Following JP Morgan CEO, Jamie Dimon’s, now infamous rant about Bitcoin being a fraud, a great product for criminals and having no value, Adam Ludwin, CEO of Chain.com, wrote “A Letter to Jamie Dimon”, which received some coverage in the financial media for its balanced discussion regarding the outlook for cryptocurrencies.
In his letter, Ludwin noted...
In short: there’s a lot of noise. But there is also signal.
To find it, we need to start by defining cryptocurrency. Without a working definition we are lost. Most people arguing about cryptocurrencies are talking past each other because they don’t stop to ask the other side what they think cryptocurrencies are for.
Here’s my definition: cryptocurrencies are a new asset class that enable decentralized applications. If this is true, your (Jamie Dimon’s) point of view on cryptocurrencies has very little to do with what you think about them in comparison to traditional currencies or securities, and everything to do with your opinion of decentralized applications and their value relative to current software models. Don’t have an opinion on decentralized applications? Then you can’t possibly have one on cryptocurrencies yet…And since this isn’t about cryptocurrencies vs. fiat currencies let’s stop using the word currency. It’s a head fake. It has way too much baggage and I notice that when you talk about Bitcoin in public you keep comparing it to the Dollar, Euro, and Yen. That comparison won’t help you understand what’s going on. In fact, it’s getting in the way.
Back in your box, Jamie.
As Forbes reports, Ludwin was invited to speak at a recent SEC meeting...
The Securities and Exchange Commission Investor Advisory Committee held a public meeting regarding blockchain and distributed ledger technology earlier this month, and one of the individuals who was invited to participate in the meeting was Chain CEO Adam Ludwin. During his opening remarks, Ludwin shared his perspective on the entire blockchain ecosystem (both public and private models), but the most compelling part of his appearance may have been when he shared his views on the current price mania around cryptocurrencies and initial coin offerings (ICO).
“I think you have to look at it from the perspective of the buyer and the seller mentality,” Ludwin said of the current digital asset market. “In essence, it is currently rational to be irrational as a buyer [or] a seller in this market.”
In Ludwin’s opinion, the buyers of ICOs are either people who made tons of money in Bitcoin/Ethereum or people who missed Bitcoin/Ethereum, because they didn’t understand them, so have resorted to buying tokens they don’t understand either.
When discussing the kinds of people who are participating in ICOs and token crowdsales during his appearance at the public meeting, Ludwin was quick to point to those who have already made large sums of cash by speculating on the prices of bitcoin and ether over the past few years. “On the buyer side, there are many, many people who invested early in bitcoin, made a tremendous amount of money and now have, effectively, a house money effect weighing on them where it’s found money — it’s a windfall — and they’re diversifying into every new project that comes along because: Why not?” explained Ludwin.
“If you’ve made money, you might as well say, ‘I’ll keep going.’” Ludwin also pointed to those who sat on the sidelines while bitcoin and ether went up a hundredfold or more because they didn’t understand the technology as probable buyers of new digital assets.
“Now, you almost have this inverted mindset where you tell yourself, ‘Alright, I have to look for things I don’t understand, and the more confusing it is, the better investment it probably is,’” said Ludwin. “It’s a very perverse mentality, obviously.”
As for the sellers of ICOs, Ludwin explains why it’s even crazier than the dot.com boom.
From Ludwin’s perspective, the irrational exuberance from the buy side of the market has led to the creation of many new projects willing to meet that demand. The Chain CEO shared three reasons as to why it’s extremely tempting for individuals and teams to create, issue, and sell new cryptocurrencies. “Number one, there’s no dilution (it’s not equity in the traditional sense) and there’s no debt — you don’t have to pay it back,” said Ludwin.
“People are buying for the appreciation expectations. It’s really free financing; it’s a remarkable instrument. [Secondly], there’s a belief out there that, by selling tokens, you’re creating evangelists for your project and they will tell their friends [about it]. And the truth is that’s probably right. People are interested in spreading the news about a new token in order for their tokens to go up in price and the sellers do have a kind of product/market fit. Of course, the thing that people are buying is a dream of making money, not interest in the underlying service usually. Finally, there’s an ability now by issuing these tokens to actually exit before you start. Normally, when you build a company, the exit comes at the end (and that’s why it’s called the exit). Here, if you issue a token and you can clear tens of millions of dollars before your project even launches, it’s an even better deal than we had in the 90s [dotcom bubble].”
Forbes comments on how many ICOs are merely exploiting Ethereum’s ERC-20 standard.
The perfect example of the inability for some companies or projects to resist the urge to do their own ICO might be messaging app Kik’s Kin token. According to CoinJournal, Kik CEO Ted Livingston admitted that they were essentially launching the token because they had no other way to compete with Facebook. Kik was able to raise nearly $100 million in their token distribution event — money that comes with all of the benefits mentioned by Ludwin. Ethereum’s ERC-20 token standard has also made it extremely easy for anyone to launch a new digital asset with the click of a button. BitTorrent creator Bram Cohen discussed the ease with which tokens can be launched on top of Ethereum at the Blockstack Summit earlier this year.
