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🧸 wagmi: What Crypto-Bears Miss – Why Stephen Diehl is Wrong

50 thousand favorites of a Tweet is not a normal thing. While crypto bears are everywhere, Stephen Diehl has become the standard bearer for the position. His threads are written with the wit of David Foster Wallace and the techno-philosophical prose of Michael Crichton. And, boy, do they perform.

With Twitter’s average engagement rate of 1%, that Tweet likely had 5M+ views. That is massive distribution. It is Elon Musk or Donald Trump level. For reference, Twitter Celebrity Patrick Collison, the CEO of Stripe with 3.5x the followers, would be happy to have a few thousand likes. 

It is not just Stephen’s threads that perform. His blog posts are also widely shared and read.  

If the weighing scale for an argument’s quality were its Tweet likes, then Stephen would have very solid arguments. 

They sure are fun to read. Take this gem from one of his popular articles, web3 is bullshit:

Yet when those of us who are in the chips, bits and packets business look into alleged engineering details they’re always either complete hand wavy woo woo or dreams overleveraged on perpetually-over-the-horizon blockchain tech searching for tomorrow’s problem to justify an investment today. Just buy my token today to secure your stake in a better tomorrow. It’s the age-old pitch of charlatans and snake oil salesmen, except this time around it’s being pushed by world’s largest investors who have deep bags of tokens to dump.

The colorful language is to the point of philosophy or fiction. “Chips, bits and packets” is another way to say ‘engineer.’ “Hand wavy woo woo,” could be ‘hollow,’ and “dreams overleveraged on perpetually-over-the-horizon,” could be ‘dreams.’ Far from Hemingway or Adams’ calls for simple language, Diehl goes over the top to help engorge you in the details. 

Full disclaimer: I love it. This article was, in part, an excuse to relish in Stephen’s masterful use of language. It is reading theater, more Tucker Max than Packy McCormick. 

But either Stephen is onto something that trillions of dollars is not, or there are flaws in his arguments. Alas, any good argument needs a strong opponent, so let’s explore:

  • Stephen Diehl’s Core Arguments
  • Blockchain: The Importance of Decentralization
  • NFTs: Why Artists’ Power Matter
  • DAOs and web3: How Ownership Will Change the World
  • Stephen Diehl’s Motivations

Stephen Diehl’s Core Arguments

I have been watching Stephen since February. He has published hundreds of thousands of critical words. But at its core, Stephen’s criticism has three main targets: blockchain, NFTs, and web3. Let us learn what he finds so skeptical about all three. 

There are a litany of arguments that I could have included here, but I am focusing on the one’s I judge to be most persuasive and core to understanding his overall position. I could be tedious and say, “from Stephen’s point of view…” every time. Instead, I am just going to write from his voice, the crypto-bear. 🧸

Target 1: Blockchain

Problem 1: Decentralization Isn’t Important

Bitcoin doesn’t do anything. Think with analogy to equities, bonds, or annuities. They actually generate future cash flows. Bitcoin does not.

Bitcoin supporters pump the crypto to increase the value of their holdings, not because of any benefit conferred by decentralization. In fact, it is unclear if decentralization as blockchain-people describe has any importance. The term is so vague as to attract all manner of supporters. 

Decentralized is an ill defined term at the human level that involves an intrinsic level of projection on behalf of the word-user concerning their personal values and political leanings. However in technology, there’s a much simpler definition simply in terms of the connections and responsibilities of software running on servers. We have systems like BitTorrent and Tor which are decentralized networks and whose responsibility is to blindly distribute data according to a set of prescribed rules and algorithms. But rarely do those nodes correspond to individuated humans or their interests. They’re just servers and the world is quite simple and predictable in this strata of discourse just like the ideal world of physics.

The type of decentralization that is valuable is the kind produced by BitTorrent or Tor. The decentralization provided by Bitcoin or other blockchain technology is just a ledger in someone else’s public database. As a result, smart contracts – and the DeFi ecosystem built up around them – are simply inferior versions of their centralized counterparts. 

In database terminology smart contracts are stored procedures that run one of the various incarnations of distributed databases these technologies are built on. In theory they act somewhat like self-automated vending machines but for more complex user interactions. In practice they act more like self-automated bug bounties which typically explode violently when certain exploits are issued against the coded logic, and at which point they spill all of the coins locked up in the contract. These disasters happen about two or three times a week now because coding at that level of correctness required in a Javascript-like language with loose and ill-defined semantics is near impossible. 

