This isn’t so much a blog post as it is a long tweet. None of this is legal advice.
It occurred to me recently that I’ve had the same thought pop into my head probably half a dozen times in the last two weeks. That thought is this:
Crypto has perhaps half a billion wallets, but I would struggle to say it has more than 50 million users.
By this, I mean that while I know plenty of people at this point – crypto and normie alike – who hold cryptocurrency, it is exceedingly unlikely that we should find an excuse to transact with each other with it. To start, it is not often that friends exchange cash with one another. If we do, for example if we buy something for someone else, there are applications like Venmo, CashApp, or Zelle which we can use to send each other money. I am a pretty diehard crypto person and even I struggle to accept or spend crypto. Most of my clients still pay in fiat.
I then had a related thought.
The reason crypto has half a billion wallets but not half a billion users is because existing applications are, by and large, purely transactional.
If I have a Wells Fargo account I don’t have a relationship with other Wells Fargo users; I have a relationship with Wells Fargo, as do they. Wells Fargo does not connect us, it services us. We need to connect in another way. Some apps, like a Venmo, have a somewhat social component to it. These apps are not, for most people, woven into the fabric of everyday life. One exception to this is WeChat, which is likely an anomaly due to the surveillance and censorship function it performs at the behest of the Chinese communist state.
PayPal didn’t make the Internet blow up. MySpace, and later Facebook and Twitter, did. The essential function of social is to provide people the means to communicate with other people on their own terms largely free from censorship, as the consumer Internet largely was prior to GamerGate in 2015. The absence of this kind of platform-agnostic facility in a crypto-native format, which also allows people to trade transactional information (bids, offers, complex transactions, wallet addresses) in tandem with a social network function is glaring.
So why isn’t Coinbase going to be the center of the crypto-internet? Well, because
Purely transactional systems do not solve the identity problem which needs to be solved in order for most of the world to trust cryptocurrency systems with their communications or be incentivized to use them for anything other than speculation.
Centralized transactional systems will never be able to fulfill the full promise of decentralized cryptosystems. Centralized social network systems are necessary to fully exploit decentralized cryptosystems.
To understand this point you first need to understand what “decentralization” actually means.
Many projects claim to be “decentralized.” By reference to practically any definition, most of them aren’t. I concede that the term “decentralization” does not have a concrete definition in the industry. What I mean by this is that virtually any project has some degree of central control. This does not stop virtually all projects with some components which are “decentralized” claiming the title for themselves, rightly or wrongly.
I have a thought exercise called the “Nuclear Bomb Test” (or the “Space Marmot Test”) which I use to assess whether a cryptocurrency system is decentralized. The results of the test dictate where I should start the analysis in determining whether a given cryptocurrency system is vulnerable to regulatory attack. It goes a little something like this: suppose that the Marmot Star Empire’s battle fleet parks itself in high Earth orbit and, Star Trek IV-style, decides to wipe out the human species so that they can steal all our vegetables.
The marmots, in their infinite wisdom, identify you, the founder, and your startup as the linchpin of humanity’s planetary defenses. Never mind what your startup actually does. All you need to know is that you are the Space Marmots’ target.
The crafty little marmots wait until you are in the room where your company’s servers are and launch a surprise attack with a 1-megaton (marmoton?) nuclear weapon, utterly and permanently annihilating you, your servers, your entire dev team, and everything to do with your business.
If the result of this attack from marmots from outer space is that your system ceases to work, then your system is not decentralized, or at least important parts of it are not decentralized. If your system continues to work, then it is decentralized, and is so in such a way that is likely to be highly resistant to regulatory attack if you launch it Satoshi-style and then disappear.
There are of course qualifications to this, for example, if you layer on lots of governance functionality and you hold large quantities of tokens, etc. Remember, though, you got vaporized by the Marmot Star Empire. The system has to do 100% of the work 100% of the time without a steersman to pass the Nuclear Bomb Test/Space Marmot Test. (Cognizant that, if we change our assumptions / environmental variables enough, even a system like Bitcoin will break. Assume arguendo for the hypothetical system we’re talking about here that the Internet is functioning as it normally does and that system adequately incentivizes transaction validators.)
While a system that is nuclear-survivable will be decentralized, because it is decentralized, it can be difficult to find. Decentralized systems, to be widely used, need to be discovered and their users need to be easy to find (if they want to be found).
Discovery of content is easy with a centralized service. Upload your contacts, type in information in this search bar. However, when you’re running a FinTech app, centralization usually also implies a requirement for licensure. But what if we could separate the concerns, where the component which would be regulated if centralized remains decentralized, and we centralize only the component which is unregulated if centralized?
This is where the social networking comes in. In the United States, financial services are highly regulated. Social networks, on the other hand, are virtually unregulated.
If Alice wants to send Dogecoin to Bob, there are two ways she can do so. The first would be to log in to Coinbase, have Bob log in to Coinbase, swap QR codes and complete the transaction on Coinbase’s ledger. Coinbase is undertaking a regulated activity, chiefly, money transmission. As such it needs a money transmission license.
