The Breakdown - Why the Bitcoin and Crypto Communities Are So Skeptical of Worldcoin

Episode Date: October 23, 2021

This episode is sponsored by NYDIG. Today’s episode is nominally about Worldcoin. The project launched this week with ambitions to airdrop a new cryptocurrency on everyone in the world. To do so, it’s using biometric eye scanning to identify people and the entire cryptosphere – bitcoiners, ethereans and beyond – are sort of not having it. NLW gives the context and background of Silicon Valley’s history with bitcoin and crypto in order to help explain the reaction to Worldcoin.  Featuring Dan Held “Why Silicon Valley Doesn’t Get Bitcoin.”  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Klaus Vedfelt/DigitalVision/Getty Images, modified by CoinDesk.

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Friday, October 22nd. And today we are talking about one of the most skepticism-raising announcements that I've seen in some time. I'm speaking, of course, about WorldCoin. and anyone who spent any time on Bitcoin or crypto Twitter in the last 24 hours will know that the crypto community, and not just Bitcoiners, but the crypto community writ large, does not like what they perceive to be a privacy-invasive Silicon Valley-backed project.

I'm going to both try to contextualize those feelings as well as give WorldCoyne a fair shake at an analysis from the standpoint of what strikes me as good, what strikes me as not so good, and what strikes me as just the stakes of how things happen in fall of 2021. But to start, let's talk about why Bitcoiners in specific, but many people in the crypto community in general, have some amount of skepticism when it comes to Silicon Valley. For those of you who don't know, I spent about a decade in Silicon Valley, I worked in startups, I worked on the venture side, and I was there during the first wave of Silicon Valley's interest or at least contact with Bitcoin. I missed it then too, so when I talk about Silicon Valley missing it, I'm not holding myself to a higher standard. Instead, I'm just trying to articulate why I think so many people missed it.

First of all, one obvious one is that Bitcoin didn't have an investable organization, right? Venture capital is mandated to invest in early stage risky startups. There wasn't anything that really resemble a startup around Bitcoin. It was a new type of asset that people weren't exactly sure what it was going to do or what it was going to be for, and there wasn't a company that was structured as a company that people could invest in. So no investable organization obviously keeps it off the radar of some amount of VCs. This gets to another piece, I think, which is that the pattern recognition that is such a hugely important part of how venture capitalists do their work, i.e., they spot factors in early-stage

startups and early-stage founders that remind them of other successful startups and founders just didn't happen for Bitcoin. A third really important point, maybe the most important point, is that I think that Silicon Valley largely tried to map a technology innovation on Bitcoin versus understanding it as fundamentally a financial innovation, or at least first and foremost, a financial innovation, even if it was enabled by a certain tech innovation as well. It's not surprising that Silicon Valley has focused on the blockchains that underlie Bitcoin because, of course, that is the technology innovation underlying the financial disruption.

But I've talked a lot and very frequently about why I think Silicon Valley sort of missed Bitcoin, and so instead of going too deep into that, I just want to read a few sections from a Dan Held thread on exactly this. Now, Dan Held was in Silicon Valley at the same time as I was, and he actually got into it, whereas I didn't, so I think he's a pretty good voice to listen to around this. On January 16th of this year, he wrote why Silicon Valley doesn't get Bitcoin. Over the last 12 years of its existence, Bitcoin has been misunderstood by Silicon Valley, which has led to many cringeworthy moments as they've endorsed silly ideas and even worse scams. The two big players in Silicon Valley are the tech companies and venture capital.

The tech companies build the products that we all use and the VCs fund their endeavor. There is a nuanced courtship that intertwines these two parties. Through that process, they dictate what is built, who gets funded, and what ideas are hot. Build, ship, iterate. This is how Silicon Valley approaches making products. If you aren't innovating, you're dying. No product is ever perfectly right the first time. Every product you see is the culmination of countless revisions, iterations, and pivots.

