Bonus: The Crypto Story by Matt Levine - Part 4

Matt's gone deep into the blockchain to break down its origins, it's possible, futures, and the current state of a technology that's showing up everywhere in industries ranging from finance to shipping too, of course video games. And we're going to be bringing his exploration to you in audio form thanks to the talents of Bloomberg editor and professional voice actor Mark Ledoff. You'll get weekly chapters of the special Crypto

issue of Bloomberg Business Week. Welcome to the fourth chapter of the special audio edition of the Bloomberg Business Week Crypto issue, written by Matt Levine and narrated by Mark Leedoff. You can find previous episodes right here in the Bloomberg Crypto podcast Feed five an I c O. Here's another important difference between Ethereum and bitcoin. Bitcoin never raised money, Ethereum did. You can think of Bitcoin as more or less the open source passion product of one anonymous guy

who really likes cryptography. The cost of building the basic system of bitcoin was Satoshi's time, which he donated. Then he mined the first bitcoins and got super rich, probably, but that came later. Ethereum was a bit more complicated to build. Vitalic bou Terran is the intellectual leader of Ethereum, but there were a bunch of co founders, there were legal entities, there were programmers. They spent a lot of time on it. They had to pay for food deliveries.

You could imagine Vitalic saying, okay, we are a company. We're Ethereum Inc. We're going to start the ethereum blockchain and make money from it, and we'll sell shares in ethereum Ink to raise the money to build the blockchain. Sell ethereum ink for cash, get the cash, build the blockchain, and I don't know, collect royalties. Ethereum ink collects point zero one percent of every Ethereum transaction forever. Ethereum was a well known and much hyped project even before it launched,

and they could easily have found investors. They didn't do that for philosophical and economic reasons. They wanted a decentralized blockchain ecosystem, and having it owned by a corporation would defeat the purpose. There is an Ethereum Foundation which works on Ethereum development and has a certain amount of moral authority, but it has no control over the blockchain itself, so

they didn't sell shares. They sold tokens. In July, they sold ether at the price of one thousand to two thousand ether per BTC, a mechanism intended to fund the Ethereum organization and pay for development. In all, they sold about sixty million Ether for about eighteen point three million dollars, all before the technology itself went live. Ethereum's Genesis block was mined in July. Today, there is a total of

about one twenty two million ether outstanding. Some of that, like bitcoin, comes from mining or now validating, but almost half of it was purchased before Ethereum was launched by people who wanted to bet on its success. Camilla Russo, in her book about Ethereum, wrote, a whole new financing model had been tested, one where a ragtag group of feuding hackers with no business plan and no live product, let alone users or revenue, could raise millions of dollars

from thousands of people from all over the world. Before anyone who wanted to buy stock in big tech firms like Facebook or Google would need a US bank account. Things got even more complicated for those who wanted to invest in startups that hadn't gone to the public markets to raise funds. Now anyone could be an investor in one of the most cutting edge technology companies out there. All they needed was an Internet connection and at least

point zero one bitcoin. It worked out well for those investors. That sixty million ether is worth billions of dollars today, But as a whole new financing model it's a mixed bag. Many people, particularly securities regulators, think it's good that startups usually can't raise money from the general public without at least a business a plan, and there's a sense in which this sale, the ether pre mine or initial coin offering i c O, was the original sin of crypto

as a financing tool. A lot of other crypto teams copied Ethereum's approach, riding up vague plans to build some project and then raising money by pre selling tokens that would be useful if the project ever happened. The analogy I've tweeted is that I c o s are like if the Wright brothers sold air miles to finance inventing the airplane. Not everyone got around to inventing the airplane. There was a seventeen I c O boom in which a lot of projects raised a lot of money by

selling tokens that never turned out to be useful. When rag tag groups of hackers with no business plan can raise millions of dollars from anyone with an Internet connection, they all will. The odds that any particular one of those non business plans will ever succeed are low. The odds that any particular one will be a scam are high. Six other chains one layers tried lemmas. The basic ideas of Ethereum, a distributed computer, smart contracts, depps, new tokens,

etcetera caught on broadly within crypto. Ether is now the second biggest cryptocurrency, well behind Bitcoin, well ahead of everything else, but it has a lot of competition. If you're building smart contracts, there are a lot of other blockchains where you can run them, including B and B chain, so Lana, Avalanche, Cardano, Tesos, Polka Dot, algorand tron and Tara two point oh, Tara

one point oh blew itself up oops. These platforms, like Bitcoin and Ethereum are called layer one block chains, meaning they're entirely separate from one another. Each layer one blockchain maintains its own ledger. They compete with one another much like other tech platforms do, arguing that they offer better performance, a better environment for developers, a different programming style, better tools. A famous problem in crypto is the blockchain tri lemma.

