On Crypto Populism

Created

Dec 11, 2022

URL

https://showerthoughts.substack.com/p/on-crypto-populism

Date Published

Oct 31, 2022

Author(s)

Richard Chen

Tags

I promised last time that I would write a spicy political take and now that it’s election season here it is.

Crypto has long been a narrative of a populist revolt against the establishment financial system. Bitcoin, after all, was created amidst the Chancellor on the brink of a second bailout for banks. We’re supposed to create a more fair, accessible financial system unfettered from the meddlings of a few central bankers.

Unfortunately, what I’ve seen is the same underlying issues causing institutional sclerosis in the real world are plaguing crypto too and leading to a populist cynicism of crypto as purely a “decentralized casino” or “get rich quick scheme.” There’s resentment against crypto elites – aka insiders and professional traders – who control the narrative on crypto Twitter to enrich themselves at the expense of retail investors.

Let’s look at a few examples of what’s causing populism in the real world and see how they manifest themselves in crypto.

The principal-agent problem: Establishment elites being wrong and not suffering the consequences.

I like this quote from one of my very first friends in crypto – Alex Pruden – who served almost a decade in the US Army as a Green Beret: “The soldier who loses his rifle is more fucked than the general who loses the war.”

Over the past decade, our top generals would repeatedly lie in front of Congress and to the American people about how much progress was made and how we’re “winning” the war in Afghanistan, when in fact all along the Afghan army was just a corrupt paper tiger we were propping up that was going to fold to the Taliban the minute we withdrew.

After 20 years, the war cost nearly $300M a day and over 2400 American lives.

Most of the public outrage and mainstream media attention focused on the botched evacuation of our allies (especially local translators) and chaos at the Kabul airport during the withdrawal. Not surprisingly, President Biden took the brunt of the heat as our commander-in-chief. Yet what happened to those generals? They quietly took multi-million dollar jobs at defense contractors and prestigious positions at think tanks and universities after their service. Not once were the generals held accountable to the American people nor suffered the consequences of their failures. [1]

Meanwhile everyday Americans have lost a lot of trust in our military institutions and have to swallow the bitter pill of repeating Vietnam all over again.

The crypto parallel we can point to here is the Terra ponzi. While most of the attention focused on Do Kwon’s bravado “come at me bro” attitude and subsequent fall from stardom, another class of bad actors went largely unnoticed – the Terra investors who were aggressively shilling LUNA and UST as great investments to their retail followers. Many of them had already taken profits during the bull market, and after the blowup they pivoted to a different ecosystem, continued to operate business as usual, and never suffered any real reputational damage.

Meanwhile tens of thousands of retail investors lost their life savings, at least eight of whom are confirmed to have committed suicide.

While you could argue the regulatory fallout from Terra affects everyone in crypto, what’s clear is the elites who are wrong – whether on the battlefield or in the markets – have a golden parachute and don’t bear the consequences of their failures.

Controlling the narrative: Manipulating the media for personal gain.

Two of the biggest mainstream media manipulations in the last few years are 1) the Hunter Biden laptop story and 2) the Wuhan lab leak theory.

The big tech social media platforms all censored sharing the New York Post’s Hunter Biden laptop story before the 2020 election, claiming it “has all the classic earmarks of a Russian information operation.” Only two years later did the mainstream corporate media elites finally admit that the story was indeed true. The media elites, who are overwhelmingly liberal, put their thumb on the scale to not hurt Biden right before the 2020 election, unlike how widespread media coverage of the FBI investigation into Clinton’s private email server hurt her right before the 2016 election.

Initially if you talked about the Wuhan lab leak theory, you would’ve been called a racist and a conspiracy theorist and been censored and demonetized from many platforms. A year later, it made the front page of Newsweek magazine, after which the overton window shifted and now it’s socially acceptable to talk about it publicly. That’s the hypocrisy of misinformation – the public health elites control the narrative by labeling what they don’t like as “misinformation” and later move the misinformation goalpost based on what’s convenient for them.

