CRYPTO: Keep the Faith, Baby

All Colander, No Spaghetti Monster

 

One might have thought that recent unraveling of the crypto-con space might have shaken faith in this imaginary “asset” class.

But alas, it has not.

Aside from the diehard crypto believers whose faith cannot be shaken, there has been what is an interesting and troubling—at least to AA—reaction among financial commentators.

Sadly even from the august salmon coloured pages of The Financial Times!!

Now pundits—even those of the financial persuasion—must “pun” on a regular basis to justify their employment.

On topics of current concern, even when they don’t really understand the basic issues involved.  

As usual, there are others--financial types, politicians, etc.--who add their voices to the mix.

Two central failures:

• Clinging to the “sacraments” of crypto after abandoning the faith. 
• A naive belief that imposition of certain standards on the industry via greater regulation will solve the problem.

A look at the first manifestation of this syndrome in this post.

Like the Pastafarian who loses faith in the FSM but still sports his/her colander, these pundits cling to Blockchain. And to DeFi.

Taking these in order.

Blockchain

The assumption is that Blockchain will allow the quicker and nearly frictionless completion of transactions.   

That is no doubt true for certain transactions conducted at certain volumes.  

But the overall utility may be modest like super yachts for oligarchs and the like.

However, if we are looking to process payments, a system's capacity is paramount.

• How many transactions the system can process per unit of time. 
• The cost of processing a transaction.

Parties interested in system economics can explore this further by looking at volume comparisons between the old and therefore presumably “bad” Visa card and the new and therefore “good” Blockchain.

Similar for average transaction costs and their variance. 

The latter of particular importance if speed is of the essence.  

And if one of the key goals is providing financial services to the "unbanked".

DeFi

According to crypto dogma, the current financial system is centralized and therefore “bad”. 

DeFi will eliminate centralization and is therefore “good”.

But like crypto, DeFi has proven to be a lot less than claimed.

It has merely replaced one set of intermediaries with another. 

And in doing so it has reduced the number of intermediaries.  

There are a lot more banks than crypto exchanges.

But some may argue that true DeFi –peer to peer transactions--can be implemented.

Let’s look at that a bit closer.

Practically how does one connect with someone to find a counterparty for one’s ”transaction”?  Generally via the internet as opposed to "in person".

I can’t think of any example of that sort of contact which does not take place through an intermediary.

Whether that’s sharing your wisdom with the rest of the world via tweets or blogposts, searching for information, looking for a rental, etc.

If you were to attempt a direct peer to peer contact without using an intermediary platform, it would be theoretically possible.  It would also be costly and time consuming.  

And you would probably not reach all the potential “peers” you wanted to reach.

That is important because you want to go where there is sufficient supply or demand to accommodate your “transactional” need as well as an infrastructure to facilitate your transaction quickly at the lowest cost. 

If you're selling 1,000 Bitcoin, Joe might buy a couple, but that would require finding a lot of other Tom's, Richard's, Harry's.  

In the next post I'll look at the second manifestation which is more dangerous and pernicious.