Blockchains can be scalable, they can process a lot of transactions quickly, decentralized, they don't depend on a few trusted parties, and secure. A minority of computers on the network can't successfully attack it, But, says the tri lemma, you can only choose two of those three. Bitcoin and Ethereum chose decentralization and security, which makes them fairly slow computers. Other blockchains are faster, but more centralized. If your consensus mechanism

is we trust six computers to verify all transactions. That's going to be faster than Bitcoin's proof of work algorithm. But if someone hacks those six computers, look out. People on the decentralized and secure blockchains spend a lot of time thinking about scaling. Often this involves so called layer two systems, which are built on top of layer one technology,

such as Bitcoin and Ethereum. For instance, Bitcoin has the Lightning Network, a layer two payment system that basically lets people on the Bitcoin blockchain set up payments to each other without running all of them through the blockchain. This makes the payments faster and cheaper, and they periodically settle

on the blockchain for security. Much of the thought in Ethereum these days is about how to scale it so that it can execute large numbers of transactions quickly and cheaply, a prerequisite for building a universal world computer, or frankly, even a payment system that can compete with credit cards.

Much of the action here is about layer two systems that specialize in doing some sorts of transactions off the main Ethereum blockchain, where space is somewhat scarce and expensive, and then saving the results to that blockchain, where transactions are secure and immutable. A lot of the interesting cryptography in crypto is found here. People love talking about zero knowledge proofs in this context because in some broad sense

there are problems of data compression. You want to be able to do a lot of transactions on a layer two and then write down those transactions in an abridged way on the Ethereum blockchain, while still being confident that the secure and immutable Ethereum blockchain keeps track of all of them two bridges wrapping. Some people in crypto are faithful to a single blockchain. They are Bitcoin maximalists or

Ethereum or Avalanche or so Lana loyalists. Many people are generalist dabblers, though they like buying lots of tokens on lots of blockchains because they see merit in many blockchain platforms, or because they like it when lines go up. One result of this is that sometimes you will want to own the token of one blockchain on another blockchain. This comes up a lot in decentralized finance, or defy the system of crypto exchanges and financial products that live on blockchains.

If you're writing smart contracts to trade tokens on the blockchain, those smart contracts. Computer programs will have to run on one particular blockchain, but you might not want to limit yourself to the tokens of that blockchain. You are, after all, building an exchange. You might want to write programs on the Ethereum blockchain that trade bitcoin, or write programs on Slana that trade ether. Say you want to write a smart contract on Solana to swap some ether for soul,

the Salana token. How do you do that? You don't. Your ether lives on the Ethereum blockchain. You have Ether is a fact about the ledger on that blockchain. The Salana blockchain has no record of that, nor does Ethereum have any record of Salana tokens. It's all incompatible, separate systems. It's separate banks and property registers and d m vs all over again. That's an annoying answer and can't really be right. So there are workarounds. The principal one is

called a bridge. A bridge is generally a smart contract on one blockchain, a smart contract on another blockchain, and some sort of trusted computer program that sits between them and passes messages. If you want to swap some ether for soul, you find a bridge. You send your ether to the bridge's smart contract and Ethereum, which locks it up. As far as the Ethereum blockchain is concerned, your ether

belongs to the bridge. Now. The bridges off chain computer program sees this and alerts its Salana smart contract, which gives you the equivalent of the ether on the Salana blockchain. The equivalent of the ether could, I suppose, be some amount of soul at whatever the current ether soul exchange rate is. The bridge could also be in exchange, but the normal approach is to take ether on Ethereum and give you back wrapped ether sometimes w E on Salana.