We see media manipulation happen time and time again in crypto, especially when controlling the narrative to pump “next-gen scalable L1s.” The playbook goes something like this: VCs invest in early rounds → VCs aggressively market “faster/cheaper/better” L1 narratives → VCs invest in supporting app ecosystems → retail finally shows interest and buys → VCs dump unlocked tokens and short perps. Then a new L1 appears that promises better scalability and we rinse and repeat the cycle all over again. [2]

This happened with EOS in 2017, Solana and Avalanche in 2021, and maybe Aptos and Sui for the next crypto bull cycle. Even though the playbook is so obvious, I’m amazed how people still fall for the loudest marketing psyops and the most popular investors on Twitter. Perhaps it’s because with each new bull cycle there’s a new crop of retail investors who don’t have the historical context for this psyops campaign and eventually get burned.

Crony capitalism and regulatory capture: Incumbents rewriting the laws and using regulators to kill their competition.

There are way too many specific examples to list of this happening across various industries. For an in-depth history of the regulatory state, I highly recommend reading one of my favorite books of all-time: By the People by Charles Murray.

In short, the main reason why we end up with regulatory capture in industries is the revolving door problem. If regulators are friendly towards the companies they’re supposed to regulate, they get hired by those companies as multi-million dollar lobbyists after their government service. A fully captured regulatory agency ends up almost behaving like a mafia: incumbent companies order “hits” on their competitors while the regulators sell “protection services” in the form of onerous compliance.

In the end, small businesses and “mom and pops” are hurt the most while large incumbents benefit the most, leading to widespread skepticism about whether the “American Dream” still holds true today.

We’re actually seeing regulatory capture playing out in crypto right now with Sam Bankman-Fried and FTX lobbying for the Digital Commodities Consumer Protection Act (DCCPA) bill. Much has already been written about the problems with this bill, but a big component is it would require DeFi projects to KYC and register as broker/dealers, effectively crippling a nascent industry that’s only existed since 2018.

What’s worse is the hypocrisy of SBF. Alameda has profited billions of dollars from DeFi by farming and dumping DeFi tokens onto retail, and now he’s kicking the ladder down after climbing up and crying for “consumer protection.” By lobbying and buying political power for protection against the shady unethical activities in the early days of FTX and Alameda, SBF is rewriting the rules to make it increasingly difficult for newcomers to enter as well as stifling crypto innovation. [3]

Closing thoughts

There’s no denying that crypto is a religion, and the religion becomes more powerful as more people believe in the ideology.

Early crypto adopters are purists. They are usually ideologically aligned with similar values of distrust in large institutions and wanting to return power back into the hands of the people. As the crypto industry crosses the chasm, it inevitably attracts tourists – those who come without higher principles and show no loyalty to anything but money. Especially given how crypto is so closely intertwined with money, greed corrupts most people who didn’t already come into this industry with strong principles and belief in the crypto ideology.

So with all that, will we see a populist leader emerge to revolt against the crypto elites? We’ve now seen the Alex Jones of crypto, will we soon see the Donald Trump or Bernie Sanders of crypto? [4]

[1] General Allen recently resigned as President of the Brookings Institution think tank amid an FBI investigation into whether he had secretly lobbied on behalf of the Qatari government. Becoming a sleazy lobbyist for American defense contractors is one thing, but being an unregistered foreign agent is another level of corruption.

[2] I should clarify the term “VCs” in this context refers to the short-term trading shops that pretend to be long-term founder-friendly VCs but really are just interested in a quick flip. Folks like Alameda, Three Arrows, DeFiance, CMS, Mechanism, etc.

[3] In traditional finance there would be a public outcry about conflict of interest if Citadel controlled the NYSE, but in crypto apparently it’s okay that Alameda controlled FTX in the early days.

