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December 27, 2022

Crypto Starts to Look Like Just Another Financial Instrument

[Bloomberg]

This was the year crypto started to look like just another financial instrument. But first…

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At the beginning of the year, there were two dominant narratives about the transformative potential of cryptocurrencies. The first was that crypto was a radical new financial system and that you could use it to get rich. This proved to be true, at least for a while. The second narrative — that there’s something special about the technology underlying crypto that lends itself to becoming the architecture of a better, fairer internet — has not panned out.

There’s no doubt that crypto is finance, and some people did use it to get rich. Sure, the whole game was a shaky playground for financial speculation, and the people who made crypto fortunes did so in large part by extracting money from a larger group of people who ended up poorer. But that’s how financial systems often work.

The idea of a crypto internet, or web3, is based on the assumption that blockchains — the ledgers on which ownership of cryptocurrencies is verified — are also good ways to track the data needed to run social networks or video games. Because these ledgers are distributed across many computers, rather than centralized in a server network controlled by, say, Amazon.com Inc. or Microsoft Corp., web3 proponents envision a world free of the bad attributes of the internet that big tech dominates.

The conditions were ripe for web3 to catch on. A handful of web3 projects took off starting in 2021, mostly based on the purchase of nonfungible tokens as a way to join a club of people who are also optimistic about NFTs or to play a video game. Meta Platforms Inc. continued to stumble into 2022; there’s disenchantment with Apple Inc. and Google; and you couldn’t blame someone for interpreting Elon Musk’s purchase of Twitter Inc. as a piece of performance art  meant to demonstrate the dangers of centralized control over important internet services.

The value of all of these services was inextricably linked to the frenzy of financial speculation surrounding crypto. This made it hard to tell whether the products were seen as appealing on their own merits, or just as a chance to get rich. The most generous interpretation of web3, which I heard often from web3 developers and their investors, was that the speculative energy was a distraction that would eventually wear off, leaving useful services in its wake.

The more cynical view is that web3 was a mirage. The hope for a whole blockchain-based internet was useful because it created an illusion that there was something more to crypto than gambling. This could, in turn, appeal to people who aren’t gamblers.

The extent to which web3 services declined along with the value of most cryptocurrencies makes the cynic’s case more convincing. Those following along closely with crypto in 2022 immersed themselves in the details of weird financial instruments and mapped the contagion as it traveled from one failing crypto company to another. As for new, breakout web3 services — there wasn’t much. It was financial speculation all the way down.

People within crypto are used to this kind of skepticism. A common response is that, yes, there have been a lot of scammy projects fueled by get-rich-quick dreams, but now the slate has been swept clean and the real work continues. (This can sound a bit like, OK, but no one has really tried a pure form of communism.)

Maybe crypto’s future as the backbone of novel technology products is yet to come — there has been at least one notable NFT release this month. But anyone trying to build web3 now is going to have a challenging time convincing people that crypto isn’t exactly what it seems to be.

By Joshua Brustein

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