Wrapped ether is a token issued by the bridge's smart contract on the Salona blockchain, representing a claim on the bridges ether on the Ethereum blockchain. It is, as it were, ether on the Salona network. Bridges are notorious sites of risk in crypto. A big bridge contract will have a lot of crypto locked up in it, will need to regularly send and receive crypto from strangers, and will have

to interoperate between different environments. If you can find a bug in a bridge, you can make a lot of money. People do that pretty regularly. An actual big Salona Ethereum Bridge is called wormhole. It was hacked this year for about three and twenty million dollars of w E see a slow database. Here's a slightly different generalization of bitcoin. One. Look, you've built a distributed database. Two. This database has some

fascinating properties. It's distributed, decentralized, secure, trust less, and permissionless. Three. Your database happens to track the ownership of electronic coins. Four What if we built a database like that to track the ownership of other things? One Map and territory. Modern life consists in large part of entries in databases, I said, and then I listed a few, starting with money. There's a reason I started with money, and why Satoshi did too. A dollar is an entry on the list

of dollars. If you have dollars, what you have is an entry in your banks database saying how many dollars you have? This entry is the dollars. The bank doesn't have sacks of gold or a big box of paper currency that the database refers to. It just has the database. This is even more true for bitcoin. There are no paper bitcoins at all. If the bitcoin ledger says you have a bitcoin, then you have a bitcoin. That's all a bitcoin is. Almost nothing else works quite that way, though.

If you own a house, in some legal sense, the main thing that you own is an entry in a property register, but in some much more important sense, the main thing that you own is the house. If your

house burned down, you could not sleep in your deed. Conversely, if someone snuck into the property registry at night and slipped in a new deed saying that they owned your house, and then they showed up at your house to kick you out, you might reasonably raise objections like, but all my stuff is here, or but I have the keys to the locks, or but all my neighbors know I live here, or but this is the address on my driver's license, and you might convince everyone, the sheriff, the courts,

your mortgage lender, that in fact, you own the house and the deed is wrong. The property registry is not definitive for house ownership the way the bitcoin ledger is definitive for bitcoin ownership. But the idea of putting important databases of real world stuff on the blockchain. For some reason, the definite art coal is always used with this stuff, and one shouldn't worry too much about which blockchain has

a lot of appeal. People are always talking about moving real estate registries, or cargo manifests or carbon emissions onto the blockchain. This is appealing because as a database, the blockchain has some nice properties. The important public blockchains, such as Bitcoin and Ethereum, are secure, open, and permissionless. Anyone can prove they own a Bitcoin and that ownership can't be reversed arbitrarily, and anyone can build on these systems.

If you want to build an exchange for trading ethereum, you can just do it. The blockchain is public and the standards for building new Ethereum programs are open. Building a new system for buying houses is overwhelmingly difficult. You need to get lots of banks and county property registries and appraisers on board. But if somehow the houses were moved to the blockchain, that would permanently allow for permissionless innovation.

Everyone could build programs and exchanges and derivatives and interfaces for house buying, and the best ones could win. The problem is that houses can't live on the blockchain. They live in the real world. They can burn down and stuff Connecting the electronic artifact on the blockchain the house token to its real world referent. The house is philosophically and practically tricky. How to make this connection is largely an unsolved problem, and quite possibly an unsolvable one, but

also an important one. Crypto's financial system is well developed and has some advantages in openness and permissionless innovation over the traditional financial system. If you could ingest the physical world into that financial system, you'd have something cool two enterprise blockchain. A less ambitious version of this is look. Banks are already keeping lots of databases to track lots of things. Dollars in banking counts, but also loans, tradeable securities,

derivative contracts, trade financing, all sorts of stuff. Some of those databases are slow, some are written in Kobal, and some require an exchange of facts is to settle transactions. It would be nice if those databases were faster, if they could talk to each other efficiently. It would be nice if JP Morgan Chases database could talk to Goldman Sachs's database, if there weren't a manual and contentious process

of reconciling trades between banks. In if you were a loan trader at a bank and you thought, uh, our systems for trading loans are so slow and cludgy, and you walked into the c e o s office and said, we should spend tens of millions of dollars hiring top notch programmers to build a new loan trading system, and we should start a consortium with our competitors and clients where we all agree to use the same loan trading system, because that will make my life easier and eliminate a

lot of back office costs. The CEO would probably say things like who are you and get out of my office and you're fired. But in twenty seventeen, if you were a lone trader at a bank, or a blockchain consultant, or frankly, a person off the street, and you walked into the office of a bank CEO and shouted the word block chain, the CEO would hand you a sack of money. Lots and lots and lots of people took