The limitations imposed by its decentralization ideals are too much to overcome. The decentralization they provide is not important.

Problem 2: Energy

Not only does Bitcoin not do anything a centralized alternative cannot do better, it actively hurts the environment. A recent paper in Nature showed that Bitcoin is accelerating the earth’s climate change above 2 degrees centigrade, pushing us faster towards hothouse earth.

For Bitcoin to accelerate global warming because it is 500K times more energy consuming than an energy transaction is  a pretty big problem. Why wouldn’t we use something that is half a million times more efficient? Credit cards are.

The negative environmental impacts are an important reason to be a loud crypto-skeptic. Bitcoin is like Chernoby or a nuclear bomb. To save the environment, blockchainists need to be taken down. 

Problem 3: Enables Criminal Activity & Ransomware

Not only does Bitcoin enable the accelerated destruction of our environment, it also actively enables criminal activity & ransomware. As Nicholas Weaver said:

Any application that could be done on a blockchain could be better done on a centralized database. Except crime.

Everything Bitcoin does could be done better centrally. Except for crime. Bitcoin, is in fact, the enabling feature for ransomware. 

Before Bitcoin, all manners of ransom were traceable. Gift cards, wire transfers, and physical delivery of bank notes all had ways to be foiled. Crypto provided the perfect answer to the ransom problem. Demand your ransom in Bitcoin.

Bitcoin has been the single enabling feature of the global ransomware pandemic that is causing actual loss of life, when critical infrastructure like power centers and hospitals are held hostage by cyber-criminals. In May, cybercriminals managed to disable one of the largest pipelines in the United States for six days. Something more vital could be next. 

NFTs

Problem 1: They Unlock Money Laundering

NFTs solve a problem for money launderers. If a ransomware attacker has several million dollars they want to cash out an exchange, the exchange will not let them because of AML laws. But NFTs allow a convenient workaround – buying and selling to yourself.

This activity seems particularly likely because of the prevalence of crypto assets following an odd trading cycle where people trade back and forth to each other at exponentially higher valuations.

Problem 2: Based on Collective Shared Faith

NFTs are essentially signatures in a database that you paid for a URL next to the payment. This means they are just digital signatures based on collective shared faith, and they have no meaning.

And then came NFTs which are almost the purest embodiment of this conflict of ideas one could possibly imagine: a purely speculative asset built on the supposed notion of artificial information scarcity and whose entire existence depends on a collective shared faith in this notion. A belief that artificial information scarcity is not only inevitable but desirable, and that the act of buying the “vanity of buying” is just the latest fashion in conspicuous consumption because All is Vanity.

This market is a Tinkerbell Griftopia. It is bonkers that some NFTs are more valuable than each other just being on the perceived value of that shared source.

Without loss of generality the essence of the NFT modality of thinking is that I can buy an authentic Ape from an authentic GorillaExchange on an authentic blockchain called BananaChain. Now if you happen to buy the same Ape from the MonkeyBazaar on MangoChain then the conflict in our definitions of value stems from which Tinkerbell halo you see more strongly, and a priori there’s no logical reason to choose either market or chain as they all simply exist as illusions in the minds of their respective believers.

This highlights the inherent valuelessness. People close to the chips and bits see NFTs for nothing more than this shared delusion. They are less than a JPEG. They are ledger in someone else’s database with a link to a JPEG. 

web3

Problem 1: It’s a Rhetorical Trick

There are generally valid problems with the web2 world. The Zuckerbergs of the world control the levers of power, and choose to fill our feeds with offensively personalized ads. However, there is also no value in the solutions web3 proposes.

Web3 is that technical manifestation of this empty grasping for a messianic solution that’s going to solve all our problems. It’s entirely rational to want to build a more decentralized technology stack and to aspire to a more egalitarian internet, a more equitable society, and a better world. However web3 is not the golden path that leads us to that world, it’s the same old crypto bullshit just packaged up in a sugar pill to make it easier to digest.

web3 is a rebrand of crypto ideals with no additional value. The decentralized stack is woo woo. It does not drive a more egalitarian internet or equitable society. It gives power to the deep pocketed criminals and investors unloading their bags unto retail investors in a global ponzi scheme.

Problem 2: The Business Models are Pyramid Schemes

To extend further, being a rhetorical trick is dangerous. Because the underbelly of the business is a pyramid scheme. It looks, swims, and quacks like one.

