Why Crypto is Good

TLDR: Crypto is good because it gives us dependable platforms for others to build on, massively expanding the possibilities of wide scale human collaboration.

This Is Not Simple

You've probably already noticed that this essay is quite long. So before I get to the meat of it, I want to address what you're probably thinking:

"If crypto is so good, why is it hard to explain why?"

The answer is because it's a low level innovation. It's not a new product itself per se, but a new environment where products can be made.

It's not like the lightbulb, it's like democracy. Both are inventions, but the lightbulb is a product, while democracy is an environment.

I don't think anyone today would question that formal democracy was an important invention. But it probably wasn't obvious at the time.

It will take many years for crypto to prove itself as a positive invention. Even today, the fundamental workings are still being debated and experimented with. After that settles, we need entrepreneurs to build products on top of it.

Early products have already been developed, but they'll need time to iterate and find their audiences. Like any new industry, it'll take several waves of innovation for consumers to truly feel the effects. That being said, lots of people can see where this ball is headed, and are really excited about what's to come.

So, what is this new environment? What will it allow us to build?

Autonomous Software

The innovation behind crypto is blockchain technology. That's what's new. There's a lot of ways to describe the power of blockchain, but here's my favorite one:

Blockchain gives us the ability to build autonomous software.

Autonomous software can't be turned off or edited once deployed. As long as the underlying operating system continues to run, so will the software. In this case, that operating system is the blockchain network of nodes (aka "validators" or "miners") which are incentivised with crypto payments to keep the network running.

It's worth pausing here to clarify how this works. Every blockchain - whether its Ethereum, Bitcoin, Solana, etc - relies on a global network of computers to run, each one maintaining their own copy of the entire blockchain ledger. These computers earn money for helping out, which is why humans set them up in the first place. (You too can participate in this! Here's how)

Ethereum is estimated to have well over 100,000 of these nodes in its network. That's a lot. As a result, the Ethereum network is incredibly stable. The first applications deployed on Ethereum have been running continuously, 24/7, for nearly 7 years.

Thanks to this stability, blockchain networks can act as a global operating system. Just like with Windows or MacOS, you can write software for this operating system, but there's two key differences:

  1. It's public, so anyone can read and use the software
  2. It's distributed, so the software never stops running.

A blockchain network is a shared computer that never turns off.

Even if you hate crypto, you have to admit that this concept is pretty cool. The entire world building on top of a shared computer gives us the ability to collaborate with one another in entirely new ways. For fans of open source software, this is a utopian vision.

At this point we've established one thing: blockchain gives us the ability to build autonomous software that will run always and forever as long as the network persists.

Sounds cool, but... how is that practical? Don't developers need to be able to edit their software to improve it and fix bugs?

Open-Source Companies

As mentioned, blockchain software can't be edited once deployed, but there are methods to functionally swap them out with other programs with something called "Proxy Contracts". This approach is used in cases where developers need to be able to fix bugs or improve code efficiency.

The key question becomes: who has the ability to swap out the program? And the answer is: whoever is given access in the code itself.

The key takeaway is that the rules for access are publically defined, and impossible to circumvent. This gives us a way to bring humans into the equation, but limit their capacity to mess things up.

Most popular web3 applications use proxy contracts and make changes via democratic community participation, facilitated with a token. In the case of Uniswap, people who hold UNI tokens can make proposals and vote on what happens next. No single person can decide what changes to make, and every decision is completely public. Take a look! If you wanted to, you could buy UNI tokens and start casting votes today.

This method combines the best of both worlds. Public and unstoppable software editable by humans via incorruptible rules of engagement.

You've probablty heard of "open-source code" (code that's public for the world to use). Blockchain technology allows us to go a step further: public code editable via public governance.

Now we can build open-source companies.

Some critics of web3 point at community governance and say that it's bascially the same way that public companies operate today, but this couldn't be further from the truth.

Executives of corporations are obliged to maximize short term profit to benefit shareholders (it's called a "fiduciary duty"). As long as decisions benefit shareholders and are not illegal, individual executives have every right to change how the company operates at any time.

You may have Apple stock, but is every decision they make public? Can you vote on the price of their next macbook? Of course not.

Okay, now we've established that blockchain gives us the ability to build autonomous software, which, when combined with a token-powered public governance process, gives us open-source companies.

What's so good about open-source companies?

Dependable Platforms

Open-source companies completely change the landscape of what's possible with societal collaboration. That's because:

Open-source companies make dependable platforms.

If your company is open-source, I can build my own company that relies really heavily on it, without having to worry about things radically changing down the line. Your company becomes a dependable platform for my own.

The rest of this section is dedicated to illustrating why that's a really really really big deal.

This idea of a "dependable platform" was simply impossible before web3. Sure, there's been tons of platform companies, but they've all been ruled by a central operator who controls the access. They were centralized, and therefore not dependable at all. That led to lots of very bad stuff for people who relied on them:

A recent example came just a few weeks ago: Google decided to change it's API, blocking third party apps from recording calls - sudden death for an entire category of apps on Android.

Another example is Twitter who also changed the data accessible with their API, instantly killing any app functioning as an alternative interface to your twitter feed.

Marketplaces like ecommerce stores and app stores are also common venues for this abuse of power...

In this famous example, Fortnite offered a cheaper way for users to make in-app purchases. Apple didn't like that, so they banned Fortnite from the iOS app store. Blocked from a billion devices in an instant.

Then there's this: Amazon launched its own line of products made to compete with other sellers on the marketplace, then supposedly ranked them higher in the listings.