advantage of this. Blockchain was for a while the sexiest word in finance, and banks were tripping over themselves to announce blockchain initiatives. And not just banks. This stuff had a particular vogue at banks, but e g. Shipping companies also got in on it. Maersk has a blockchain platform, trade Lens, built with IBM that it advertises for shipping

and supply chain management. The Australian Securities Exchange announced that it will replace a trading system with the blockchain, though it keeps delaying that the idea here was sometimes vague to be honest, but broadly speaking, we're talking about permission to block chains or private blockchains. Big public blockchains are

generally not something a banker is going to like. Having all transactions to be public is good for security, everyone can verify that everything is correct, but also bad if your transactions are meant to be secret. It's also just sort of ikey for regulation who make sure that your transaction records are correct. A bank regulator will ask and the bank will answer, well, we don't really know, but we think it's some mining pools in Russia, and the

regulators will get nervous. But many of the basic ideas of a blockchain, a ledger of every transaction that's demonstrably shared by every computer on the network can be implemented privately. If you get together with eleven of your friends and agree that the twelve of you will do transactions with one another, keep a ledger, verify all the transactions, and use cryptographic hash functions to make sure the ledger isn't changed.

Then you and just do that. If you all trust each other and don't let anyone else join the network, or if you let only people you trust join the network, then you don't have to worry about malicious miners taking over your network. It's just you and your friends. This has advantages for security, particularly for explaining security to bank regulators. You also don't have to make the blockchain public if

you don't want to, and there are efficiency advantages. It's only twelve of you confirming transactions, so you can do it faster. Presumably you're doing this for a reason. You want the ability to do these transactions with each other, so you don't have to get paid for confirming transactions. You don't need mining or staking. Those are ways for public blockchains to reach a consensus among people who have

to prove they have a commitment to the system. The twelve of you all know one another and build the system, so your consensus is good enough without any further proof, you can just vote on it. We'll be right back with more from Bloomberg Business Week Special Crypto issue written by Matt Levine a narrated by Mark Leadoff. D Web three. An important fact about bitcoin is that it's both a

technological method of sending money and the money itself. That is, Bitcoin is a computer system for sending bitcoins, and a bitcoin is the thing that the bitcoin system sends. Some of what goes on in crypto is about the technology. People use the ideas of blockchains and smart contracts and so forth to build software. Some of what goes on in crypto is about the money. People call up their brokers to place bets on the prices of crypto tokens

going up. But a lot of what goes on in crypto is about both crypto technology runs on crypto tokens and crypto tokens get their value from crypto technology. Brawly speaking, the name for this is web three. The idea is that the original web was the early development of the Internet, when people built decentralized, open, community controlled protocols for the Internet. Web two point oh or Web two was when big

tech companies more or less took over the Internet. Now your experience of the Internet is largely mediated through Facebook and Google, and Apple and Amazon, and they make tons of money from controlling the Internet. No open decentralized project is going to compete with them. But Web three will be when people build decentralized, open, community controlled protocols for the Internet again and also make lots of money because the decentralized protocols won't be owned by big tech companies.

But they won't be free and owned by no one either. They'll be owned by their users. Just kidding. They'll be owned by venture capitalists who buy tokens in these projects early on, and who are the biggest boosters of Web three, but all so by their users. One tokens and token omics. Think about what you get when you buy a bitcoin. One thing you get is a unit of digital cash. You can send the bitcoin to someone else to buy

a sandwich or whatever. If this digital cash thing takes off, then lots of people will accept bitcoin for sandwiches, and this currency that you bought will be very useful. But another thing you get is a share in the bitcoin project, not a share of actual stock, but still a chance

to profit from the success of bitcoin. If this digital cash thing takes off, then lots of people will want bitcoin to use to buy sandwiches, and there will be a lot of demand for bitcoin, but only twenty one million bitcoin will ever exist, so each bitcoin will be more valuable as more people decide to use bitcoin as their way to transfer digital cash. That logic never quite made sense. A convenient currency for digital cash transfer has a stable value, and the rising value of bitcoin makes

it less useful as a currency. If your bitcoin keep going up in value, you should not spend them on sandwiches. Bitcoin as an appreciating asset will be a bad currency. There's a famous story of the guy who spent ten thousand bitcoin in May to buy two large pizzas as proof of the concept that you could use bitcoin to buy pizza. Today, those ten thousand bitcoin would be worth about two hundred million dollars. Still, it worked well enough.