The duck test is all that matters. If a business model looks like a pyramid scheme, swims like a pyramid scheme, and quacks like a pyramid scheme, then it probably is a pyramid scheme. Sprinkling digital signature schemes and techno-utopianism on top doesn’t change the economics. Intention in business models doesn’t matter; the road to hell is paved with good intentions. All that matters is outcomes.

Even if the intentions of web3 are noble – artist empowerment, equality, and the like – the outcomes of the model look like people trained on the price pumping their bags to increase their wealth. 

Of course, several groups of people will be well intentioned about promoting the pyramid scheme. It is the same with multi level marketing. But that does not hide what it is.

In fairness, not everyone involved in cryptocurrency is a scammer, just like not everyone involved in multi-level marketing is a scammer. Nevertheless, multi-level marketing schemes are a scam; there is a fundamental economic problem at the heart of the business model. However many people are simply desperate, swept up in the craze, trend following or simply ignorant of the underlying economic structure. 

The endorsement of web3 by VCs is only further proof of the problem with web3. It is an ecosystem that does not exist yet, being pumped by people whose job it is to return more money to their limited partners. 

Problem 3: There is No Technical Reason to go web3

web3 is the same meaningless blockchain technology repackaged, that no serious software developer thinks is important. The three technical narratives that drive web3 are compute, bandwidth, and storage. None of these problems really exist in a decentralized context. Each one of these is dubious. 

For compute, blockchain networks do not actually scale. The only ones that do, like Solana, are centralized. The Ethereum virtual machine has the compute power of an Atari 2600 from the 1970s, except it is much more expensive to run. 

That anyone could consider this to be the computational backbone to the new global internet is beyond laughable. We’ve gone from the world of abundance in cloud computing where the cost of compute time per person was nearly at post-scarcity levels, to the reverse of trying to enforce artificial scarcity on the most abundant resource humanity has ever created. This is regression, not progress.

In the world of bandwidth and storage, the problems are just as significant. In bandwidth, a decentralized solution has no bandwidth to deal with grandma’s password reset, delete child pornography, or respond to DMCA requests. In storage, having no data deletion in privacy makes it fairly hard to store personal photos or determine those access controls.

Of course, Stephen makes a litany more arguments against blockchain, NFTs, and web3 that I have not mentioned here. Some are more easily dismantled than others. Whatever the case, these are the 8 I find most persuasive. But, ultimately, I fall on the other side. Why? Let’s take each one by one.

Blockchain: The Importance of Decentralization

The arrow that most easily pierces Stephen’s code-thick armor is that decentralization is important. Then everything else makes sense. The energy and criminal tradeoffs, if they exist, are simply necessary casualties in the pursuit of decentralization. 

So, why might decentralization be important? Let’s go back to the original texts starting the crypto movement, the Bitcoin and Ethereum whitepapers. Satoshi and Vitalik very clearly outline why they think it is. 

Starting with Bitcoin, Satoshi never actually uses the term decentralization. Instead, he explains why centralized authorities rise in the first place. The reason they are needed in current regimes, theoretically, is the double spending problem. Without a centralized authority, you cannot confirm a payee has not double spent the currency. 

We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of Ownership. The problem of course is the payee can’t verify that one of the owners did not double-spend the coin. A common solution is to introduce a trusted central authority, or mint, that checks every transaction for double spending. 

That seems like a relatively innocuous solution when described that way. What’s so bad about that? Satoshi, as always, has a way to be brief with his words.

The problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank.

The companies and governments running the centralized systems become indispensable. This is a powerful, but easily underappreciated, statement. Being indispensable is how companies and governments live long after they should, exerting control over society they have not earned. 

This was as clear as day in the 2008 financial crisis, when many financial institutions were deemed “too big to fail,” and taxpayers had to save the very bankers who had lined their Hampton’s mansions with those taxpayer’s hard-earned dollars. It was an example of the tyranny of the rich exerting itself in America. 

Image: Karo Zagorus

More than anything else, that violation of everyone’s trust – that the banks would manage our money well – was the impetus for creating Bitcoin. It became clear that relying on the centralized rails in even the world’s #1 economy was fraught with problems.

The inherent instability of the system has only been highlighted further by the actions of the world since. The Greek government defaulted on its debt, and European citizens had to save it. The Venezuelan and Zimbabwean government printed so much money their currencies collapsed. Governments from China to Russia confiscated accounts of individuals from billionaires to drug addicts without trial. 

The rich and poor across the world lost trust. Even the US government printed more money in one month of 2020 than it had in two centuries. 

