What is the ACTUAL use of crypto?

Crypto's in trouble, but not for any of the obvious reasons. Yes, the prices are way down, but the real problem with crypto goes way deeper. And it's not about the code either. The core technology works as expected. The big crypto debate right now is around use cases. Basically, what problems can crypto actually solve that create real value? Countless projects cover up their terrible ideas by just slapping crypto on there. But these scams are falling apart. Now. The true believers are still saying we're early. All while the crypto critics are demanding clear proof that crypto has real world use cases. So what is crypto actually good for? Let's break this into three sections, starting with Bitcoin. The original Bitcoin whitepaper from 2008 focused on peer to peer money transfer. But it's been 14 years now and bitcoin still isn't widely accepted as payment for really anything. Most people still use Venmo or cash app to send money to friends. And when they shop online, they use credit or debit cards. And the reason is simple. Bitcoin fees are really high, especially for small transactions. Now bitcoin developers are working on the Lightning network to solve this problem, but it's hard to say if it will ever catch on. Even if the transaction fees drop, there's still another big volatility. In 2014, I was running an e commerce site and we decided to accept Bitcoin as payment. The price of Bitcoin kept going up, so it worked out great for us. A customer would give us $100 worth of Bitcoin and in a few months it would be worth $1,000. This creates a problem though. If you have a refund policy, smart customers can treat you as a hedge. Basically, they buy a product using Bitcoin, then if the price goes down, they sell the product on ebay for dollars, hedging their downside risk. If the price of Bitcoin goes up, they ask for a refund of their Bitcoin from the company and send the product back. This allows them to capture the upside potential of Bitcoin without any of the downside risk. This scheme obviously doesn't scale very well, but you can see how online merchants wouldn't want to deal with this. Even though the price of Bitcoin has soared over the past decade, the number of people actually using it as a currency hasn't. So what's driving the value here? Well, for a long time, Bitcoin has been thought of as an inflation hedge and a store of value. It's been called A digital version of gold. And that seemed like a reasonable theory, at least until this year. Since since the number of bitcoins is capped at 21 million, it should be resistant to the type of money supply driven inflation that we've seen in history. When the government starts printing ever increasing amounts of money, the value of that money falls rapidly and hyperinflation sets in. This simply can't happen with Bitcoin. So it should be a decent inflation hedge, right? Well, that's not what we're seeing this year. Inflation is at 40 year highs. It should be Bitcoin's time to shine, but it's in freefall time. So what's going on? The simple answer is speculation. While a certain portion of bitcoin buying and selling might be informed by inflation, it seems like a bigger portion was driven by pure speculation. As the government pushed down interest rates and pumped money into the economy to fight off a recession, people started buying riskier and riskier assets to maximize returns. Instead of bitcoin trading like gold, it started trading like a high growth tech stock. So if Bitcoin can't be used to send money easily or to protect against inflation, what's it good for? Well, there is one use case that seems to be holding protection against government seizure across the globe. Authoritarian governments threaten to seize assets of their citizens. All too often. If you live in a country where you think the government might turn on you, suddenly storing a portion of your wealth in Bitcoin might be your best option when you flee the country. You could be part of a religious or ethnic minority that is about to be persecuted by a dictator. Or you could just be a successful businessperson who the regime perceives as too powerful. No matter the cause, you need to get out of the country and fast. Traveling through the airport with a suitcase full of gold and diamonds isn't likely to work. But memorizing the private key to a bitcoin wallet is pretty foolproof. It's tricky to put a precise value on this authoritarianism insurance, but it clearly does provide some benefit. But Bitcoin is only one small part of the broader crypto ecosystem. The hot topic of the past few years has been the second key area we need to discuss and NFTs. It's so easy to write off monkey pictures as completely useless. And trust me, I'm not about to try and convince you that these are worth anything. But we still need to dive into the underlying technology here. At their Most basic level, NFTs are just blockchain records that indicate ownership over a Particular digital asset. Yes, you can copy that digital asset just like any other jpeg, but the whole right click save meme kind of misses the point of art collection. There are plenty of perfect reproductions of art out there, but collectors still pay millions for the real thing. They care about the history tied to the original work, and owning the real thing is meaningful to them. There's a problem though. The entire art market, including everything from ancient Egyptian hieroglyphs to contemporary paintings, is only worth $65 billion. Last year, the NFT market was worth $15 billion. How could something only two years old already be worth 25% of the entire art market, which spans all of human history? The answer, again, is speculation. Tons of traders flooded into the NFT market hoping to flip JPEGs to the next buyer for a profit, and for most of last year they were successful. Now, even though there was clearly an NFT bubble, does that mean that NFTs are completely useless? I don't think so, but let me explain. Even though the random cartoon NFT might not have any long term value in the art world, that doesn't mean that digital art as a whole has no value. I actually love digital art and think that NFTs can work in certain circumstances. For example, this quilt right behind me was created by an artist named Libs Elliot. She writes code in a programming language called Processing to generate the design, and then sews a quilt to match that output. I