stalemate that is unlikely to be broken until after the midterms.

Starting point is 00:04:31 But whatever happens, it's clear that the first priority of the government, vis-a-vis this entire industry, is to ensure that they can set the rules for assets that look like US dollars. Number five, speaking of stable coins, turns out algorithmic stable coins aren't stable. At this point, algorithmic stable coins are not a new idea. we now have years worth of depeg stablecoins to show for experimentation. This year marked the turning point in popular discourse, however, given that Luna's UST was widely seen as a worthwhile experiment that might have found the secret sauce to work.

Starting point is 00:05:04 Its collapse has ingrained the idea so deeply in the industry that it's hard to imagine that people will treat algorithmic stablecoin design with the same credibility ever again. Now, this is not to say that truly decentralized algorithmic stablecoins aren't a type of asset that people will keep experimenting with, but I think it's likely that we'll find some sort of different name or label that better appreciates how different they are than their asset-backed cousins. The key quote I think of all of this came from Nick Carter who tweeted, I saw someone today compare it to the history of flight, as if it's

Starting point is 00:05:34 just a matter of time until it works. The analogy should instead be flapping your arms and thinking you'll eventually fly. Number six, a new one to the list, OFAC thinks it can sanction protocols. OFAC is the Office of Foreign Assets Control there within the Department of Treasury, and just recently, they added mixing service tornado cash to the sanctions list. This sent shockwaves through the crypto industry, with defy app, stablecoins, and exchanges scrambling to comply. In doing so, OFAC not only asserted that they can sanction not just people but protocols, code with no one necessarily standing behind it,

Starting point is 00:06:08 but they demonstrated that the fear of compliance would have people within the industry jump to respond. Now, I chose to use the word thinks it can sanction. protocols, because ultimately I believe that there will still be many court cases ahead of us as relates to this topic. Number seven, CBDCs are going to roll out slower than it seemed. 2020 was the year of the CBDC narrative. With more efficient government stimulus delivery, better macro data availability, the imposition of negative interest rates, CBDCs seemed like a done deal. Now there is a lot more debate. Inflation hit, the world began to realize the extent to

Starting point is 00:06:43 which CBDCs could be simply an authoritarian control mechanism, and now in the U.S. at least, we're seeing senior Fed officials, many members of Congress fighting off any discussion of a retail CBDC. This doesn't mean that CBDCs aren't on the horizon, but it's a lot bumpier a path to get there than it seemed just a couple years ago. Number eight, good tweeting does not equal good trading. The end of easy mode in crypto markets has really separated the Twitter LARPs from the season traders. It's one thing to write a Twitter thread about the next big crypto narrative. It's a completely different thing to manage risk and trade positions through a choppy and down bad market. By the way, to make it clear, I'm much better at those big threads than I am about

Starting point is 00:07:23 trading, but at least I know that. Still, it was very clear that Suu from Three Hour's Capital was the poster boy for Twitter philosophers who, to paraphrase his own words, could not manage risk and had the market manage it for him. Still, it's not just Sue. The bear market has reminded everyone throughout the space, why trading is a profession. Number nine, risk management got loose during good times. Crypto has always been marked by excessive risk, volatility, and hidden leverage, but nothing in the past came close to the lax risk management that was on display this time around. Or perhaps it was just that the types of institutions, the total amount of dry powder, the amount of experience that was supposed to be here, set us up for an even more dramatic collapse. From crypto lenders to

Starting point is 00:08:06 defy applications to protocol treasuries, much of what could blow up did blow up. A huge amount of this centered around the cascade from the UST-T-Tera-Luna implosion to the three-house capital default, which unveiled that half the industry, it seems, had lent the fund money without taking sufficient collateral. There was also the excessive risk taken by lending firms like Celsius, who punted customer funds into obscure Dow's and yield farming. Ultimately, risk management that didn't matter for years in an upmarket finally came home to roost. Number 10, not your keys, not your coins. You guys know that NXO has been a long-time sponsor of this show, and my feeling about these types of protocols that put your assets to work for you, whether they're centralized finance or

Starting point is 00:08:46 decentralized finance in name at least, is that people get to make their own decisions, and that in a free market, everyone can measure risk for themselves. However, this was a year where those risks really came to pass. Right now, there are a huge number of people waiting in line to see if they're going to get anything back after they had assets parked in companies like Celsius and Voyager. And even if you believe, like I believe, that there's room for good actor versions of those types of companies in the space, the fundamental truth, not your keys, not your coins, got a huge reaffirmation this year. Number 11, Terra was the first DeFi disaster to hit the mainstream.