As a result, decentralization from the point of view of not trusting centralized governments and banks does, in fact, seem quite important. Stephen Diehl, living in the UK, lives in a colonial imperialist bubble. He does not fear the UK government or bank seizing his assets for a spicy blog article. Iranians, Chinese, and Russians do not have that same luxury. And that is why decentralization and solving the trust problem is so important. It is a matter of life and death.

And that is why the energy and criminal activity tradeoffs are okay in the short term. Both are being attempted to be solved in the long term.

On the energy front, Bitcoin is working on the lightning network and becoming more energy efficient eventually. Jack Dorsey is determined to spend Square’s market cap to help it do that. Similarly, Ethereum is working towards ethv2 and a future that is more energy efficient. If one of those blockchains does not win, it appears a more energy efficient one like Cardano might. 

On the criminal activity and ransomware points, the traceability of blockchain trades is actually proving quite valuable. Law enforcement is using it the same way it has wire orders or physical delivery of notes – to eventually track down to the source. Several sting operations have caught big dark web transactors already, and that curve will accelerate over time. On June 7th, the FBI and DOJ announced they had recovered $2.3 million of the Colonial Pipeline’s ransom by tracking multiple Bitcoin transfers to a specific address. 

Over time, companies might be able to actually use blockchain technology to become immune to ransomware. Sometimes the problem can also be the solution, designed another way.

The final nail in the coffin of “decentralization isn’t important” is the Ethereum ecosystem. As Vitalik wrote in the whitepaper:

The intent of Ethereum is to create an alternative protocol for building decentralized applications, providing a different set of tradeoffs that we believe will be very useful for a large class of decentralized applications, with particular emphasis on situations where rapid development time, security for small and rarely used applications, and the ability of different applications to very efficiently interact, are important. Ethereum does this by building what is essentially the ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transition functions.

Ethereum extends the capabilities of decentralized Bitcoin to a large class of decentralized applications. These applications have proven user benefits in a trustless fashion, like lending with Aave, making payments with Terra, and exchanging assets with Uniswap. Investors have judged these applications worthy enough to lock in nearly $165 billion dollars in the DeFi ecosystem today. 

This makes the tradeoffs of the environment and criminal activity in the short-term even more digestible. There are tangible financial products operating in a trustless fashion, giving us freedom from the tyranny of “too big to fail” companies and governments. Fiat currency is a tool of control, and blockchain is the answer.

NFTs: Why Artists’ Power Matter

Collective shared faith is at the basis of hundreds of markets. Stephen’s favorite comparison for NFTs is the star naming record – you paid for an entry in someone else’s database. Is an NFT any different?

The differences between the star naming market and digital art market enabled by NFTs are fairly important:

  1. The record is verifiable, public, and decentralized
  2. The work’s ownership can be traced, all the way back to the creator
  3. Enable hundreds of thousands of creators to live the creative lifestyle they prefer

Artists’ power, the third point, is one in particular Stephen seems to have completely forgotten about. For years, the best way to monetize your talents as a creator was to work in gaming. With NFTs, a world of digital art and collectibles has opened up that never before existed. This has created a whole new economy. 

Yes, this economy is based on a collective, shared belief. But what system isn’t? If you were to summarize Yuval Harari’s landmark work Sapiens in a sentence it would be, “Widely shared, collective intersubjective belief systems have carried humanity through history.” 

From language and government to, of course, currency, everything relies on a collective, shared belief. There is nothing inherently wrong with it. Stephen’s complaints about belief are like complaining about the real-world art market. Many people do not choose to participate. But that does not make the market worthless.  

More than Artists Too

​​NFTs are a new digital primitive. They are similar in flexibility to websites and other past digital primitives.

As a result, we have just seen the beginning. Collectibles and art started it, and this year we have seen the amazing growth of gaming as well. Brands, culture, the metaverse, off-chain assets, and off-chain governance are next. 

Image: 6529

The problem with Stephen’s arguments against NFT is he is thinking too presently. Yes, what he got to see so far was primarily paying for a database record, but in the future it could be much more. 

In fact, NFTs look set to disrupt Hollywood, SaaS, and gaming. 

https://twitter.com/gregisenberg/status/1454948430195855362

But what about money laundering?

Of course, Stephen’s chief complaint is that NFTs enable money laundering. It didn’t help that an analysis in the journal Nature found the top 10% of traders account for 85% of transactions & trade at least once 97% of all assets. 

But double click for a second on that – that means probably only up to 3% of assets are actually money laundered, since whales are trading most assets. Even if an initial entry point into the art was money laundering, the collective shared belief that drives collectible and art markets takes off afterwards. 