The idea that Satoshi perfectly crafted Bitcoin on the first try is unfathomable for them to consider. When tech workers see Bitcoin, they want to fiddle with different parameters, block size, monetary policy, its core capability and utility. This is exactly the right mindset when building applications, but the wrong mindset when it comes to building the base layer of the financial system. You can't be constantly tinkering with the base layer of the financial system. And then I want to zoom forward a little bit, as this is a very long thread, but I want to go to that period that I was discussing when I was there. Bitcoin for Payments era, 2012 to 2015. Silicon Valley first became interested in Bitcoin to disrupt V-Syce. slash PayPal in 2012 to 2015. Disrupting payment systems seems like it had great product market fit and was

understandable as an investment thesis. VCs couldn't go to their LPs and say we're here to undermine central banks across the world through a new digital gold standard. Their LPs would have called them insane and they would have been shunned by their peers. It was painfully obvious to many companies on the ground that this investment thesis didn't have product market fit. There was a little reason for consumers to use Bitcoin as an alternative to PayPal or Visa since Bitcoin is slower, harder to use, and more expensive. Now, we will link this thread in the show notes because there's a lot more that's here, but you can see Dan echoing some of those themes that I had. And really the thing that I want to point out here, the reason that I bring this up is that there is this base

level skepticism between Bitcoiners and Silicon Valley. One critique you'll often hear is that VCs who missed Bitcoin doubled into the Ethereum ecosystem because they missed Bitcoin. I don't doubt there is a part of that. This is a pattern that you see frequently in crypto around layer ones. Missed Bitcoin, get into Ethereum. Missed Ethereum, get into Salana. Missed Salana, I don't know, get into whatever it comes in a year or whatever that says it's quantum computing proof. This is to some extent just a natural human market behavior. And I don't doubt that there was a part of that when it came to why Silicon Valley was more interested in the Ethereum ecosystem as a whole. But going back to this idea of pattern matching, I also think that the Ethereum ecosystem better

fit the tech disruption versus financial disruption pattern that Silicon Valley was used to. In short, after Web 1, there had to be a Web 2, right? Web 1 was all platforms that created content, and we were all just the consumers of that content. Web 2 broke that paradigm down and said the users of a platform can actually be the creators on that platform. Instead of one to many as Web 1 had been, it was many to many enabled by these centralized platforms, these social networks. But inevitably, in the mindset of a technology, there's always going to be a something next, and that something next is going to be rooted in the critique of the something

that came before. The obvious critique of Web 1 is that it reduced people to simply passive consumers of content rather than actual engagers, rather than people who could have conversations, who could share photos, who could share podcast, et cetera, et cetera. The problem with Web 2 isn't the many-to-many paradigm. It isn't the empowerment of people to create content. It's the way that that content is mediated through platforms that ended up having enormous control. The algorithms of Web 2, the business models of Web 2,

these things have created enormous challenges all the way up to a societal standpoint. So if you are that type of Silicon Valley technologist who's saying to themselves that after a Web 1, there had to be a web two, and inevitably that means there's going to be a web three, then the question was what that web three would be. And to be clear, you're hearing a lot about web three now, but already, by the 2017-2018 boom, many in Silicon Valley were looking at exactly that. Chris Dixon from Andrews-Horowitz wrote a piece in February 2018 called Why Decentralization Matters,

and in it he articulates the core problem of the big platforms. He writes, let's look at the problems with centralized platforms. centralized platforms follow a predictable life cycle. When they start out, they do everything they can to recruit users and third-party complements like developers, businesses, and media organizations. They do this to make their services more valuable. As platforms, by definition, are systems with multi-sided network effects. As platforms move up the adoption S-curve, their power over users and third-parties

steadily grows. When they hit the top of the S-curve, their relationship with network participants changes from positive sum to zero-sum. The easiest way to continue growing lies in extracting data from users and competing with compliments over audiences and profits. Historical examples of this are Microsoft versus Netscape, Google versus Yelp, Facebook versus Zinga, and Twitter versus third-party clients. Operating systems like iOS and Android have behaved better, although still take a healthy