Starting point is 00:09:22 Now, the reason I say that is that a lot of the failures that DeFi had experienced before, the hacks, the exploits, etc. In those events, the losses were limited to an extremely enfranchised group of people. who really did know the risks involved. I've long said that the sandbox that DeFi had because of the high technical barriers to entry made it much less risky overall. Why Terra was unique is that all you had to do to be exposed to the DeFi experiment of UST was to hold assets in the Terra ecosystem. That means that a huge number of people only had to go to an exchange by that asset to have that exposure. And obviously we've now seen the downside of that.

Starting point is 00:10:02 Number 12, the follow-out from Terra was bad, but could have been a lot worse. Right as that ecosystem started to collapse, it was clear that we would spend the next few months learning what else would be taken out as losses were realized. 3AC was obviously the most notable casualty, and its blast zone touched all sorts of industry participants, but ultimately this could have been a lot worse. It wasn't Mount Gox. It wasn't even the 2020 crash. Many D-Fi protocols handled the plummet admirably.

Starting point is 00:10:29 People have pointed out that it was, in fact, C-Fi Protocol. who didn't manage their risk that were the hardest hit. So yeah, it was rough and will be seen as one of the most negative and profound events of this year and really of this cycle. But I think it could have been a lot worse. 13. Crypto doesn't have bailouts. It just has capitalism. One of the things that always makes me chuckle is when a political opponent of Bitcoin and crypto says at some point, the industry is going to come knocking on Congress's door looking for a bailout. What happened instead was a rush of emergency liquidity loans to good firms, merger and liquidation offers to struggling firms, and generally the capitalist process playing out.

Starting point is 00:11:04 Number 14, the Layer 1 battles aren't over. Now, this is maybe a little bit of an ironic one given the collapse of Luna, given that we had the whole Sol Avax Luna thing over the last year. But those other L1 chains haven't disappeared. And what's more, in the last few months, we've seen the announcement of a new set of chains, which have a lot of hype and excitement around them. Ethereum seems poised for the next phase of its life with the merge.

Starting point is 00:11:26 There are more people moving into Bitcoin as an actual Layer 1 competitor, viewing itself as a competitor of these other chains, not just as a settlement layer, but as something else. And so I think this narrative, this layer one battle narrative, is going to be something that simply continues to develop. Speaking of which, number 15, great builders are interested in lightning. One of the sleeper narratives for this cycle was Lightning Network adoption. While much of the space was exploring NFTs in Defi, you saw some really notable folks focus on Lightning and Bitcoin layer two. Jack Dorsey's block and TBD planted their flag in a huge way with their call it tongue-in-cheek Web 5 announcement. Jack Mahler's strike continued to go all out on the technology.

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Starting point is 00:13:55 Number 16. Imposing Bitcoin might not work. I share my birthday with El Salvador Bitcoin Day, the one-year anniversary of the law for Bitcoin being legal tender going into effect. What started out as the most bullish Bitcoin narrative of the cycle, the nation-state adoption of Bitcoin is legal tender, has transitioned into something that's much more questionable. There were issues with the rollout, and currently it seems like only a small percentage of businesses in El Salvador actually accept Bitcoin. The much-Balihood Bitcoin bond or volcano bond hasn't actually been offered, and it seems like it's from a lack of demand. Plus, there remain questions about Naibu Kelle, the president of the country itself.

Starting point is 00:14:39 None of this is to say that Bitcoin in El Salvador is a failed experiment yet, but it's certainly not as shining an example as many of us would have hoped. Alex Gladstein, the chief strategy officer at the Human Rights Foundation, wrote last year, the government overseeing the adoption process is showing alarming signs of centralizing political power. The paradox looms. As one Salvadoran told me, Bitcoin is about taking away the powerment of government to fiddle with our money and savings, not about government intervention. Number 17, crypto funds and companies have money for this winter. This is a point that I make very frequently, but there is a difference between 2018, 2019, and now,

Starting point is 00:15:15 which is that in the wake of the ICO boom, there was no money left. Now that is simply not true. Interesting projects are still getting funded, and big VC funds still have more dry powder to deploy. This means that we have more shots on gold to build the sort of new things that get people excited again than we did back in that previous crypto winter. Number 18, speaking of things that VCs liked, there was a lot of mania around NFTs. This was the cycle where a picture of a monkey was worth more than a house. There was even talk at the start of the bare market that the most premium NFTs might be the true store of value assets.

