I Took the Crypto Red Pill: Week Two
Originally a thread on X/Twitter:
After years of sitting on the sidelines, I finally decided to take the red pill.
“Week 2” put me on the steepest part of any learning curve I’ve experienced in decades.
Here are a few of my simplified observations, early conclusions and emerging frameworks:
2/44: Observation 1 (W2): Taking the “red pill” meant different things to different people.
It was amazing how polarizing these words are to the community-at-large. The sheer fact that I declared that I was taking the red pill created three types of very distinctive reactions.
3/44: Reaction 1: Excitement for me.
Many people with a working knowledge of crypto/web3/DeFi who know me well were excited that I’m finally taking the leap into their world. It’s a party they were waiting for me to join because they thought I’d be additive to the community.
4/44: Reaction 2: Excitement for them.
There are many “traditionalists” who’ve only lived in the world of Banking as it exists today and are struggling to make the leap. For them, I’m a trusted source who will separate the signal from the noise and lay out a safe path forward.
5/44: Reaction 3: You didn’t red pill.
Multiple comments/DMs were some variation of: “You’re a fake because you don’t believe in the movement.”
This attitude is why I avoided the space for years. But I’m on a journey so I reached out to a few of these people to chat.
6/44: I wish I recorded my conversations and could let community hear them unaltered.
But my general take is that there’s a faction of people who think that centralized monetary systems and forms of government aren’t working and that crypto in its purest form is an escape valve.
7/44: They don’t ascribe to the belief that inflation is a tool that serves a purpose nor that our various governments can resist overspending. Their escape value is to transfer their buying power into crypto because it can’t be manipulated.
8/44: The conversations took on a strange tone when discussing real world issues like wars and public infrastructure projects and social safety nets.
The topics were different but the first principle argument was the same: “Why should I pay for things I don’t believe in?”
9/44: To this faction of maximalists (mostly Bitcoin), taking the red pill is about breaking away from the established system and taking power away from government officials, products of generational wealth, and CEOs. Power to the people.
10/44: Observation 2 (W2): It’s more than one thing.
While there’s a vague commonality at the technological infrastructure layer, there are various ecosystems in the crypto/web3/DeFi world that are more dis-similar than similar. This has resulted in multiple learning curves.
11/44: My Bitcoin journey feels very serious. It’s about understanding the trends of corporate and consumer adoption. It’s about government regulation. It’s about perspectives on inflation. It’s about having philosophical conversations with maxis.
12/44: My web3 journey is one of optimism and possibility. I feel like a kid again sifting through NFT projects. I find myself comparing what being a creator pre-web3 has been like vs. what being a creator in-web3 will be like. Web3 makes me smile.
13/44: My DeFi journey has already made my head hurt and I know I’m barely scratching the surface. I tweeted about it and DMs flooded my inbox with suggestions and empathetic thoughts. This is where the real learning curve is. This is also where “getting it right” matters.
14/44: Observation 3 (W2): Defi reminds me of software in early development.
For the past few years, I held a greatly simplified understanding of DeFi:
DeFi is trying to replace people, policies and process with code and incentives that disintermediate financial transactions.
15/44: But after working through a few “homework exercises” that required interacting directly with various DeFi apps (Dapps), I realized that I was playing around with Primatives, not software that can replace complex financial transactions.
16/44: The Primatives kind-of, sort-of work in a clunky, non-intuitive and scary way. But they’ve been designed to handle very specific things that will need to be assembled in a very thoughtful manner if they’re going to live up to the promise of “Banking without Banks.”
17/44: This “ah ha” moment came from a sleepless night of tearing apart various financial transactions and reducing them to the “Primatives” that exist below the surface. I realized that many critical Primatives that work in TradFi land aren’t yet built in DeFi land.
18/44: This explains why the most trafficked corners of DeFi revolve around use cases that require very few Primatives. Borrowing against one’s own digital assets is a great example. The number of Primatives required are minimal and the edge cases are few and well understood.
19/44: As I marched through various financial transactions, it occurred to me that ledgers and rails have far fewer Primatives and edge cases than lending and insurance. The number of Primatives explodes when dealing with statistical cash flows and reversable transactions.
20/44: For instance, making an unsecured loan will need Primatives that don’t exist today outside of TradFi. Collections is a great example. And some Primatives are built around proprietary IP which makes them very difficult to build in DeFi land (i.e. – risk models).
21/44: And for common secured loan use cases, many complicated “real world” Primatives need to exist: A valuation primitive, a title certification and insurance primitive, a repo/eviction primitive (car/house/etc), a sale of assets Primitive, etc.
22/44: It’s a certainty that many Primatives in DeFi land won’t look like they do in TradFi world. For instance, assets originated on-chain will require a different set of Primatives than off-chain assets. MANY Primatives need to be built before DeFi can replace TradFi.
23/44: And as I deconstructed a number of very typical TradFi transactions, I realized that DeFi land has to work through an additional layer of complexity beyond the creation and assembly of Primatives. The complexity stems from Regulation and Consumer Protections.