Furthermore, while money laundering is a great problem to point out with the current system, that does not mean the underlying technology is doomed. As Stephen points out in his example of the South Korean exchange’s KYC/AML laws, NFT platforms will eventually implement more of these. He is right. They need to. 

Until then, individualized chains, like the Dapper Lab’s flow chain behind NBA Top Shot, can implement their own procedures to help reduce money laundering. Eventually, like the stock market, the system will be able to regulate away the scammers. 

DAOs and web3: How Ownership Will Change the World

In Stephen’s world, web3 is repackaged crypto-babble. So let’s start by precisely defining, what is web3? Let’s turn to the two thought leaders of the space – Chris Dixon and Packy McCormick.

web3 is about a sharedly owned internet, orchestrated by tokens. So, yes, crypto is a part of this – but not the parts around energy usage, money laundering, or pyramid schemes. Just the part around using tokens to orchestrate shared ownership by the builders and users. This is hardly a rhetorical trick.

In today’s world, users are left out of owning the value they create. Users become the product. Mark Zuckerberg becomes worth $115 billion dollars and can invest $10 billion a year to build the next big thing. But the creators who powered that growth, for the most part, are left out of the proceed. Social Media became sports, where only the too 0.00001% can monetize. web3 wants to reimagine that ownership. 

There will be kinks along the way. Stephen is worried about DMCA requests, unsafe content, and the like. These are important concerns – but they are problems for builders to solve. Most of the walls builders have hit so far, they have managed to smash down. 

Of course, the internet had a lot of questions as well. Similar one’s, in fact. Each new paradigm does. From NFTs to art, DeFI, and now DAOs, web3 is a new wave of computing and blockchain is the technology, like mobile or the internet, that will enable the next wave of innovation.

Things like storage, data, and bandwidth may be bad now, but they are bound to improve over time. The Ethereum virtual machine has a very clear plan to upgrade. It is just taking slightly longer than planned. 

Like with blockchain and NFTs, eventually the system will be able to wring out the scammers and ponzi schemers. Those do get attracted to the market. It is a valid criticism. But that is not the core of innovation driving the market. 

Stephen Diehl’s Motivations

One of the most interesting things in the Stephen Diehl story is: what is his day job?

He seems to work as the CTO of a company that would be threatened by blockchain technology. But that is nowhere in his Twitter bio. He is mainly presenting himself as a humble programmer.

Interestingly, his non-tech blog has 19 articles. All 19 are criticism of crypto, web3, and blockchain. 18 of them have been written in the last ten months.

It seems he realized he could write big posts to help decrease the probability of his company being disrupted.

The combination of the relative floweriness of his arguments and reason to benefit from blockchain’s failure makes his arguments read more like confirmation bias than a search for truth. Stephen has a way to articulate positions that a lot of people agree with – Crypto seems too good to be true and likely not worth investing – in a colorful and fun-to-read way. 

“Chernobyl sitting at the heart of Silicon Valley.” It is the type of writing that sticks with you. But it is unclear why he is spending so much time deconstructing crypto. What does he have to gain? Internet notoriety is one thing – but what does he want to parlay it into?

Ultimately, this section is not that important. That is why I put it last. Even if he had the worst of intentions, if his arguments were right, we should evaluate them as such. So, you should disagree with Stephen Diehl because of the merits of the arguments. But, if you feel bad about disagreeing with a sheepish programmer, remember that he is a CTO with a potential motivation. 

So, Who is Right?

Stephen Diehl’s arguments could be wrong, and yet his conclusions could be right. Blockchain may turn out to be supplanted quickly by other technology. NFTs and web3 could fall by the wayside in the ensuing reshuffling of the decks. 

But the colorful core arguments he makes do not stand up to scrutiny, at least mine. 

Of course, mine was a very PM-style read of the arguments. Stephen excels in taking an engineering-style read. Our contrasts can help highlight the different reads of the position of blockchain. Stephen sees it now, as inferior to the centralized alternatives. I see the problems it solves and what it can be.

The crypto-maximialists have a phrase that I am now beginning to love more and more: we all gonna make it. They tend to short form it on Twitter to wagmi. While I am not convinced Crypto is worth everything it is being valued at today, it is clear to me it is worth much more than Stephen Diehl has valued it at.

wagmi

By Aakash Gupta

15 years in PM | From PM to VP of Product | Ex-Google, Fortnite, Affirm, Apollo