30% tax, rejecting apps for seemingly arbitrary reasons and subsume the functionality of third-party apps at will. Now, to get clear about what Chris is saying is that at the beginning of any sort of network effect-driven marketplace or social network, there is an aligned interest between the owners of the network and the users of the network. That is to get more users and more activity. That's what everyone wants. What makes a network, whether it's a marketplace or a social network valuable, is the number of people and how much they engage. However, over time, at some point, there's not that many more people that a network can get on. They start to reach critical mass. And as they do

so, each incremental new user or new piece of content that flows through the network is worth less to the owners of that network. That is the point at which they have something that I had previously written about as the extraction imperative. When the incremental value of each new user starts to fall, the corporate entities that run these networks and platforms have an imperative to extract more from each user on that platform. This often looks like changes in the relationships with the third parties who built on that platform. I think that one of the best examples of this is Amazon's relationship with its third party sellers. As time has gone on, Amazon has used the data that it is acquired over time

to essentially outcompete every other third party seller on its platform because it just knows more about what users want. The point is that already in 2017 and 2018, this was the topic as it related to crypto and decentralization in Silicon Valley. And over the last four years, the issues apparent with big tech have only gotten more pronounced. These issues have jumped from people like Chris Dixon identifying them to people like the U.S. Congress and Senate identifying them. And I guess my point here about VCs pushing the Web 3 thing is to say that in many ways they're projecting what they're looking for next onto crypto, as much

as crypto is selling a story to them. TLDR, the internet evolves and it feels to many high-conviction VCs that what it evolves into next looks something like what these crypto platforms promise. But that doesn't mean there isn't still tension. VCs have a business model largely structured around owning big stakes in corporations that make technology. That looks very different than truly decentralized tech. More broadly, there's also a chip, I think, on many crypto builder's shoulder. That chip says that it's the first major technology that grew up outside of Silicon Valley, and it's not willing to just play by Silicon Valley's rules.

The point of all of this is to give you context about why you often see skepticism when a Silicon Valley project tries to join the space. and such was the case yesterday with the announcement of WorldCoyne. This podcast is sponsored by NIDIG, an institutional Bitcoin firm that sees Bitcoin as a gateway to financial security for people around the world. Find out more at NIDIG.com slash NLW. That's NYDIG forward slash NLW. WorldCoin is a project backed by Sam Altman who spent many of these last years running Y Combinator.

In their introductory blog post, WorldCoin writes, Introducing WorldCoin, a new collectively owned global currency that will be distributed fairly to as many people as possible. The internet is powerful because of large networks. Email, social apps, and marketplaces are examples of such networks. The more participants they have, the more powerful they become. For the first time, cryptocurrencies make it possible to distribute ownership and control of those networks to their users rather than a single entity. If a cryptocurrency were adopted at scale, it would vastly increase access to the internet economy and make applications possible that are now unimaginable. However,

less than 3% of the world's population currently participates in cryptocurrency networks. To rapidly get its new currency into the hands of as many people as possible, WorldCoin will allow everyone to claim a free share of it. Now, you may be noticing, dear listener, that this everyone allowed to claim a free share of it presents some challenges. How to allow everyone to claim a free share of it without rampant fraud. Here's how WorldCoin is going about it. For this to happen, we first had to solve one major challenge, ensuring that every person on Earth can prove that they are indeed human, not a bot,

and that they have not received their free share of WorldCoin already. This challenge is the long-standing problem of unique humanness. How can you prove you are you without telling us anything about yourself? To address it, we built a new device called the orb. It solves the problem through biometrics. The orb captures an image of a person's eyes which is converted into a short numeric code, making it possible to check whether the person has signed up already. If not, they receive their free share of WorldCoin.

