The collapse of the Crypto Revolution


Yay, crypto revolution!

The answer is not, as Boxer the Horse said before the Pigs killed him, “I must work harder.” The answer is not a more earnest crypto project. The answer is not Better Code TM.

We need to talk about how we got here and why the revolution failed. Then we can talk about what we’re gonna do.

That’s crypto-billionaire Sam Bankman-Fried, SBF to his friends, on stage at the Crypto Bahamas Conference a few weeks ago with noted crypto experts Tony Blair and Bill Clinton, discussing (per the New York Times) “blockchain technology and the war in Ukraine”. I am not making this up.

I figure Blair and Clinton were paid at least $200k each for sharing their keen crypto observations with the crowd, but SBF can afford it. He’s #60 on the Forbes 100 list with an estimated net worth of $24 billion, which is also why he can wear shorts and a tee shirt wherever he wants.

But sure, all you apes who hate Ken Griffin with the heat of a thousand undying suns because you can imagine all the ways in which Citadel can grind you up between its hedge fund operation and its market making operation, tell me again what a cool guy SBF is. Speak to me in hushed tones about how you dream of pitching your project to Alameda Research, SBF’s hedge fund, or getting your coin listed on FTX, SBF’s market maker.

Oligarchy is a grinding machine, no matter how charming the oligarch.

That’s the tattoo that crypto-billionaire and ur-raccoon Mike Novogratz showed off a few days before the Terra/Luna house of cards came tumbling down. For those of us old enough to remember the last time Novo blew up on a currency peg, we can only imagine his right arm has a tattoo of the Matterhorn and a Swiss flag with a giant Euro in the background.

That’s a still shot from the execrable Super Bowl LVI TM commercial, starring the one and only Matt Damon. It’s almost too easy to make fun of Damon for shilling crap so crappily. Almost. Next time I’ll make fun of Tom Brady.

That’s a tweet from Brian Armstrong, the CEO and Chairman of the Board of Coinbase, telling us that there is no risk of bankruptcy for a company with a stock down 80%, a 36% year-over-year revenue decline, and $830 million of negative free cash flow over … [checks notes] … the past three months. Meanwhile, somewhere a small RIA is being referred to SEC enforcement for not adequately footnoting an S&P 500 chart with disclaimers that you cannot invest directly in the S&P 500.

If you don’t see that the crypto “industry” has become just as blindingly corrupt, just as oozingly fatuous, just as profoundly captured by the Nudging Oligarchy as the traditional financial services industry it was supposed to replace … well, you’re just not paying attention.

A year ago I wrote In Praise of Bitcoin. Here’s the money quote:

In my dystopian vision, Bitcoin isn’t banned or criminalized. Pfft. That’s a rookie, weak State move. No, I see a future where everyone buys Bitcoin. Where you are encouraged to buy Bitcoin. Where Bitcoin is sold to you morning, noon and night. Where normie economists get on conference calls late at night because they’re Bitcoin price-curious.

Except it’s not really Bitcoin.

Instead, it’s Bitcoin! TM — a cartoon version of the OG Bitcoin, either a Wall Street-abstracted representation of the price of Bitcoin or a government-painted version of Bitcoin in Dayglo orange. Either way — abstracted or painted — your Bitcoin! TM is trackable and traceable, fully KYC and AML and FBAR and SWIFT and every other US Treasury acronym-compliant. Either way, your Bitcoin! TM has all the revolutionary potential of a bumper sticker and all the identity signaling power of a small tattoo on your upper arm.

Bitcoin!TM doesn’t stick it to the Man … Bitcoin!TM IS the Man.

And that’s exactly what has happened.

But it hasn’t just been a transformation of Bitcoin into Bitcoin! TM. No, the securitization of Bitcoin into Bitcoin! TM has created an entire ecosystem of yield farming and staking across hundreds if not thousands of crypto coins, an ecosystem that is directly based on Bitcoin! TM as a funding mechanism and indirectly based (through Tether) as a liquidity mechanism.

This is, in fact, now the dominant real-world use case of Bitcoin. Not to transmit funds to the unbanked. Not to escape the monetary clutches of a failed state. Not to create an alternative payments system for goods and services. Not to achieve any of the laudable OG Bitcoin goals. Nope, the overwhelmingly dominant real-world use case for Bitcoin today is to fund a trading account.

My god, that’s sad.

Sadder still, this vast crypto ecosystem of yield farming and staking, all ultimately based on Bitcoin! TM for funding and liquidity, has in turn either subverted or crowded out every decentralized financial project of which I am aware.

It wasn’t enough for the crypto-billionaire club – guys like SBF and Mike Novogratz and Michael Saylor and Brian Armstrong and Vlad Tenev and the Winklevi – to turn Bitcoin into Bitcoin! TM. No, no, they didn’t stop there.

They also went and turned DeFi into DeFi!TM.

All of crypto has been turned into tables at the Wall Street casino, just as far as the eye can see.

How did they do it?

By giving us a MacGuffin.