Bitcoin is used enough for digital transfers of value that it became valuable and early adopters got rich. This is a key financial innovation of crypto. Crypto built an efficient system to make the customers of a business also its shareholders. Lots of crypto projects have this basic structure. File Coin is a decentralized system for storing files where you can pay to store files or get paid for storing files for someone else. You pay or get paid in file coin.

Helium is a decentralized system for wireless hotspots where you can get paid for running a hot spot or pay for access. You pay or get paid in Helium's tokens, and there are play to earn video games such as XI Infinity, where you pay for tokens to play the game and get rewarded in the game's tokens. Participating, storing files, providing WiFi, playing the game makes you an investor as well as a user. This is potentially powerful because crypto

is in the network effects business. Many crypto projects are useful mainly if lots of other people use them. Bitcoin is a useful payment system if lots of people have Bitcoin and accept it for payments. Ethereum is a useful computing system if lots of people build apps on ethereum. If you build a decentralized financial exchange or appeer to peer, marketplace, or whatever else on ethereum, it's useful if lots of people use it. It's hard to build an network effects

business from scratch. Early users of a network effects business won't get much out of it because there's no network yet, you might as well just wait until there are more users. The economics of crypto tokens reverse that early users of a crypto network get tokens cheap, and if the network takes off later, then their tokens will be worth a lot. Now there's an advantage to being early. Token effects people

sometimes call this. Many claims made about Web three are just about taking this basic idea at face value, assuming that it's good, and applying it in vague, ambitious ways. One issue for web three is that for most consumers, the process of even signing up is going to be baffling. You generally don't just take out your credit card and

start playing a game. You might need to buy ether on an exchange, then use a bridge to connect to the game's own special wallet, then trade your ether for another token you need to buy characters, or fight battles or whatever. Another problem is the urge to tokenize businesses with no obvious network effects. In July, Esquire published an article about how the crypto revolution wants to reimagine books. What if you could own a stake in Harry Potter?

What if the book series functioned like a publicly traded company where individuals could buy stock in it, and as the franchise grows, those stocks become more valuable. If this were the case, someone who purchased just three percent of Harry Potter back when there was only one book would be a billionaire. Now just imagine how that would affect the reading experience. Suddenly a trip to Barnes and Noble

becomes an investment opportunity. Early readers could spot the next big thing and make a hundred dollar contribution that becomes ten thousand dollars or even a hundred thousand dollars if the book's popularity grows. If readers could own a percentage of the franchise, they might then be incentivized to help that book succeed. They could start a TikTok account to promote the book via book talk, or use their talents

as filmmakers to adapt it to the screen. All of this stands to increase the value of their original investment. You'd feel like a chump reading poetry, wouldn't you. The bad way to put this is that every Web three project is simultaneously a ponzi. Here, I'm using the word ponzi in the broad sense in which It's often used by people in markets investments, where most current investors are just betting on the price going up because new buyers

pile in. The underlying businesses or projects may be legitimate and real, but the investment model is about new buyers paying off old ones. Why would you buy some tokens to join a Web three Facebook competitor. Well, if you like the product, go right ahead. But probably it's at least in part because you want to get rich off the tokens by selling them to someone else. Why do you think someone else will buy the tokens? Is it

because you think they like the product? Or is it because you think they are planning to get rich by selling to a bigger sucker. Where does that end? Draw? Whole leg A writer on business and technology wrote a blog post about Web three that I think about all the time. The title is in praise of pond Zis. It goes like this, this is essentially a pyramid scheme, a ponzi, but it makes sense. It will be the dominant marketing method of the next decade. And beyond nonsense.

You might say, at the end of the day, you need to sell something. Narratives aren't enough, But aren't they. Another difference between the old world and ours is that we no longer sell things. In the past, the content was used to sell stuff. Executives from manufacturing companies got their TV channel buddies to produce soap operas in order to sell more soap. But today content is not used to sell anything beyond itself. Everything is content, including your

actions and behaviors. Why give them away for free? Two dows? I should mention some other Web three ish concepts here. One is a d a oh, usually pronounced dow, which stands for decentralized autonomous organization. Now's aren't decentralized autonomous organizations. In the early days, people sometimes thought that's what they were. This company runs automatically through smart contracts with no human intervention, they would say, it's never been seen before in human history.