“A lot of what people are doing now are these like ERC-20 tokens and stuff on Ethereum for their ICOs mostly because they don’t possess the skills to roll out an actual altcoin for the most part, which is not confidence inspiring,” said Cohen. “As a general rule, if you don’t possess the skills to roll out an altcoin, you probably shouldn’t be doing an ICO.” In the past, those who wanted to launch a new, tradeable token needed to create their own blockchain from scratch and convince exchanges to take the time to add it to their platform. The ERC-20 standard has made the process of adding a new token to an exchange much simpler because many of the new tokens follow the same general structure.
In the opening section of his letter to Jamie Dimon, Ludwin stated....
It’s easy to believe cryptocurrencies have no inherent value. Or that governments will crush them. It’s also becoming fashionable to believe the opposite: that they will disrupt banks, governments, and Silicon Valley giants once and for all. Neither extreme is true. The reality is nuanced and important. Which is why I’ve decided to write you this briefing note. I hope it helps you appreciate cryptocurrencies more deeply.
Let me start by stating that I believe:
- The market for cryptocurrencies is overheated and irrationally exuberant
- There are a lot of poseurs creating them, and some scammers, too
- There are a lot of conflicts of interest, self-serving hype, and obfuscation
- Very few people in the media understand what’s going on
- Very few people in finance understand what’s going on
- Very few people in technology understand what’s going on
- Very few people in academia or government understand what’s going on
- Very few people buying cryptocurrencies understand what’s going on
- It’s very possible I don’t understand what’s going on
Also:
- Banks and governments aren’t going away
- Traditional software isn’t going away
Ludwin argues that all asset classes exist to allocate resources to a specific form of organization.
Despite the myopic focus on trading crypto assets recently, they don’t exist solely to be traded. That is, in principle at least, they don’t exist for their own sake. To understand what I mean, think about other asset classes and what form of organization they serve:
- Corporate equities serve companies
- Government bonds serve nations, states, municipalities
- Mortgages serve property owners
And now:
- Crypto assets serve decentralized applications
If you haven’t read Ludwin’s letter, you’d probably assume that he argues for the superiority of decentralized application over centralized applications, but you’d be wrong. He explains.
In fact, on almost every dimension, decentralized services are worse than their centralized counterparts:
- They are slower
- They are more expensive
- They are less scalable
- They have worse user experiences
- They have volatile and uncertain governance
And no, this isn’t just because they are new. This won’t fundamentally change with bigger blocks, lightning networks, sharding, forks, self-amending ledgers, or any other technical solutions. That’s because there are structural trade-offs that result directly from the primary design goal of these services, beneath which all other goals must be subordinated in order for them to be relevant: decentralization.
Here’s the important bit about crypto assets for Ludwin.
Thus, bitcoin, for example, isn’t best described as “Decentralized PayPal.” It’s more honest to say it’s an extremely inefficient electronic payments network, but in exchange we get decentralization. Bottom line: centralized applications beat the pants off decentralized applications on virtually every dimension. EXCEPT FOR ONE DIMENSION. And not only are decentralized applications better at this one thing, they are the only way we can achieve it. What am I referring to? Censorship resistance. This is where we come to the elusive signal in the noise. Censorship resistance means that access to decentralized applications is open and unfettered. Transactions on these services are unstoppable. More concretely, nothing can stop me from sending Bitcoin to anyone I please. Nothing can stop me from executing code on Ethereum. Nothing can stop me from storing files on Filecoin. As long as I have an internet connection and pay the network’s transaction fee, denominated in its crypto asset, I am free to do what I want. (If Bitcoin is capitalism distilled, it’s also a kind of freedom distilled. Which is why libertarians can get a bit obsessed.)
Here are his “big picture” thoughts from the letter on the challenge for cryptos.
Given how different they are from the app models we know and love, will anyone ever really use decentralized applications? Will they become a critical part of the economy? It’s hard to predict because it depends in part on the technology’s evolution but far more on society’s reaction to it. For example: until relatively recently, encrypted messaging was only used by hackers, spies, and paranoids. That didn’t seem to be changing. Until it did. Post-Snowden and post-Trump, everyone from Silicon Valley to the Acela corridor seems to be on either Signal or Telegram. WhatsApp is end-to-end encrypted. The press solicit tips through SecureDrop. Yes, the technology got a little better and easier to use. But it is mainly changes in society that are driving adoption. In other words, we grew up in the rainforest, but sometimes things change and it helps to know how to adapt to other environments. And this is the basic argument that the smart money is making on crypto assets and decentralized applications: that it’s simply too early to say anything. That it is a profound change. That, should one or more of these decentralized applications actually become an integral part of the world, their underlying crypto assets will be extremely valuable.
Despite his use of words like “irrational” and “perverse”, Forbes notes that Ludwin’s view on the outlook for cryptocurrency prices is positive.
Although Ludwin took part of his time to address the obvious (some would call) bubble in the cryptocurrency market, he still sees a bright future for this new asset class. “Despite what probably sounds like a bit of cynicism here on cryptocurrencies and the fact that it’s obvious, I think, to every fair observer that we’re witnessing a mania that will have a correction . . . you should not bet against cryptocurrencies in their long term sustainability or viability and the reality that they are a new asset class, that they’re enabling a fundamentally new and important segment, and I think [they] will only increase globally in value over time,” said Ludwin.
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