The Maltese Falcon is a MacGuffin.

Private Ryan is a MacGuffin.

The design plans to the Death Star are a MacGuffin.

The jewels/gold in a heist movie, the papers/computer file in a spy movie, the “love match” in Bridgerton, the rug that really ties the room together in The Big Lebowski, Doug in The Hangover, the Infinity Stones in the MCU, Rosebud in Citizen Kane, Baby Yoda in The Mandalorian Season 1 … these are all MacGuffins.

A MacGuffin is an Object of Desire, around which merry plots are constructed to thrill/amuse/frighten/engage the viewer.

Most movies you’ve seen over the past 40 years have a MacGuffin embedded within them, an Object of Desire introduced to the audience midway through Act 1 of the universal three-act structure, revealed in its true form/power midway through Act 2 and claimed by the protagonist near the peak of the rising action arc at the conclusion of Act 2.

Seriously, just google whatever movie you like + “three-act structure” and you’ll see what I mean.

Why are movies and TV shows built on MacGuffins and three act structures? Because they work! Our primate brains have evolved over millions of years to make sense of the world through story arcs. We literally have clusters of neurons in our brains that are specifically engaged to identify MacGuffins in what we see and hear, and still more clusters of neurons that make us want the MacGuffin and grok the story arc that propels both fictional characters AND OURSELVES to pursue the MacGuffin.

Hollywood is an industry built on understanding our desires, built on creating product to satisfy those desires.

So is Wall Street.

Here’s old friend SBF explaining to Matt Levine, Joe Weisenthal and Tracy Alloway how MacGuffins work in the crypto biz, specifically the yield farming and staking ecosystem of DeFi! TM, as funded by Bitcoin! TM.

Wherever SBF says “box”, insert the word “MacGuffin”.

Matt Levine: (21:17)
Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there’s a more sophisticated understanding than that.

Sam Bankman-Fried: (21:28)
Let me give you sort of like a really toy model of it, which I actually think has a surprising amount of legitimacy for what farming could mean. You know, where do you start? You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that’s gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It’s just a box. So what this protocol is, it’s called ‘Protocol X,’ it’s a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.

So far what we’ve described is the world’s dumbest ETF or ADR or something like that. It doesn’t do anything but let you put things in it if you so choose. And then this protocol issues a token, we’ll call it whatever, ‘X token.’ And X token promises that anything cool that happens because of this box is going to ultimately be usable by, you know, governance vote of holders of the X tokens. They can vote on what to do with any proceeds or other cool things that happen from this box. And of course, so far, we haven’t exactly given a compelling reason for why there ever would be any proceeds from this box, but I don’t know, you know, maybe there will be, so that’s sort of where you start.

And then you say, alright, well, you’ve got this box and you’ve got X token and the box protocol declares, or maybe votes by on-chain governance, or, you know, something like that, that what they’re gonna do is they are going to take half of all the X tokens that were re-minted. Maybe two thirds will, two thirds will offer X tokens, and they’re going to give them away for free to whoever uses the box. So anyone who goes, takes some money, puts in the box, each day they’re gonna airdrop, you know, 1% of the X token pro rata amongst everyone who’s put money in the box. That’s for now, what X token does, it gets given away to the box people. And now what happens? Well, X token has some market cap, right? It’s probably not zero. Let say it’s, you know, a $20 million market …

Matt: (23:56)
Wait, wait, wait, from like first principles, it should be zero, but okay.

SBF: (23:59)
Uh, sure. Okay. Completely reasonable comments.

Matt: (24:04)
I mean, that’s not quite true, but, like, when you describe it in this totally cynical way, it sounds like it should be zero, but go on.

SBF: (24:10)
Describe it this way, you might think, for instance, that in like five minutes with an internet connection, you could create such a box and such a token, and that it should reflect like, you know, it should be worth like $180 or something market cap for like that, you know, that effort that you put into it. In the world that we’re in, if you do this, everyone’s gonna be like, ‘Ooh, box token. Maybe it’s cool. If you buy in box token,’ you know, that’s gonna appear on Twitter and it’ll have a $20 million market cap. And of course, one thing that you could do is you could like make the float very low and whatever, you know, maybe there haven’t been $20 million dollars that have flowed into it yet. Maybe that’s sort of like, is it, you know, mark to market fully diluted valuation or something, but I acknowledge that it’s not totally clear that this thing should have market cap, but empirically I claim it would have market cap.

Matt: (24:57)
I agree.

Joe: (24:59)
It shouldn’t have any market cap in theory, but it practice, they always do. Okay.

SBF: (25:03)
That’s right. So, and obviously already we’re sort of hiding some of the magic impact, right? Like some of the magic is in like, how do you get that market cap to start with, but, you know, whatever we’re gonna move on from that for a second. So, you know, X tokens [are] being given out each day, all these like sophisticated firms are like, huh, that’s interesting. Like if the total amount of money in the box is a hundred million dollars, then it’s going to yield $16 million this year in X tokens being given out for it. That’s a 16% return. That’s pretty good. We’ll put a little bit more in, right? And maybe that happens until there are $200 million dollars in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or other sort of similar parties, go and put $200 million in the box collectively and they start getting these X tokens for it.