But no, the thing that runs automatically through smart contracts with no human intervention is a smart contract. A DOW is a way for people to get together to vote to control a pot of money or a protocol on the blockchain. In other words, a DOW is a company like just a regular company. It has shareholders who put in money and control it. Actually, they put in money and get back tokens that give them rights to govern

the DOW and the shareholders can vote. Dows are unlike regular companies and that the shareholders token holders ten to vote on more stuff. Often there's a chat room on an app called Discord, and people can propose ideas for the DOW, and there are procedures for holding a vote. Whereas US public companies let shareholders vote in only very constrained and symbolic ways, dows tend to let token holders vote on all sorts of stuff and often give them

a fair amount of real control of the company. In this, dows look more like partnerships than public corporations. That's bad, by the way. In US law, the partners of a general partnership have unlimited liability for the debts of the partnership. And if you set up a business without filing any incorporation paperwork, then oops, it's a general partnership. In May, a lawsuit was filed against the members of a DOO

that ran a system for trading and lending crypto. The system was hacked, and the lawsuit argues that the DOW members, as general partners, are on the hook for the damage. There are efforts to set up dows using normal legal techniques and getting limited liability. But it's early. Crypto is painfully learning lessons. Incorporate your business to avoid huge personal

legal trouble that traditional finance learned centuries ago. Some dows are the governance mechanisms for big decentralized finance or defy applications like crypto exchanges, and are responsible for setting policies and parameters for how they work. Other doos are just weird larks. Constitution Now made some headlines for raising a bunch of money from crypto investors to buy a copy

of the U S Constitution. They failed to buy it, did some dow voting stuff on what to do next, and ultimately returned most of the money minus gas fees, and shut down. It was a quick way for people to pull their money online to have fun together. It was a discord chat with a pool of money. Three identity reputation credential tolls in the Bitcoin white paper, so Toshiy Knackamoto makes a privacy recommendation a new key pair should be used for each transaction to keep them from

being linked to a common owner. It's free and easy to generate new bitcoin addresses, so every time you accept a payment in Bitcoin, you should do it in a different address. The Bitcoin blockchain is public, sure, so everyone can see every transaction, but the goal is for all of your Bitcoin transactions to be separate, unlinkable, so no one can ever get a full picture of what you're up to on the blockchain. Meanwhile, in Ethereum, there's the Ethereum Name Service or e n S, which we talked

about earlier. This lets you register a domain name like Matthew Levine dot et h and use it across various Ethereum functions. Use your e n S name to store all of your addresses and receive any cryptocurrency token or n f T, says its homepage. Venture capitalists sometimes use their ean S domain as their Twitter to play name. These are very different philosophies about what you're doing in the crypto world. Bitcoin is philosophically digital cash, anonymous and transactional.

Ethereum is philosophically something like an open source programming community, where reputation is what's valued, and to accumulate reputation you need a consistent identity. You do all your Ethereum stuff under your real name or at least your vanity plate. Many of the grand claims that people make about Web three are about reputation and identity. The idea is that you can keep your identity on the blockchain in some immutable, decentralized, transparent,

provable form, and then do good stuff with it. You have some crypto wallet that contains not just tokens that you bought, but also tokens you received for doing things. When you graduate from college, your college sends you a bachelor's degree token or a series of token specifying the courses you took and your grades and maybe what you learn earned. When you pass your driving test, the d

m V sends you a driver's license token. When you go to a professional conference, the conference organization send you unattended a conference token. When you get promoted at your job, your employer sends you a senior blockchain developer token. When you help out on an open source project, the leaders of the project sends you a thanks for helping with our open source project token. When you post a lot on Reddit, other Reddit users send you good post on

Reddit tokens. These exist, and they're called community points. When you help your friends move, your friend sends you a thanks for helping me move token. All of these tokens are verifiably signed by their issuers, your college, the d m V, Reddit, your friend, and the issuers have varying degrees of credibility and importance. These tokens will also, in the general case, be non transferable. You can't sell your

college degree to someone else. And then if you're looking for a job, you'll show perspective employer your degree tokens and conference tokens and Reddit tokens and whatever else seems relevant. And perhaps there will be bad tokens and I got fired token and I ran a crypto scam token, etcetera, that people can send you to undermine your reputation, and perspective employers will have to consider how much credibility those deserve, etcetera.

