It’s been a bummer summer for crypto. Flagship coins Bitcoin and Ether are at multiyear lows, while lesser coins barrel to zero. Luna went from a market capitalization of $34 billion (“market” and “capitalization” are becoming misnomers for crypto) to worthless in a matter of days.
Last week, crypto lending platform Celsius announced it was pausing all withdrawals and transfers between accounts. The company that told us to “unbank yourself” because “banking is broken” broke. (Pro tip: CEOs shitposting with their T-shirts are likely not great fiduciaries.)
This is the end of the beginning of web3, not the beginning of the end. A staggering amount of human and financial capital has been allocated to web3 businesses and technologies. If we invested this much in cheese we’d convince ourselves that Gouda can arrest a pandemic. But the sector’s struggles highlight crypto’s failure to deliver on a core promise: trustlessness. Trustless transactions are crypto’s raison d’etre. In the crypto Magna Carta, the white paper that introduced Bitcoin, Satoshi Nakomoto used the word “trust” thirteen times (in eight pages) and summed up cryptocurrency as “a system for electronic transactions without relying on trust.”
In God (and Each Other) We Trust
Why would crypto want to eliminate trust? Trust is at the heart of all human endeavors. Our species’ superpower is cooperation, and cooperation requires that we trust one another. Trust that we will divide the spoils of the hunt, keep our livestock from one another’s fields, or honor a warranty on a defective product. Modern life exists on a web of trust — from the dairy aisle to the interstate highway, we rely on millions of other people to do their jobs and demonstrate high regard for people they’ll likely never meet. But maintaining all that trust is expensive and cumbersome. I trust drivers to obey speed limits because I’ve paid tax dollars to support highway patrol officers. I trust milk because the FDA inspects dairy plants; and the brand name tells me who to sue if the milk makes me ill.
The financial system in particular is scaffolded by an elaborate set of safeguards — incentives, regulations, relationships, rule of law, fiat currencies — ensuring trust that we can move our capital without fearing it will disappear en route. In 1867 the cost to transfer assets, via stagecoach, from San Francisco to Omaha was roughly $10,000, adjusted for inflation. Today, Wells Fargo transfers money much, much faster and at near-zero cost. The value driver is not SWIFT, CHIPS, or the Fedwire system, but our trust that a transfer will actually happen.
It’s estimated that the cost of maintaining trust accounts for 35% of employment in the U.S. In financial and professional services, that number is 48%. I think that means (go with me here) the majority of my students will not be bankers, analysts, or product managers, but agents of trust in the Jedi order. I’m not sure the last sentence makes much sense, but it felt good writing it.
What if we could have all the great taste of cooperation without the calories of trust? That’s the promise of crypto. Whatever you need validated, you put it on the immutable blockchain, and you have ground truth.
But beware of tech bros preaching decentralization. Technology has been promising to eliminate the middleman for decades, only to present new middlemen — in this case, new actors asking you to transfer trust and wealth from one institution to theirs. Crypto enthusiasts spent 14 years and tens of billions of venture capital dollars trying to create a trustless financial system with no middlemen. Status? See above: Celsius.
Crypto’s dirty little secret is that it’s no more eliminated the need for trust than it has replaced the U.S. dollar. (Sorry, Jack.) Its core rhetoric is in the Reaganite antigovernment creed … “Don’t trust the Fed.” Don’t trust anyone, they told us. But this is bullshit. I mean bullshit3. When crypto went mainstream in 2020, it appended a new line: “trust us.”
Just. Like. A. Bank.
Celsius — now in the grip of an old-economy bank run — operates on the same model as Citi … or Lehman Brothers. You give them your “money,” they engage in complex machinations with it, and you trust that they can/will give it back to you when you need it.
