A Letter About Crypto

Written in March 2021 & Published in August 2021.

This is an overview of crypto and my story of getting back into the industry. From hearing about it on the Dark Web in 2013 to partying in a Prague Castle for an Ethereum conference in 2018, I have had a love-hate relationship with the industry.

Recently I took time off and I re-learned some fundamentals of economics, history, finance, debt, and technology to satiate my curiosity. This gave me a different lens to the current economic and technological momentum. I learned that seeking ‘objective truths’ is the most important measure of knowledge and our worldviews. Re-learning something with pure curiosity and strong fundamentals was also a beautiful lesson.

I want this letter to be an expression and explanation of how I see things differently and help people understand the value of what is being built.

I am not trying to convince you to invest an exuberant amount of money in the space but to dip your toes in an industry you may have been curious about. So yes this is a disclaimer that is not financial advice.

Anyway, let’s dive into the rabbit hole.

It’s one of my longer pieces so please take time to read it. Skip where necessary.

History of Money and Value

The concept of money has evolved so much over the years. From ancient Egypt to the Trump Administration, it has changed form countless times from rocks to tulips to gold bars. Money is a store of value and is subjective. Kind of like art.

  • Why did we choose to value paintings at certain prices?
  • Why is gold > silver?

It is inherently whatever we want to believe in as a collective. If we were purely logical we may have just stayed with rocks but humans can be greedy and we established social hierarchies.

More recently, the value of money was pegged/measured one to one and this was actually quite stable. But after WWII + Western victory, the US started to devalue it and put their own subjective measure to what USD is. The majority of the world has USD Reserve as a part of their national financing however it’s a devaluing measure. More recently they started to print a shit tonne of money to accommodate for the Stimulus packages and debt issue.

This is something we rarely think about because why should we question it when we live in the best economic time?

The Birth of Bitcoin (2009)

Skip if you know already

My Finance Degree in one movie.

The Financial Crisis in 2007–2008 plays a role in the birth of Bitcoin. I was in primary school in Australia and I didn’t understand why it was a big deal. It did not affect me or my family.

But it really hit the US hard. It was the result of greed and using debt to pay for the debt. Then the bubble popped. Some random called Satoshi Nakamoto had been working on a mechanism to combine money + logic called Bitcoin in 2009. “He” wanted to create a less human-reliant system to create ‘sound’ money.

Sound money is not liable to sudden appreciation or depreciation in value. This was the case with gold but no longer due to human intervention + greed.

Put simply Bitcoin is inherently gold-like money run by computers. Computers don’t care if you are greedy or a kind human. They are binary and won’t try to inflate it. Maybe this is why people refer to digital gold.

The Birth of Ethereum (2013)

Skip if you know already

In 2013–2015 some Spok-looking Russian-Canadian called Vitalik created Ethereum with some others. The best way to describe it is digital lego for finance. An experiment to see if you can program ‘sound money. On Bitcoin, it is difficult to do that.

It uses the currency called Ether on the system/blockchain called Ethereum to do some black magic which I will explain below.

Something that seemed like a digital lego block is transforming into digital concrete blocks that I believe can transform a lot of finance.

My 2017–2018

Initial Coin Offerings were starting to get popular. People were raising $10M — $100M + on Ethereum using the digital lego. It was interesting and people did not have to wait for traditional Silicon Valley money to create.

It was a breakdown of borders, money, and value.

I was helping out to do some university research on this. How much did they raise? Were they legally compliant? Were they legitimate? I think I analyzed over 200 ICO projects. A lot of it was just pure shit but interesting.

I then joined the bitfwd crew to help market and educate the value of Blockchain and Crypto.

I was sent my first ETH then. I didn’t understand what really happened with this alien technology but it was cool. I then helped with a lot of marketing. We also raised some ETH to work on a crypto-project. We essentially worked on identity + infrastructure that was too early for its time. We closed up shop. I left the industry feeling a bit defeated and it was only nerd-developers making products for themselves.

I was a bit guttered and had just finished my university degree. So I went soul-searching in Japan. My travels gave me a bit of self-confidence that I wanted to learn to build with code and build ‘real’ things.

My 2019–2021

Came back to Sydney. Worked a bit then took a one-way flight to New York to find an engineering job. Ended up with a role in San Francisco. Soon after, I worked for another startup. I learned a lot but was still following crypto + did some contract website and design work for some crypto companies.

I then burned out from Startup Hustle and took a break to explore my curiosity.

The Present Moment

I gave my mind time to explore and rest. I wanted to follow my curiosity to see where would it lead.

The two I realized I wanted to explore were: Artificial Intelligence (AI) and Blockchain.

I read as many technical papers and did tutorials on both subjects.

I re-read every main technical whitepaper and Blockchain book ever published and a lot of things clicked for me. I think back in 2017 I was non-technical so couldn’t 100% understand everything.

I learned a lot about long-term outlooks in technology and life.