24/44: I don’t have answers (yet) but I do understand the right questions to ask. I wonder how many people working on and/or investing in DeFi right now appreciate the complexity that stems from the two core pillars of Regulation and Consumer Protections.
25/44: Situation: New regulation re-frames what’s allowable in an ecosystem based on a retroactive analysis of complaints and a determination of where harm has been done. And when new regulation is enacted, it almost always applies to historical as well as new transactions.
26/44: Questions: How do smart contracts work if new regulations change what’s allowable? How can a smart contract be modified? How can Regulators monitor whether an individual contract is compliant? How can a transaction be reversed if it’s found to be non-compliant?
27/44: Situation: Many countries (not all) have enacted consumer protection laws that stem from the belief that if left to their own devices, the “big” will trample the “little” in pursuit of profit. Many laws exist specifically to protect the “little” from the “big”.
28/44: Questions: How can bad actors be stopped from creating predatory contracts? What if a consumer ends up involved in a non-compliant contract? Who do they go to? How do they stop the code from executing? Who can be punished and how? How do they get their money back?
29/44: I have a lot more to think through with regards to DeFi’s potential to replace TradFi. But I will say that only a small fraction of the people who I’ve engaged with have a full appreciation of the difficulty of the dive. It the Triple Lindy of finance.
30/44: Observation 4 (W2): NFTs are both more and less than people think.
NFTs have seen a meteoric rise in transactional value (up 38,000% YOY) which signals there’s something going on that can’t be ignored. The “something” is part financial, part social and part zeitgeist.
31/44: I have to admit that I was a flat-out skeptic until I started directly interacting with the NFT community and specific NFT projects. The lightbulb went on and it hasn’t gone off since. The possibilities are crystal clear as are the numerous ways of running scams.
32/44: I’ve been an active participant in two specific NFT projects (@OwlCounsilNFT and @chain_runners) and there are a handful of others I have my eyes on. I could write volumes on my early NFT experience (don’t tempt me), but instead, here are a few high-level thoughts:
33/44: NFT Thought 1: It’s about the money because it always is.
Guess what Gen Z and Millennial consumers believe will be their key to financial freedom? Surveys suggest 50%+ believe the answer is crypto. And within the crypto world, NFT projects might be the most accessible.
34/44: Conducting diligence on a token offering is flat out impossible for most people, but kicking the tires on a NFT project is actually pretty simple. Quality of team. Strength of community. Ability to attract whales. Excitement around the roadmap. It’s easy to digest.
35/44: And when the pieces come together perfectly, the return profile is astounding. Mint at 0.025 ETH (plus gas fees) and watch the floor price rocket to 1 ETH in days or weeks. And if the NFT project becomes the next “big thing” then 100X+ returns are possible.
36/44: What’s an unfortunate truism is that anything that can generate 100X+ returns will attract speculators and speculators don’t add long-term value to an asset or a project. SOOOO much of the Discord chatter is about floor prices and whale purchases.
37/44: NFT Thought 2: Infinite artificial scarcity is a foundational concept.
While each NFT project is designed around scarcity, the truth is that there are very few barriers to spinning up a project which means that today’s NFT ecosystem is one of infinite artificial scarcity.
38/44: Adding layers to a NFT project allows it to move out of the “infinite artificial scarcity” bucket and into the bucket of “true scarcity”. Community matters. Engagement matters. Novelty matters. Utility matters. It’s easy to fall flat in a world of infinite choices.
39/44: NFT Thought 3: When you own something you want to evangelize it.
NFTs and meme stocks have a lot in common. The meme stock phenomenon has been as much about building community and identity than it has been about financial gain. Many NFT projects are the same.
40/44: But when people have ownership over IP they’ll figure out what to do with it and this is a powerful Universal Force that shouldn’t be underestimated. I’ve only been part of the @chain_runners community for a week and I already see commercialization everywhere.
41/44: I wrote a backstory for my runner and plan on writing more “lore” soon. It’s what I can bring to the community. Others are getting paid for commissioned original art and launching tangential NFT projects that are amazing. The energy is contagious.
https://x.com/fintechjunkie/status/1463906966124834822
42/44: But I wonder if the artificial scarcity of 10,000 runners is doing the project good or holding it back. I know MANY people who don’t want to spend 1+ ETH on OpenSea to join the community but they have a lot to contribute. This will hopefully work itself out over time.
43/44: What I find cool is that I can do what I want with the IP. I can have an NFT printed on a canvas and hung on a wall. I can publish and sell stories if I’m talented enough to gain a following. And I can sell the NFT if I want to hand the baton to someone else.
44/44: I’ve gone on too long already so apologizes are in order. But I feel like I’ve barely scratched the surface of “week 2 learnings”. I didn’t get a chance to comment on DAOs or details around specific Dapps or “mistakes I made” along the way. I’ll save them for “week 3”.