bought this in 2016 way before NFTs were a thing, but if it came with an NFT to display the code or to prove that I own this particular design, I think that could be cool. Another example is Anders Hoffman. He also makes generative artworks, and I've purchased a few of his prints over the years. The actual designs are visually interesting to me, but my favorite part of his work is the code. He posts his code on GitHub, but buying an NFT of the art seems to make a lot of sense here. The problem is that there just aren't that many great digital artists out there. The Mona Lisa is over 500 years old, after all. History is really important when it comes to art, and history takes time. There is one nft, though, that I think could actually become a historical artifact. And don't worry, it's not for sale. If we think about why the Mona Lisa is so valuable, we can identify a few key ideas. First, Leonardo da Vinci was an incredibly important historical figure. He was a literal Renaissance man and contributed to astronomy, botany, cartography, and many more fields. Second, the Mona Lisa demonstrated many innovative techniques for layering paint. Leonardo was actually breaking new ground with the way he used light, emotion and posture to to bring life to the painting. Most NFTs don't fit either of these criteria. They are usually developed by anonymous people and the artwork looks like it was copy pasted from Fiverr. But there's one NFT that could fit that criteria over time. It's called At My Whim and it was created by Moxie Marlinspike. Now, it's clearly not the Mona Lisa, but I do think it satisfies our two main criteria. First, Moxie is an important person. He's a prominent cryptographer and the founder of the signal messaging app. His cryptography protocol is what keeps messages on WhatsApp and Google Secure. Second, his YWIM NFT is actually innovative in my opinion. See, most NFTs just store a link to an image hosted somewhere on the Internet. You might own the nft, but if the server that hosts your monkey picture goes offline, you basically own nothing. Moxie took this concept and exploited it to illustrate some of the flaws with NFTs. YWIM looks different based on where you view it. If you go to OpenSea, the NFT will display a spiral of lines. But if you look at the same NFT on Rarible, the background turns blue and the image is a bunch of wavy circles. It doesn't stop there though. As soon as you view the NFT in your wallet, you just see a poop emoji. This kind of meta commentary is at the heart of lots of high value artwork. Just look at John Baldessari's tips for artists who want to sell. This 1966 painting is thought provoking because it subverts the core idea of contemporary art. And because of that, it's still on display in museums today. Now, will Moxie Marlinspike's NFT ever be worth anything? Who knows? It's not for sale, but maybe hundreds of years in the future it'll be passed down as a memory of the NFT hype wave. If it does, there will be some really interesting implications. One thing that makes NFTs unique from other art is that they are permanently tied to the creator. If an artist sells a painting for $100 and then years later that painting gets sold at auction for millions of the artist still only has $100. But NFTs can encode permanent royalty rights. That means every time the NFT is sold, the original artist gets a cut. Let's say hundreds of years go by and that MOXIE at my whim, NFT winds up worth millions. Well, every time it trades, his descendants or whoever controls his crypto wallet would get a cut. That's a big incentive for artists to use NFTs, but it doesn't change the underlying demand for art collecting. At the end of the day, the most valuable art in the world just doesn't trade very often. And that's part of what makes it so valuable. Auction houses like Sotheby's are constantly on the hunt for valuable artworks. But Even in the $65 billion art market, Sotheby's is only worth a few billion dollars in total. At the end of the day, art collecting just isn't that popular. The average person doesn't have the money to collect art. They just want to buy food, housing, and maybe have some money left over for entertainment. And that's why a lot of NFT promoters are angling to frame NFTs as not just art, but as utility tokens that grant special privileges. They say, sure, you might just be getting a JPEG right now, but in the future, you'll have access to some of the most unique experiences money can buy. And by itself, that's not completely crazy. If you spend a lot of money on a piece of art, the artist might invite you to a private tour of their gallery. You don't need a blockchain to make that happen, though. The blockchain becomes important when those access rights need to be irrevocable. Just as bitcoin protects wealth from government overreach, the Hope is that NFTs could prevent big tech overreach. Here's how it works. In theory, let's say I wanted to create more content, but I need a bigger production budget to make it happen, so I need to charge. I have a few options. YouTube has a memberships feature where I could upload extra videos to paying subscribers. But if I asked you all to buy a channel membership, I would be locked into YouTube. If I wanted to do a paywall newsletter later, I'd have to get you all to go over to a service like Substack. Now, I could do a paid podcast behind the YouTube membership wall. But lots of people like to listen to podcasts through Apple or Spotify, and they wouldn't be able to because their membership was tied to YouTube. There isn't really a good way to offer a variety of content across platforms to every paying supporter. NFTs could theoretically solve this. Every member of the community gets a token that can prove that they are a paying member, and then access the premium content across any platform. This, of course, assumes that YouTube, Spotify and every other platform are going to go along with this and allow creators to share content specifically to NFT holders. And this is where it gets tricky. See, Twitter and YouTube have both announced NFT integrations, but it's extremely limited and I'll explain why in a second. With Twitter, the NFT integration is essentially limited to linking an image you own and then using that as your profile picture. You get a hexagon instead of a circle and anyone can click to see the NFT's metadata. But this feature is completely separate