In each example above, people invested their time and energy into building a business, only to see it get dissolved by platform tyrants. This phenomenon is incredibly common because it's just how capitalism works: corporations are designed to extract as much profit as they possibly can.

When you're first starting out as a platform business, you play nice, because you need to attract people to start making money, but as you gain power, you don't need to be so nice anymore, and you can start squeezing. And if you don't start squeezing, a competing platform will come along that does, and put you out of business.

Here's a good illustration of the effect (adapted from Chris Dixon)

Isn't is weird how all the big companies are infamous for extractive practices? Actually no, it's not weird at all, it's survivor bias. Our world rewards and empowers that sort of corporate behavior.

The risk of your business getting destroyed by extractive platforms is so common that it has a name in the business world: "platform risk". Seasoned entrepreneurs avoid opportunities with too much platform risk, and those who are more naive simply don't get funded.

Because of platform risk, people actively avoid building big and innovative things on top of platforms. The entire world of capitalism conspires against platform-dependent businesses. The resulting landscape of innovation looks like this:

It's a city where every building is one story high.

But what if there wasn't platform risk? What if Amazon and Apple and Google were all open-source companies, owned and operated by their communities of users? Platforms couldn't suddenly change their API, or suprise people with price hikes, or compete with their own community.

The risk dynamics completely change. People feel safe to build on top. Imaginations run wild, investor money pours in, entire lives are committed.

You get this:

Rooftops become floors.

You can build stuff on top of other stuff that's just as big, or even bigger than the stuff below. Can you imagine what would be possible if Facebook, Google, and Apple could all build on top of one another's success?

The enormity of compounding effects from this fundamental shift is hard to overstate.

Imagine if every time a cell duplicated itself, it permenantly shared all future nutrients with that other cell. That seemingly small change in the nature of biology might be hard to notice at first, but over time it would have colossal effects on all life on Earth. The introduction of dependable platforms is similarly tectonic in the realm of societal collaboration.

Your enthusiasm for web3 is based on how massive you perceive this shift to be. For many folks in the "builder class" of society (founders and VCs), this shift is literally life-changing. For folks outside that world, it's less so, for now. Like the cell analogy, this change will take time to play itself out, but once it does, our world will be radically different.

The funny thing is - this effect is self-fulfilling. Whether or not you agree with the first principles of this idea, the fact of the matter is, a huge population of founders, developers, and VCs do, and the fact that they believe is what is causing all this stuff to be built. And every day, the pace of development is getting faster and faster as more people pour in.

If you don't believe in anything I've said in this essay, you still have this reason to think crypto is good: because it inspires builders to build.

Conclusion

This tech is really new. Yes the Bitcoin whitepaper was published in 2008, but Bitcoin was built purely as digital money, it does not function as a decentralized operating system for autonomous code. That stuff didn't come until 2015 when Ethereum first went live. Many people point to that date as the true genesis of "web3".

Despite only being only a few years old, the industry has already produced a dense forest made up of thousands of interdependent projects across dozens of verticals - a testament to the compounding effects of web3's open-source ecosystem.

Here's one example:

A few years after Ethereum was launched, Uniswap launched their exchange on top of it, allowing anyone to swap one type of token for any other type. Then Aave came along and built a lending platform on top of Uniswap, allowing people to borrow money against crypto collateral. Then Instadapp realized that Aave was too complicated for everyday users, so they built a new interface on top of Aave that made using it a lot simpler. This entire stack of interdependent projects popped into existence in just a few years.

In closing out this essay I want to be clear about what I'm arguing. I don't think every peice of technology should run on the blockchain. I'm not a web3 maximalist. Blockchain architecture and community governance comes at a very significant cost in terms of user experience and pace of development. But if you're trying to build a platform business, or build on top of a platform yourself, web3 is a promising direction to look in.

Crypto is good because it gives us dependable platforms for others to build on, massively expanding the possibilities of wide scale human collaboration.





FAQ

If platform businesses can't squeeze their ecosystems to draw profits, why would people work to build them in the first place?

Web3 platforms can still make money by charging token-based transaction fees, they just can't abuse their power by changing the rules or pricing arbitrarily. This means less profit in the short term. However, because of their dependability, web3 platforms end up attracting a lot more economic activity in the long run, leading to profit that can actually be much greater than web2 competitors.

Isn't it a huge pain in the ass to vote on every single little change to a product? How do web3 platforms get anything done?

Web3 governance design can be anything you can imagine. Projects design their governance projects according to what their goals are as a platform. If you want attract as many builders to your platform as possible, then you'll design a governance process that's careful and egalitarian. If you instead want to optimize for speed of product development, you may choose to design a system that requires less community involvement. It's quite common for projects to start out centralized around a few key players while the product is built, then gradually cede power to a wider community as the product matures.

Why are financial projects so common in crypto?

Currency is the ultimate platform. To send or receive a specific currency, you need to have the uptmost trust that it's going to behave as expected. Launching native currency for your project brings with it a ton of benefits, but before web3, such currencies failed to become interoperable with the rest of the world.

You'd never accept minecraft diamonds as pay for your job because you can't pay your rent or buy groceries with them. No one ever built monetary exchanges for you to trade the diamonds for US Dollars because minecraft is a closed platform. Severe dependency makes such projects infeasible.

But a web3 minecraft could absolutely facilitate that reality. Project-specific currencies are now possible, and so there's been an explosion of activity as buidlers discover all the amazing things you can do with them.