Starting point is 00:15:50 Whatever you think about NFTs in their long-term trajectory, the wild returns and, Mania was pretty incredible to witness. Minting a board ape for around $192 in April 2021 gave a return in the 200,000% range, if you include free derivative mince and a token air drop. The fact that minting a board ape and holding it for a year was one of the best financial decisions anyone could make will be something that people study and debate for some time to come. Still, number 19, and I think this is notable, people aren't just abandoning NFTs like they

Starting point is 00:16:22 did with ICOs. When the end of the ICO boom hit, people absolutely washed out of that space. That's not exactly the case with NFTs. There are many reasons why people could be actually excited about the technology and what it means to have true digital ownership. It could be the fact that they're more like art than securities and that people genuinely care about their collections. It could be that people really are in it for the community and that they think there's a long-term future for the communities they've chosen. It could just be a question of illiquidity. But either way, my prediction continues to be that NFTs post this crypto winter, whatever happens, are going to come out a lot

Starting point is 00:16:58 stronger with a lot more interesting ideas than this first PFP cycle. Number 20, one of the reasons for that is that NFTs are one of the first discrete crypto breakouts. And what I mean by that is that many of the people who were in NFTs never really cared about the debates between Bitcoin and Ethereum or anything else like that. It's the first time since I've been in crypto that I saw an entirely new group come in with a totally different set of ideas and priorities that didn't cross over into the rest of the industry. Number 21, big companies are going to compete for the Metaverse. This one seems obvious, but if we needed to put an exclamation point on it, the fact that Facebook changed its name

Starting point is 00:17:36 to Meta couldn't make this clearer. At the same time, seeing what the beginnings of Facebook now Meta sees as its Web3 strategy has made a lot of people reaffirmed in the reason why they want an open, not a controlled, centralized Metaverse. Number 22, the Crypto industry is getting a lot more comfortable with using legal means to achieve its goals. Before this cycle, crypto lawsuits were few and far between, and crypto lobbying was almost non-existent. This year, we're obviously seeing a ton of lobbying from lots and lots of different types of organizations. And even more than that, more companies willing to avail themselves of the legal system to get answers. The tornado cash sanctions, for example, seem to be

Starting point is 00:18:14 resulting in multiple parties using the legal system to assert the right to use the privacy tool and question government overreach. In short, the industry has moved from quiet, unless you're on Twitter civil disobedience, to loud and direct legal challenge. Zooming out again, number 23, and probably this should have been number one, but inflation wasn't transitory. Turns out that printing money and handing it to people while supply chains were still broken was really inflationary. U.S. inflation hit 9% in June, which was the highest level since 1981. And while I actually think that if you wanted to get real wonky and academic, you could make a coherent argument for transitory, being a reasonable definition on a long

Starting point is 00:18:51 enough time scale based on the supply chain disruptions that happened post-COVID, when the Fed used transitory what they meant is something that was limited enough in time that they could get it under control, which clearly they couldn't. The famous quote on this from Jerome Powell from recently was, I think we now understand better how little we understood about inflation. Number 24, fighting inflation is harder and more painful than just not getting it in the first place. This is one of the most classic examples of an ounce of prevention is worth a pound of cure that we've ever seen. Almost six months have passed since the start of the feds fight against inflation, and we've only recently reached somewhere close to what they call a neutral interest rate. The West is learning again

Starting point is 00:19:27 what high inflation means, and it is uncomfortable. Number 25, one of the most depressing ones on here. Large-scale traditional warfare is still possible. The post-Cold War era has been a time of relative peace for the Western Coalition, with differences settled via trade negotiation and economic competition. Of course, that's not true around the world, but coming into this year, the idea of a Western European country invading one of its neighbors seemed nigh unthinkable. The invasion of Ukraine ended that complacency, as the West had to ponder nuclear annihilation in kinetic warfare against pure military forces for the first time in decades. Among other things, this put armed conflict against China decidedly back in the considerations

Starting point is 00:20:06 list, and because of that, the world got a whole lot more dangerous in the last year. Number 26, war in response have hastened de-globalization. The world has been de-globalizing for a while, and we saw a hastening of it during COVID, when the shortage of medical supplies made us really ask questions about globalized supply chains, but certainly now, with the sanctions of Russia that has gone to a whole new level. We're reconsidering everything from food to computer chips for this new environment. Number 27, Dow's can do cool things, but still be outbid by Citadel. Dow's are still really looking for the thing that makes them click for normal people, and the

Starting point is 00:20:42 Constitution Dow was pretty close. The community raised like $40 million in a couple weeks and narrowly missed out on winning an auction for an original copy of the U.S. Constitution. They were ultimately foiled by Ken Griffin, the CEO of Citadel, who seemed armed with knowledge of the Dow's maximum bid, because, of course, it was transparent. I still think that the fundamental use case of Dow's as a fundraising mechanism is where they get disruptive, but we're still waiting for that real breakout moment. Number 28, institutions haven't abandoned crypto in the down market. This is something that a lot of people anticipated that institutions would just turn heal and run as soon as things got bad. However, we've seen what I call a quiet post-narrative institutionalization,