Main ‘objective’ conclusions:

  • Money is subjective.
  • The current economy of using debt to create more debt is unsustainable.
  • Society is moving towards a more self-sovereign attitude towards governments and banks.
  • Maths, logic, and computing do not have human characteristics such as greed and stupidity.

Subjective conclusion:

  • Crypto could be a strong potential solution to address all the above.

But does all this matter? Crypto is essentially all speculation and a first-world toy. I walk the streets of Mexico and people could not care about it. They don’t have ATM cards, hide the cash and some live off less than $6 a day. Why would they need this crap?

From my time in San Francisco of trying to egotistically chase ‘Silicon Valley’ status and make money, I got tired and found no meaning in it. So I dropped everything and dug deeper to understand what is ‘objectively true’ for this world.

Money. Success. Materialism. Getting super fit — All of this kind of dissolved.

I now accept I am running on a hedonic treadmill and no longer fight it.

I feel pretty light.

So I decide I want to play this game called ‘life’ and participate in what I think is the closest thing to co-creating the new Internet.

So what is happening in the space atm?

This is where most of you are asking questions. A lot of hype is happening at the moment and that is fine. It’s good to widen the audience and bring new long-term people in.

  • People are buying “NFT” artworks for $60M +
  • The industry is worth $2T +
  • Bitcoin and Ethereum are at an all-time high.

Yeah but all of this is high-level hype and doesn’t demonstrate what is being built in the industry.

The financial instruments being built are really interesting. I will explore a few examples. These are all experimental projects but really interesting.

First of all, as a way to instill some FOMO + context

Interest Rates

We are all familiar with this concept. We seek high-yield interest saving accounts which range between 1–5% APY since we still value liquid cash.

I use UP Banking in Australia and it gives me ~2% APY. Inflation is at like 1–2% per year so I don’t really save much. In the crypto space, using mStable, BlockFi, or ArcX, APY interest rates sit at 10%+.

Sure they are experimental and there is some black magic happening which I can explain in person but it makes no logical sense for me to leave my money with negative returns.

These are just the tip of the iceberg of what it means to re-create financial instruments and savings in a sovereign manner.

Lending

The traditional process is to contract with a bank or lender for X amount of money and they put a large % tax on when to pay back the loan. Why? Because they are the institutions with the most liquidity.

What happens if this was all run by code and you didn’t need to pay a high % for the lending — pretty much free and instantly..?

Please re-read this. And imagine what it does for the debt-ridden society of credit cards and student loans. And for mortgages.

On protocols such as Compound and Aave, you are empowered to borrow both $$$ and provide liquidity for borrowers and earn interest. (More info later)

Index Funds + ETFs (Exchange Traded Funds)

We follow S&P, ASX, or whatever markets and are aware of ETFs tracking a combination of assets within the traditional stock market. These usually return for 5–20%+ per annum. This is starting to be mirrored in the crypto-sphere with slightly higher risk but more return.

Due to Ether (the utility of Ethereum — kind of like the slot machine token to use the Ethereum blockchain), the crypto lego allows tokens to be combined, fractioned, and moved around in all sorts of ways.

Companies such as Set Protocol + dHedge are allowing for people to compartmentalize crypto-assets into Index Fund and ETF style instruments with 50–100% returns. There are also added benefits such as extra interest earnings.

Derivatives | Options

Personally never understood options until recently. It is essentially agreeing that X commodity (i.e. oil) will be bought or sold at a certain price. A bit of speculation but when combined with market knowledge, it is quite a lot of leverage.

I.e. you think Tesla will grow another 10% at its current price. You can put in a Call ‘option’ and purchase it for a fraction of the price. You then receive the opportunity to buy at that price + market reward for being correct.

Of course, there are some downside risks. It is a market based on what humans think will happen which is confusing but is actually a really large market.

The below diagrams show the current financials derivatives market + the comparison to where crypto and decentralized finance (DeFi) is at. As DeFi matures, it is only a matter of time the derivatives sector grows and potentially surpasses the traditional finance market size.

I was very surprised to realize the magnitude of the market sizes.

Wrote an article about the current landscape:

https://medium.com/coinmonks/understanding-defi-options-opyn-hegic-siren-ribbon-finance-and-more-4f05477037b0

Current vs Defi

Awesome that you made it up to here.

A lot is happening under the surface of the news. I don’t know if Bitcoin will reach $100,000 or if which countries are going to adopt it.

But this is a really interesting time to be alive where I believe rallies of communities are building new financial and social instruments which are more native to the Internet and independent from the current system.

Change is constant in this world (i.e. Covid, BLM, and Brexit) and I do not believe the current system is suited to our needs so I do believe blockchain technologies (plus AI … for another time) are strong alternatives and will be changing our lives for sure.

Stay well and happy to help where I can to get you down the rabbit hole.

Tom

You can usually find me on Twitter :)

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