I say you'll show perspective employers your tokens, And I suppose there are different ways to imagine the public accessibility of all these things. Perhaps the tokens are publicly associated with your name and anyone can see all of them.

Perhaps employers see only what you voluntarily send them. And if you go on a decentralized dating app, perhaps you'll show perspective romantic partners, your degree tokens and your cool hobby tokens, and the I'm a good romantic partner in many ways tokens that your ex has sent you when you were together again. The possibility of bad tokens is interesting here. I don't know. These things are more often

described as loose utopian sketches than specific programs. When I write them down, they sound extremely dystopian to me, but perhaps you disagree. Sometimes they're spelled out a bit more. In May, Metallic Baterian published a paper with Eglen Wile and Puja Oliver called Decentralized Society Finding Web Three's Soul. It called for a set of non transferable soul bound tokens spt s representing the commitments, credentials, and affiliations of souls.

A soul in this terminology is not quite a person, though it is more like a person than it is like a Bitcoin address. A soul could be a person or an institution, a university, etcetera. But a person could also have multiple souls for multiple contexts. When issuing a tradeable n f T, an artist could issue the n f T from their soul, says the paper. Beautifully, it would be amazing if theology could be replaced or perhaps

solved by cryptography. A person's soul is nothing more than the things and people that she loves, the people who love her, and the impact that she has in the world, and we've encoded it on the blockchain here it is. It would be a bummer to lose the private key to your soul. For what shall it profit a man to gain a lot of bitcoin and lose his own soul. Actually, a fascinating part of the Decentralized Society paper is about

exactly this community based recovery of private keys. The idea is roughly that if your soul has a lot of connections to a lot of other souls and you lose the private keys for your crypto accounts, there should be a recovery mechanism where those other souls can vouch that you really are you, and then you get the keys back in a decentralized way e unsensorable ledgers. Here's another way to describe what Sutoshi did. He created a way

to do irreversible transactions on computers one censorship resistance. Ordinarily, if there's some database on a computer somewhere, then it changes some data field it can just change that field back to what it was. Those are equivalent easy things for a computer to do, but the blockchain makes it

hard to change things back. If a bitcoin moves from one address to another address, and that transaction is included in a block, and then a few more blocks are added afterward confirming the transaction, then it would take an unfathomable amount of computer work running hash functions trillions and trillions of times to rewind the blockchain to remove that transaction.

Blockchain is one way It's ledger is permanent. This is nice if you want your ledger to be really secure, hard to hack, backed up in multiple places, though honestly it's probably an overkill for those purposes. But it's really nice if you want your or to be immune from government meddling or really anyone's meddling. Crypto people call any

interference with transactions censorship. Bitcoin is censorship resistant. You might not trust the government because, for instance, you live in a repressive dictatorship that controls the banking system and will seize your money from you unjustly, or you might have other objections. U S banks, often though not always in conjunction with US government agencies, are very much in the

business of blocking payments. They'll block payments to organizations designated as terrorists by the government or two countries sanctioned by the government, but they'll also block payments to pornographic websites in response to public pressure campaigns. If you'd like to finance terrorism, or do business in Iran, or consume Internet porn, this sort of thing might drive you to embrace crypto. But even if you don't like terrorism, or Iran or porn,

this sort of thing might make you nervous. What other forms of commerce might be shut down by the government or by banks acting independently of the government. Firearms is one pretty obvious answer, but anything that creates strong feelings can be litigated through the payment system two or not. The practical problem with censorship resistance is that the crypto world touches the real world at various points, and those contacts make it hard to be totally free from the

pressures of outside influence. A meme in crypto is the five dollar wrench attack, named for an x k c D web cartoon, pointing out that the way to steal someone's cryptocurrency isn't by using sophisticated methods to hack his laptop, but rather by hitting him with this five dollar wrench until he tells us the password. The other problem is that while crypto generally creates decentralized and irreversible transactions, it also creates a permanent public record of those transactions. The

government can just look at that record. It can't reverse the transactions, but it can do its best to make life unpleasant for the recipients. You can send bitcoin to anyone without anyone's permission, but at some point you'll want to do something with bitcoin. You'll want to spend it. If you have a lot of it, you'll want to spend it on real estate or yachts, or jewelry or art. If you want to spend it on n f T s, then I suppose you can keep it in the cryptosystem forever.