Why has crypto abandoned trustlessness? Well … trustless doesn’t work. Last year $2.2 million worth of NFTs were stolen on NFT marketplace OpenSea. A truly trustless model would render those NFTs unrecoverable — but that’s unfair, so OpenSea took the trust route and froze the transactions. Coinbase used to boast that trustlessness made crypto “immune to country-specific sanctions.” Then when Russian soldiers poured over the border into Ukraine and the U.S. enacted sanctions, the company complied with the mandate and blocked 25,000 Russian-linked accounts. Crypto transactions require high technical competence, even advanced programming knowledge. And they are far from free — the proof-of-work system that underlies Bitcoin and Ethereum incurs massive energy costs. (Crypto boosters promise that will change, and we should … trust them.)
Middlemen are inevitable. We depend on them to provide more than just trust: security, convenience, customer assistance, and so on. They make user interfaces intuitive and navigable. They help you recover your belongings when you forget your password or your keys. These services provide value, and that comes at a price. Competition and innovation can reduce the cost of trust (stagecoach vs. SWIFT), but they do not eliminate it.
The web3 ayahuasca Big Gulp led us to believe we could innovate away the tiresome and expensive infrastructure of trust. But as we wake from that trip, it’s worth asking history’s central question: Who to trust?
Most transactions present ample data for a rational answer. And were we rational actors, we would weigh that data and proceed accordingly. But desire clouds the equation. If we want something enough, our tolerance for risk goes up fast. When it’s midnight at the airport, you’ve been on the road for a week, and the line for licensed taxis home is 40 minutes long, the driver hanging around baggage claim looks increasingly trustworthy. Desire offers rationalizations instead of rationality: You don’t know anyone who’s been robbed by an unlicensed driver, you’ve heard taxi medallions are controlled by organized crime, you’ve got a good eye for people … you’ll be fine. Desire is essential to human experience, but it does lead to bad choices in trust. Many residents of New York have a doorman and multiple locks on their door. Most of them, usually after drinking, have let a stranger into their apartment.
What happened with Celsius is an example of desire working overtime. Splashed next to a stock photo of a sailbro, Celsius’s website promises: Earn up to 18.63% APY. That promise triggers our greed glands, so we don’t read the fine print and let that stranger in. The fine print, likely read sober, illuminates that this advertised rate is only for “Platinum Loyalty users” depositing “Synthetix” tokens. And the payouts come in the form of CEL, a digital currency from Celsius. CEL is down more than 90% year over year.
Blockchain technology has been heralded for being secure, but there’s a difference between technical security and financial risk. When a platform such as Celsius tells you “security is at its core,” that means it’ll secure your Cumrocket coins on the blockchain ledger. But this has nothing to do with securing the price of your Cumrocket (down 85.2% year to date). The company has purposefully conflated the two. Another pro tip: Don’t trust a trading platform that displays exploding confetti on its website.
Who Do You Trust?
Trust is expensive, which is another way to say it’s valuable. But it’s also free — among the most valuable assets you can build are not lying and demonstrating competence. We’re in an era of overpromising, and it often feels there are few consequences for exaggerating, or just outright lying. The richest man in the world has been overpromising what his (very good) cars can do for years. Our last president promised anything and everything, and he’s the unchallenged leader of one of our two political parties. But the truth is like air trapped underwater. Eventually, the plates shift and the truth bubbles up to the sunlight.
The benefits of trust apply to nations as well as individuals. For every standard deviation increase in a nation’s trust, bilateral trade increases 90% to 150%. In countries with low levels of trust, investment skews disproportionately toward projects with short time horizons. Lower trust is also correlated with lower GDP per capita. Put it this way: Over the long term, fomenting trust can make you rich.
People work for, invest in, and meet with me because they believe they can (mostly) trust me. I have never sued or been sued by anybody. In contrast, at home I am simultaneously the least/most trusted person on the planet. My kids don’t trust me on anything about culture, technology, media, haircuts, sports, TV, what they should wear, say, or even eat. But they completely trust I would do anything for them. To be willing to do anything for someone is to love them, and them knowing it is to be loved back.
Life is so rich,