from Super Follows, which are like YouTube memberships. If I had Super Follows turned on, you would be able to subscribe for a monthly fee and then see private tweets from me behind the paywall. But there's no way to link these two features and say, well, look, anyone who owns this particular NFT is automatically a super follower and gets to see my private tweets. That might actually be a good use case for NFTs. You hold one NFT and then can automatically see private tweets. As a super follower, watch private videos on YouTube as if you were a channel member and see paywalled content on any other platform I choose to publish on. This is a big problem for tech companies though. In this scenario, they make no money. If you pay for a channel membership on YouTube, Google gets a cut, and if you become a super follower, Twitter takes a portion of that. If this were all powered by NFTs, the big tech platforms couldn't take their fees, so they have no incentive to integrate at this level. The idea of a decentralized record of memberships like this is actually really great. The creator gets to have a direct relationship with their audience, and the tech platforms get to focus on making apps with great user experiences. And and this is a situation where using a blockchain is actually fully justified. If one company controlled the ledger, they could change the terms of the deal or cut off a rival. We've seen this in the past. After Facebook bought Instagram, they instantly stopped allowing Twitter to repost Instagram photos. But at the end of the day, these companies are profit motivated and unless they are getting a cut of the membership revenue, they won't allow creators to use these special features for free. So maybe we need entirely new platforms. And this takes us to key area number three. The reason that these tech platforms are so valuable is because they have network effects. No one wants to move from YouTube to a new video platform because all the creators and all the viewers are already here. Even if you build a better app with more features, getting people to actually move and start using that new network is incredibly hard. This is called the cold start problem, and many crypto proponents argue that tokens can actually solve this. Everyone's seen the massive cycles in crypto prices. If you get in early, you can quickly make millions. At their worst, these hype cycles are just Ponzi schemes in disguise. But can this dynamic actually create real value? The idea is pretty simple. You launch a token. Predictably, the first people to show up are speculators hoping to get rich quick. But while the token is pumping, you start adding real features, improving the service, working tirelessly to create real value over time. The hope is that you catch up to the hype and end up with a network that has real users. Sure, the first people to sign up for your Twitter killer were only interested in the money, but now that it's up and running, people will stick around, right? There's a problem with this though. While it works in theory, finding product market fit is a messy process, and having a bunch of fake users who are only interested in speculation makes it impossible to separate the signal from the noise. What you wind up with is actually an inverse network effect. Your early users, who should be the most dedicated to your project, they wind up holding millions of dollars in your token and they need to sell. The bigger you get, the more selling pressure there is. As these mercenaries move on to the next project, they can pump and dump. We recently saw this with a game called Axie Infinity. The game had a simple players collect digital pets called Axies and then battle them to win rewards and level up. It's a similar core mechanic to plenty of successful games like Hearthstone, and if they could crack the code on amazing gameplay, everything would probably play out just fine. The problem is that the vast majority of the player base is only interested in the money making potential of the game. So it becomes extremely difficult to understand what features will actually lead players to stick around when it's not just about the money Bridging the gap between real world and digital economies is nothing new. Plenty of people made money far farming and selling gold in World of Warcraft years ago, but that's not what kept the majority of the player base entertained. If you search on YouTube for World of Warcraft, you'll find plenty of people who are genuinely enjoying the game. But searching Axie Infinity shows mostly tutorials on how to make money. Now that's not to say that blockchain gaming is doomed. There is One crypto game that does seem to have attracted a real player base, and I think it's precisely because it isn't designed to make people money. It's more of a blockchain tech demo and uses some really advanced cryptographic features called zero knowledge proofs. The game is called Dark Forest and it's important not to confuse it with the Defi project with the same name. It's basically a space simulation game. But what's interesting about Dark Forest is that it's open source and it runs on a blockchain. What that means is that anyone can fork the code, make changes to the game and then run a new instance of that game. But they can't cheat and see the entire map because the map is cryptographically hidden and only revealed to the local players. It's more of an experiment than anything else, and it certainly doesn't justify the sky high values we're seeing in the crypto market. But it does seem like people are experimenting with this new technology in a valuable way. A blockchain is just a new kind of database. That's it. It might be hard to describe the exact use cases of the technology today, but I'm still optimistic that we will take see interesting and novel projects pop up in the future. Blockchains do have the power to change the fundamental economics and power structures of the Internet, and that's hard to ignore. The prices might swing wildly from one year to another, and it's possible that the whole crypto thing never surpasses the 2021 peak. But I'm still excited to see what people build. The art market and crypto world fully collided last year. And to understand some more of the limitations of crypto crossing over into the future physical world, just watch this video about a crypto group that tried to buy the Constitution Next. Thanks for watching.