The second way to do so would be for Alice and Bob to trade that information peer to peer, e.g. via e-mail, text message, or noncustodial wallet applications. E-mail is not regulated. Nor is Twitter, nor SMS, nor Facebook. If I write to my friend Henry via Gmail to agree to a Dogecoin transaction, Gmail does not itself become money transmitter.
Another example: I’m allowed to lend my friend $20 without being licensed as a lending platform. I’m allowed to negotiate that deal over Gmail without Gmail becoming a lending platform. If I do it with Zopa, however, Zopa is a centralized intermediary and their movement of bits is different from Gmail’s in that Zopa’s movement of bits requires a license. Cryptocurrency makes Zopa unnecessary. A social network which tracks a DeFi loan I’ve made to my friend entirely off-platform but does not actually arrange the loan or custody the funds – Yelp for crypto lending – should not require a license, either.
What is missing from crypto is the way to allow noncustodial peer to peer information exchange plus identity attestation to occur at scale. The difference between a Wells Fargo and a Facebook is the social network and the implied level of trust that happens from communicating – and eventually, transacting – within that network. I have never used Wells Fargo to talk to my friend Henry, for example. I talk to him using Facebook all the time. I know that Henry’s Facebook account is run by Henry because he and I have communicated on it for years, and I can see the message history. There’s a level of trust there that doesn’t really require a digital signature, although a digital signature always helps.
If we want crypto to be mass market, truly mass market, trying to weave it into my relationship with Wells isn’t the way to go. Trying to weave it into my friendship with Henry, is.
It should be possible to layer cryptocurrency signals and messaging on top of a social app so that users of a social app can reach out to onchain applications, verify their credentials via the social network, and settle the transactions off of the social network.
Social applications, being largely unregulated, are likely the vehicles through which cryptocurrency mass adoption will take place.
Put differently: a solid social network with a high degree of awareness of P2P protocols, and awareness of how its users interact with P2P protocols, but which does not actually facilitate transactions on those protocols, is likely the way that DeFi applications can expand the most rapidly and be adopted by the most people in the shortest amount of time with a minimum of regulation.
In the United States, the relationship between the government and social applications is governed principally by the First Amendment, 47 U.S.C. § 230, and IP law. The upshot of 1A plus Section 230 is that users can say largely whatever they want and the platforms will not be treated as the publishers or speakers of their users’ speech, subject to certain statutory limitations where social platforms have an affirmative obligation to remove unlawful or infringing content.
Peer to peer transactions which are private and not operated as a commercial enterprise, similarly, do not attract much regulatory attention if they are regulated at all. (Usual “your mileage may vary” caveat, particularly with reference to conduct amounting to the operation of an unlicensed money services business). Online social platforms are well placed to act as a central hub for identity which can then be spread out among various peer to peer applications.
In this way we could achieve all of the functionality of DeFi without the weaknesses of DeFi, i.e. the centralized user interfaces or the governance tokens which need to be sold in order to fund those interfaces. There is nothing regulated, as far as I can tell, about providing an information exchange with no functional transactional machinery (although the SEC takes a somewhat different view – see its consultation over proposed changes to Exchange Act Rule 3b-16).
Social has been tried in crypto before. So far it has failed. I think the reason why, so far, is that crypto-social has been “social incentivized by tokens” rather than “social which empowers crypto users to communicate about tokens.” People have been trying to monetize the transactions when they should be trying to monetize the traffic.
The traffic is more lucrative.
The social component is unlikely to be a Bitclout-style system and is unlikely to live on-chain. It is highly likely to provide ample tooling for users to confirm public key addresses for individual transactions, verify that other keys belong to other users, and be aware of onchain information between its users without facilitating onchain transactions.
The first wave of crypto-social services are likely to be centralized to a significant degree, although decentralized solutions are being worked on in various places. These solutions will take crypto off of institutional balance sheets and investment accounts and into web applications where they will be woven into the fabric of our lives.
This wave of crypto adoption will utterly dwarf all prior waves.
Fin.
Here is a picture of a marmot, licensed under the Pixabay license.
You’re spot on here but I’d go further to say that all of the types transactions that I would do with others are rooted in our relationship. If we’ve known each other for a while and go out for lunch, and I forget my wallet, you might pay and I would send you the money later. If I respond to a classified ad on Craigslist, I would use a payment method to get the cash to you. At no point in the p2p world is the payment started from anywhere other than the social interaction. When Moxie talked about integrating payments into Signal, I was surprised by some of the backlash, as that made entirely too much sense. It has always surprised me that neither FB nor Twitter did a deal with the likes of Paypal or other p2p payment systems. Cryptocurrencies certainly have that potential except like all good things, people’s greed and the speculative environment around these has just ruined the space. It would make a more interesting use case for the likes of a stable coin but then the instrument is no longer decentralized.
I would have a hard time disagreeing with any of that.