The original image will not need to be stored or uploaded. In contrast to many centralized services we use today, no other personal information is required. Through modern cryptography, this numeric code is also not linked to the user's wallet or transactions, further preserving user privacy. So I'm reading a bunch of this, but I just want to give you all the relevant context before we dig into the reaction. The project is also backed by a star-studded panel of VC and angel backers in their just announced $25 million round at a $1 billion valuation. What's more, some 20% of the project is going to be kept for team and other network incentives. So let's take a step back now. If you had to guess, what would you think the issues

that people were going to call out with this project were? First, a VC-backed coin claiming to be for everyone when they're reserving 20% for the team. Yes, that is going to be something that people will call out. Second, a VC-backed coin claiming to be for everyone when a VC-less coin that everyone already knows already exists. That is indeed another one. And of course, there's the biometrics. In a world where privacy is getting more and more contentious, a device that gives poor people money in exchange for scanning their eyeballs just has a problematic visual. Indeed, the internet yesterday was a whirl with gifts and memes and images of the Ludovico technique from a clockwork orange, where the morally degenerate young man Alex

is forced to watch images of horror. So what's my take? Well, let's talk the bad side first. I think the name WorldCoyne is almost so designed to be blaze that it triggers people's sense of skepticism. It has some strange feel, but that probably wouldn't matter if it weren't for the orb. The idea that this eye-of-sauron-looking orb thing is the centerpiece of their design is just such a questionable choice from a first impression standpoint. Now, I do think that a lot of the critique you're seeing on Twitter is overblown, in that this isn't really a biometrics project. It's an attempt

at an identity solution to create a cryptographic record of an individual that can't be repeated. Theoretically, there's no reason they have to keep that data. The problem is, of course, two parts. First, is the data existing in the first place. It inherently introduces a trusted third party. Rightly or wrongly, they're making their organization a third party that must be trusted for the sake of the fair launch. And maybe that's the right trade-off for this project, but it is a trade-off and they have

to understand that. The other part of the problem is, pun-intended, the optics of it. lines of people in some Indian village waiting to get in line for $10 worth of a digital currency in exchange for their eyeballs just feels off, even if theoretically it's giving value. Ryan Selkis from Masari wrote, If I wanted to make a caricature of something evil-sounding, I would raise money from the wealthiest investors in the world for a metal iris scanning ore built by the folks working on OpenAI in an attempt to air drop a new world currency 20% of which is owned by the seed backers.

I think the point that's relevant here is his choice of word caricature of something evil sounding. I don't believe that Ryan is saying or describing evil intent to these people. He's pointing out in more poetic and pointed fashion than I am, the optics of the orb. What's more, it's not just optics. Santiago Siri is a hacker, coder, developer, and crypto person who has been in this industry for a really long time. He comes from South America. He has roots in Argentina and Uruguay and has worked on projects like democracy, Earth, and proof of humanity. He's been through Y Combinator. He's a part of both of these worlds. He responded to Chris Dixon's thread about A16Z's investment in WorldCoin by saying,

doing hardware is incredibly wrong. Semaphore on Ethereum as a zero-knowledge approach is unconvincing. Venture capital eye-scanning people in developed countries is creepy AF. You should be embarrassed and ashamed for trying to profit with people's data in countries like Indonesia using this, and he shares a picture of an orb. The point of decentralized identity is allowing everyone, to audit permissionlessly how that identity was granted. Who Watches the Watchman was literally the title of the paper I co-authored. You are doing Facebook 2.0 and you'll be called for it in public big time. I think given Santiago's actual bridge across all these communities, it's worth at least

listening to his take. It's not just some hysterical maximalist take from any one chain or another. So I think that it's very clear that the optics are the bad piece, and the decisions inherent in those optics could become bad as well. that idea of introducing biometrics into a trusted third-party system that seems so against what's so much of what Bitcoin and crypto were about. Now, let's talk about some things that I find pretty neutral about the project. There are many folks who are saying Bitcoin already exists, so why do you need this? And frankly, I'm 100% not worried about this. Bitcoin is the ultimate free market technology.