[4] My hot take on Trump is – despite all of his problems – he was a big middle finger to the D.C. establishment elites for everyday Americans getting screwed over.

On Crypto Populism

I promised last time that I would write a spicy political take and now that it’s election season here it is.

Crypto has long been a narrative of a populist revolt against the establishment financial system. Bitcoin, after all, was created amidst the Chancellor on the brink of a second bailout for banks. We’re supposed to create a more fair, accessible financial system unfettered from the meddlings of a few central bankers.

Unfortunately, what I’ve seen is the same underlying issues causing institutional sclerosis in the real world are plaguing crypto too and leading to a populist cynicism of crypto as purely a “decentralized casino” or “get rich quick scheme.” There’s resentment against crypto elites – aka insiders and professional traders – who control the narrative on crypto Twitter to enrich themselves at the expense of retail investors.

Let’s look at a few examples of what’s causing populism in the real world and see how they manifest themselves in crypto.

The principal-agent problem: Establishment elites being wrong and not suffering the consequences.

I like this quote from one of my very first friends in crypto – Alex Pruden – who served almost a decade in the US Army as a Green Beret: “The soldier who loses his rifle is more fucked than the general who loses the war.”

Over the past decade, our top generals would repeatedly lie in front of Congress and to the American people about how much progress was made and how we’re “winning” the war in Afghanistan, when in fact all along the Afghan army was just a corrupt paper tiger we were propping up that was going to fold to the Taliban the minute we withdrew.

After 20 years, the war cost nearly $300M a day and over 2400 American lives.

Most of the public outrage and mainstream media attention focused on the botched evacuation of our allies (especially local translators) and chaos at the Kabul airport during the withdrawal. Not surprisingly, President Biden took the brunt of the heat as our commander-in-chief. Yet what happened to those generals? They quietly took multi-million dollar jobs at defense contractors and prestigious positions at think tanks and universities after their service. Not once were the generals held accountable to the American people nor suffered the consequences of their failures. [1]

Meanwhile everyday Americans have lost a lot of trust in our military institutions and have to swallow the bitter pill of repeating Vietnam all over again.

The crypto parallel we can point to here is the Terra ponzi. While most of the attention focused on Do Kwon’s bravado “come at me bro” attitude and subsequent fall from stardom, another class of bad actors went largely unnoticed – the Terra investors who were aggressively shilling LUNA and UST as great investments to their retail followers. Many of them had already taken profits during the bull market, and after the blowup they pivoted to a different ecosystem, continued to operate business as usual, and never suffered any real reputational damage.

Meanwhile tens of thousands of retail investors lost their life savings, at least eight of whom are confirmed to have committed suicide.

While you could argue the regulatory fallout from Terra affects everyone in crypto, what’s clear is the elites who are wrong – whether on the battlefield or in the markets – have a golden parachute and don’t bear the consequences of their failures.

Controlling the narrative: Manipulating the media for personal gain.

Two of the biggest mainstream media manipulations in the last few years are 1) the Hunter Biden laptop story and 2) the Wuhan lab leak theory.

The big tech social media platforms all censored sharing the New York Post’s Hunter Biden laptop story before the 2020 election, claiming it “has all the classic earmarks of a Russian information operation.” Only two years later did the mainstream corporate media elites finally admit that the story was indeed true. The media elites, who are overwhelmingly liberal, put their thumb on the scale to not hurt Biden right before the 2020 election, unlike how widespread media coverage of the FBI investigation into Clinton’s private email server hurt her right before the 2016 election.

Initially if you talked about the Wuhan lab leak theory, you would’ve been called a racist and a conspiracy theorist and been censored and demonetized from many platforms. A year later, it made the front page of Newsweek magazine, after which the overton window shifted and now it’s socially acceptable to talk about it publicly. That’s the hypocrisy of misinformation – the public health elites control the narrative by labeling what they don’t like as “misinformation” and later move the misinformation goalpost based on what’s convenient for them.