Starting point is 00:21:22 where companies like BlackRock keep pushing forward with their integration of crypto assets. It seems pretty clear that they're gearing up for the next cycle, which means they assume there's going to be a next cycle. Number 29, Bitcoin remains somehow bipartisan. In an increasingly divided in partisan political landscape, Bitcoin and crypto policy seems to be one of the few topics where party lines aren't strictly going to determine how people think about things. The Lumas Jilla brand bill is the hallmark of this effort. But even before that, we saw good faith congressional hearings with reasonable questions and discussions from people from both parties. Number 30, the dollar can and will be weaponized. Although it's faded somewhat into the

Starting point is 00:22:00 background of our discourse now, the sanctioning of the Central Bank of Russia's dollar reserves is one of the most brazen weaponizations of the dollar in history. What was once a hypothetical consideration for antagonist states is now a reality that must be planned for. What the implications of this change will be are yet to be seen. Number 31, it's not just Bitcoin on the balance sheet. Elon takes back a lot of shit. This one I'm just laughing at because obviously Elon was one of the heroes and villains of the pandemic-era Bitcoin rise. He was a hero when Tesla announced a big Bitcoin acquisition, and a villain just a couple months later when Tesla seemed to walk it back and said they no longer accept Bitcoin

Starting point is 00:22:35 for Tesla's due to ESG concerns. Given now that Musk's very public bid for Twitter has also done the round-tripper, with them now fighting it out in court, it's an open question of whether this guy ever actually means anything that he says. Number 32, Goblin Town over Supercycle. Crypto is a narrative-driven industry and the most hopium-filled narrative of the last year was the super cycle. It was the idea that increased adoption would drive a feedback loop causing more and more adoption. Obviously, this year we have learned very clearly again that prices can and will fall and we have not lost down cycles as part of our markets as well. Instead, we have been living and depending on who you are, thriving in Goblin Town.

Starting point is 00:23:15 33, crypto games have promised but are yet to find their shining example. One of the biggest narrative adjustments, I think, of the last year has been that around Axi Infinity. It went from the promise of fulfilling basic income needs to quote a type of digital sharecropping to quote Nick Carter. Now, I think that there's still a ton of opportunity in this space. There are more teams with gaming experience than ever building crypto-based games. But as close as Axi seem to have been to some, it really wasn't that breakout moment. Like I said, though, I still think there are going to be more shots taken in this space. CryptR Us writes 80% of the developers I talk to at Gamescom are building Web3 games.

Starting point is 00:23:54 They're not announcing it publicly because the audience isn't ready yet. The NFT hate is still high. Gamers will eventually change their mind. Next Bill Run will be all about crypto gaming. Number 34, Bitcoin mining is extremely resilient. Right around this time last year, we were starting to see how the hash rate had migrated from China after the Bitcoin mining ban there. That was one example of resilience. Over the last year, we've also seen another version of resilience,

Starting point is 00:24:19 which is that there is a growing and dynamic political dialogue around Bitcoin mining that is not just about why it should be allowed because of free markets, but is also for how it can become a part, a supporting part, of green energy goals. I believe that both the real world and the political resilience of Bitcoin mining will continue to drive positive outcomes for the Bitcoin space for years to come. Number 35, all markets are going through a great repricing. A decade of suppressed interest rates pushing the world into the everything bubble where valuations were mostly a function of liquidity and meme stocks dominated the landscape has now come to an end. Analysts everywhere are scrambling to revise pricing models to reflect fundamentals in reality

Starting point is 00:24:58 again across all asset classes. The question is, after inflation, will this great repricing stick? Number 36, we're at the beginning of a new cycle, not the end of a bear. The story of the markets over the last year has been the bullish dip buyers against the structurally bearish. Every time a Fed statement could be taken as dovish markets ripped. It's becoming more clear that this isn't a brief bear market to cool off. This is the start of a longer and more difficult economic cycle than has been seen in a generation. Number 37, the merge is actually happening. More than six years after Vitalik Buterin first laid out plans to transition Ethereum to proof of stake, the merge

Starting point is 00:25:32 is finally happening sometime next week. The test nets have tested, the validators have validated, the developers have developed. All that is left is to do it live. There is much to be. There is much to be debated here, but also much to be excited about. Best of luck to everyone involved. Finally, 38, however, and sorry to end on a bleakish note, but we're going to need more than a merge narrative to come back. Despite the merge being the biggest crypto narrative since Bitcoin as an inflation hedge a couple years ago, I do not believe that the merge alone can overcome the dire macro outlook. We have a new economic world and an entirely new cycle that we're going to have to sort out. And crypto and Bitcoin are going to have to find their

Starting point is 00:26:12 place within it. To end on a positive note, I have no doubt we can. So there you go, guys. 38 takes, 38 things we've learned in the last year. For all of you who have been hanging out that entire time, I have so much appreciation for you. Thanks again to my sponsors, nexus.com, chain aliasis, and FTX for supporting the show. And here's to another year and more. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - 38 Things We Learned About Crypto and the Economy in the Last Year

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