And now all of a sudden everyone’s like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they’re wrong about that? Like, you know, this is, I mean boxes can be great. Look, I love boxes as much as the next guy. And so what happens now? All of a sudden people are kind of recalibrating like, well, $20 million, that’s it? Like that market cap for this box? And it’s been like 48 hours and it already is $200 million, including from like sophisticated players in it. They’re like, come on, that’s too low. And they look at these ratios, TVL, total value locked in the box, you know, as a ratio to market cap of the box’s token.

SBF: (26:43)
And they’re like ‘10X’ that’s insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it’s $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden of course, the smart money’s like, oh, wow, this thing’s now yielding like 60% a year in X tokens. Of course I’ll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.

Matt: (27:13)
I think of myself as like a fairly cynical person. And that was so much more cynical than how I would’ve described farming. You’re just like, well, I’m in the Ponzi business and it’s pretty good.

Joe Weisenthal: (27:27)
At no point did any of this require any sort of like economic case, it’s just like other people put money in the box. And so I’m going to too, and then it’s more valuable. So they’re gonna put more money in, and at no point in the cycle, did it seem to like, describe any sort of like economic purpose?

SBF: (27:42)
So on the one hand, I think that’s a pretty reasonable response, but let me play around with this a little bit. Because that’s one framing of this. And I think there’s like a sort of depressing amount of validity…

Matt: (27:53)
Can you comment on like the sustainability of that? Because, you know, on the one hand you’re like, well, a trillion dollars of institutional money is going to come into Bitcoin. And on the other hand you’re like basically there are a lot of Ponzis that have done really well.

SBF: (28:06)
Right. So let me, okay, cool. I’ll stay on the cynical route, think about like cynically, what could happen here? Well, okay. So you’ve got this boxes and it’s kind of dumb, but like what’s the end game, right? This box is worth zero obviously. And like that, you know, you can’t like keep this smart cap or something. But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that’s what people are pricing it at and sort of has that market cap. Everyone’s gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it’s worth like less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back. You just get liquidated eventually. And it is sort of like real monetizable stuff in some senses. And you know, at some point if the world never decides that we are wrong about this in like a coordinated way, right? Like you’re kind of the guy calling and saying, no, this thing’s actually worthless, but in what sense are you right?

Matt Levine calls this a Ponzi scheme, and of course, he’s right. But it’s so much more than that! Calling this a Ponzi scheme trivializes what SBF is describing. It puts crypto into an easily grokked story arc – oh, haha, yield farming is just a Ponzi scheme – and allows us to go on with our day, listening to CNBC and reading the Wall Street Journal and advising clients and trading our personal account, same as we ever did.

What SBF is describing is not just a Ponzi scheme and not just what’s happening in this crypto corner of Wall Street.

As SBF quite rightly goes on to say in the interview (but got only a fraction of the attention), this is exactly the same fundamental structure of the VC world.

I’ll go even further.

What SBF says about crypto and VC can be said equally about every asset class, every facet of capital markets, both public and private.

This is the fundamental structure of the business of markets, where Objects of Desire wrapped up in merry plots and three-act structures are sold to us night and day, over and over again, not for the mere price of a movie ticket but for the accumulated wealth of a lifetime.

It’s MacGuffins all the way down.

Where does this all go from here? It’s clear enough where crypto goes, again courtesy of SBF.

Which is why we need federal oversight.

LOL. Did you think this would end any other way?

Government oversight isn’t to be forced on crypto, it is to be invited on crypto, invited by the very same billionaires who turned Bitcoin into Bitcoin! TM and DeFi into DeFi! TM.

Why? Because there is no difference between the revolutionary pigs and the incumbent humans. They are indistinguishable, all merged together into a single Nudging Oligarchy, all looking to their natural partner, the Nudging State, to complete their reign.

And when SBF calls for “oversight”, he means literally that. Not the control of a jackbooted thug, but the much more powerful control of the ever-watchful panopticon, looking out over the world of money, missing nothing, allowing nothing to emerge that would threaten its position.

The US Treasury is the Eye of Sauron — a gigantic panopticon tower that sweeps the world with its unblinking gaze.

This is the “federal oversight” that the billionaires want.

This is the “federal oversight” that the billionaires will get.

This is the “crypto revolution” that the billionaires want.

This is the “crypto revolution” that the billionaires will get.

If we let them.

I tell you that there is another way, a revolution not of the financial system, which was always doomed to be the failure we are witnessing today, but a revolution of the human heart, which was always the only revolution that ever mattered.

A revolution of the human heart won’t be televised, and it won’t make you rich. Or maybe it will, I dunno. That’s beside the point. The point is to develop a process of resistance to the MacGuffin, a process of retraining our brains to see the Objects of Desire and the story arcs created around them for what they are – a means of control, an assault on our autonomy of mind.

What are we gonna do about it?