We see media manipulation happen time and time again in crypto, especially when controlling the narrative to pump “next-gen scalable L1s.” The playbook goes something like this: VCs invest in early rounds → VCs aggressively market “faster/cheaper/better” L1 narratives → VCs invest in supporting app ecosystems → retail finally shows interest and buys → VCs dump unlocked tokens and short perps. Then a new L1 appears that promises better scalability and we rinse and repeat the cycle all over again. [2]

This happened with EOS in 2017, Solana and Avalanche in 2021, and maybe Aptos and Sui for the next crypto bull cycle. Even though the playbook is so obvious, I’m amazed how people still fall for the loudest marketing psyops and the most popular investors on Twitter. Perhaps it’s because with each new bull cycle there’s a new crop of retail investors who don’t have the historical context for this psyops campaign and eventually get burned.

Crony capitalism and regulatory capture: Incumbents rewriting the laws and using regulators to kill their competition.

There are way too many specific examples to list of this happening across various industries. For an in-depth history of the regulatory state, I highly recommend reading one of my favorite books of all-time: By the People by Charles Murray.

In short, the main reason why we end up with regulatory capture in industries is the revolving door problem. If regulators are friendly towards the companies they’re supposed to regulate, they get hired by those companies as multi-million dollar lobbyists after their government service. A fully captured regulatory agency ends up almost behaving like a mafia: incumbent companies order “hits” on their competitors while the regulators sell “protection services” in the form of onerous compliance.

In the end, small businesses and “mom and pops” are hurt the most while large incumbents benefit the most, leading to widespread skepticism about whether the “American Dream” still holds true today.

We’re actually seeing regulatory capture playing out in crypto right now with Sam Bankman-Fried and FTX lobbying for the Digital Commodities Consumer Protection Act (DCCPA) bill. Much has already been written about the problems with this bill, but a big component is it would require DeFi projects to KYC and register as broker/dealers, effectively crippling a nascent industry that’s only existed since 2018.

What’s worse is the hypocrisy of SBF. Alameda has profited billions of dollars from DeFi by farming and dumping DeFi tokens onto retail, and now he’s kicking the ladder down after climbing up and crying for “consumer protection.” By lobbying and buying political power for protection against the shady unethical activities in the early days of FTX and Alameda, SBF is rewriting the rules to make it increasingly difficult for newcomers to enter as well as stifling crypto innovation. [3]

Closing thoughts

There’s no denying that crypto is a religion, and the religion becomes more powerful as more people believe in the ideology.

Early crypto adopters are purists. They are usually ideologically aligned with similar values of distrust in large institutions and wanting to return power back into the hands of the people. As the crypto industry crosses the chasm, it inevitably attracts tourists – those who come without higher principles and show no loyalty to anything but money. Especially given how crypto is so closely intertwined with money, greed corrupts most people who didn’t already come into this industry with strong principles and belief in the crypto ideology.

So with all that, will we see a populist leader emerge to revolt against the crypto elites? We’ve now seen the Alex Jones of crypto, will we soon see the Donald Trump or Bernie Sanders of crypto? [4]

[1] General Allen recently resigned as President of the Brookings Institution think tank amid an FBI investigation into whether he had secretly lobbied on behalf of the Qatari government. Becoming a sleazy lobbyist for American defense contractors is one thing, but being an unregistered foreign agent is another level of corruption.

[2] I should clarify the term “VCs” in this context refers to the short-term trading shops that pretend to be long-term founder-friendly VCs but really are just interested in a quick flip. Folks like Alameda, Three Arrows, DeFiance, CMS, Mechanism, etc.

[3] In traditional finance there would be a public outcry about conflict of interest if Citadel controlled the NYSE, but in crypto apparently it’s okay that Alameda controlled FTX in the early days.

[4] My hot take on Trump is – despite all of his problems – he was a big middle finger to the D.C. establishment elites for everyday Americans getting screwed over.