That means things are allowed to try to beat Bitcoin. They have been for a decade and they will be for decades more. Worldcoin is welcome to be another, and so is any other type of coin. I think anyone who thinks that other things shouldn't be allowed to try and compete because Bitcoin already exists, kind of missed the memo on the whole free market thing. Alex Gladstein writes, if this is successful and actually distributes a new token to tens or hundreds of millions of people worldwide, the important question will be, how quickly and easily will users be able to convert their Worldcoin into Bitcoin? So like I said, I think that concern is sort of wrong-headed, but to be clear, that doesn't mean you have to like Worldcoin.

Now, let's try to talk about the good. I believe that there is a way to put aside one's priors and actually consider that this is a group of people who care about the idea of getting everyone on the planet invested in a new economy and a new currency of the future. I think we often do ourselves a disservice when we assume malintente priori. Silicon Valley for all its faults is full of true idealists as well, and that's the thing that VCs who have backed this have said. Kyle at Multicoin wrote, we are excited to back Alex and the Worldcoin team. Worldcoin is the most egalitarian thing we've ever seen. It's insanely ambitious and if it works can really reshape the fabric of society. Suu from Three Arrows Capital writes,

Worldcoin is one of the most ambitious and uplifting projects I've seen so far in crypto. And now, of course, you are welcome to have whatever opinion you want to have, given that they are financially invested in this, but I'm willing to take this commentary as sincere. Let's finally, though, talk about the parts that are just is. Some of these tradeoffs here are inevitable in trying to launch something new, into the 2021 landscape. Hasu touches on this in a short thread where he writes, I'm no fan of the ore, but seeing a bunch of bad and unfair takes. My two cents.

One, most of you have given up privacy for less than $10. Two, there's no need to store biometrics, at least in theory. You only hash it and check against the database of hashes who have claimed. Three, pre-mine. Welcome to 2021. You can't launch a coin and not be ready to massively invest in growth and expect to compete with everyone else. That pre-mine brings up a really, really powerful question and one that should be debated. I agree with Hasu that you can't plausibly launch something new and not have the capital to go compete. But at the same time, does the fact that that capital comes with its own set of strings instantly and from birth undermine anything new? This is the purest Bitcoin or take, and it's not unconvincing. I think there's

another question which is way too big for the scope of this show, which is already running long, but is something that we do need to discuss, which has to do with wealth inequality. The question is, can an airdrop really address wealth inequality? Or does it instantly just create a bigger market for whales? I think that's a discussion we can have, even if we're not trying to be skeptical. Turdemeester writes Worldcoin, Silicon Valley's most expensive way to learn that all markets inevitably gravitate towards wealth inequality? Ultimately, I have to say I've rarely seen the crypto world so united. Bitcoiners, Ethereum, they don't like it.

I'm doing my best to give it a chance, and I will continue to do so, but I've expressed why the first impression was so rough for so many. I'll end on this note. Somehow, despite all of this contention on Twitter, Worldcoin is not even close to the most universally despised Silicon Valley entrance into the crypto world this week. Earlier in the week, various news outlets started reporting that Mark Zuckerberg wasn't just interested in the metaverse, but that he was actually planning to rebrand Facebook, to rename the company, to reflect that intent. Udi Wertheimer wrote, Facebook's insistence on launching a cryptocurrency and becoming a metaverse means one thing. Zuckerberg had enough of running a company. He wants to run a country. He follows it up.

The word metaverse was coined by Neil Stephenson in the book Snow Crash, and it originally described a virtual world owned by corporations, where end users were treated as citizens in a dystopian corporate dictatorship. What if Neil was right? Jack Dorsey weighed in and retweeted Udi asking if Neil's version of the metaverse as a corporate dystopia was right and said, narrator, he was. We're going to spend some time next week when this announcement actually comes on all of this Facebook metaverse stuff, but boy, is it wild? How little trust this company has. Anyways, guys, this was way longer than a normal episode. Clearly, this is something I've been thinking

about a lot and the topic that I cared deeply about. But I appreciate you listening if you made it this far. And until tomorrow, be safe and take care of each other. Peace.