But what sort of life is that. A financial system cannot be entirely self contained. You have to be able to turn your money into actual stuff, and that's where they get you. The normal way to turn your bitcoin into dollars is through a centralized crypto exchange, such as the apps for buying and selling crypto that you saw advertise during the Super Bowl. They're the main FIAT off ramp, the place that lets you sell your bitcoin, which are hard to spend for dollars, which are easy to spend.

Centralized crypto exchanges are extremely sensorable since they tend to be run by well the CEOs who would prefer to remain wealthy and not in prison, and so they'll do things like ask you for your driver's license before letting you open an account. If you're on the government's do not open an account list, they won't open an account for you. Also, if your bitcoin are on a bad list,

they won't turn them into dollars for you. If you come by one hundred thousand bitcoin in the wrong way by hacking someone's bitcoin account, or by doing a ransomware attack, or by getting them from an address that the government has blacklisted for some other good or bad reason, and transfer them into an exchange, the exchange will ask you

where they came from. Also, the government and the exchange can trace the providence of your bitcoin and see if any of them were involved in known bad transactions hacks, ransomware, et cetera. And if they were, the exchange can block you from taking your money out and call the police. Earlier this year, a couple were arrested and accused of trying to launder one nineteen thousand, seven hundred and fifty four bitcoin stolen from the bitfin x exchange in a hack.

She was a YouTube rapper and a Forbes contributor colorful character. That's billions of dollars of bitcoin at today's prices. But these people were not living particularly large, because it turns out billions of dollars of stolen bitcoin can be extremely difficult to spend and extremely easy to track. Most of the allegedly stolen bitcoin never left the account where they

first landed after the hack. Some were sent to crypto exchanges and converted into dollars, but the exchanges kept meticulous records of who was opening the accounts and withdrawing the money, and quickly froze withdrawals. Some were exchanged for gold at a precious metals dealer, but they had to show a driver's license and give a real home address for that transaction,

so the FBI saw who got the gold. Some of the money was spent on a Walmart gift card, and if you're buying a Walmart gift card with your billions of dollars of stolen, censorship resistant currency, then your money laundering is not going well. Coming up next, you'll hear more from Matt Levine's special Crypto issue of Bloomberg Business Week,

narrated by Mark Leadoff. F Digital scarcity. We've talked about how Satoshi's essential technological innovation was that he found a way to make numbers on computers scares, and a weirdly important generalization of bitcoin is that it is a way to create electronic scarcity. One wait, what is that good for digital cash? It is sure dollars are electronic ledger entries that are scarce because a complicated system of banking

regulation makes them scarce. Banks can make new dollars just by changing a number in a database, but there's a lot of ceremony involved in making sure they do that in the right way. If you want to decentralize permissionless system of money without trust or regulation, you need some way to limit how much money there is, and bitcoin solved that problem. The broader idea of scarce digital assets

is weirder, though. The normal condition of human existence is that good stuff is scarce and companies make money selling it to us because we can't get infinite amounts of it for free. This isn't always true of everything, but it's generally true of the things that you notice paying for. In general, you can breathe as much air as you want for free. Though science fiction occasionally has fun imagining dystopian worlds where air is scarce, expensive, and controlled by corporations.

Crypto people sometimes have fun imagining those worlds, too, but thinking they're utopias. It's hard to mind coal or make a chair, or train a tax accountant. There isn't an unlimited supply of those things, so they cost money. Every so often, a scarce thing becomes abundant, a vast oil field is discovered, a robot is invented that can make a hundred chairs per hour, and prices drop and the

people who were previously in the business go broke. So there's a natural intuition that scarcity creates value and abundance destroys it. This is, of course wrong. You'd rather have more stuff than less as a consumer. Abundance is good, but you can't get rich selling stuff that's infinitely available for free, and you want to get rich. The modern world has developed ways to get rich by selling stuff that, in theory is infinitely available because it's electronic. Microsoft Word

is not really scarce. The amount of physical resources electricity, computing power, disk space involved in making one more copy of that computer program and putting it on my computer is tiny in the scheme of things. And when I pay for a copy of Word, I'm paying Microsoft Corps for the effort involved in coming up with Word in

the first place, not for the marginal copy. And Microsoft is in part in the business of making those copies scarce, of making it not trivial to copy its programs with copy protection schemes and subscription plans so that it can charge for them. Or if you regularly read Bloomberg Online, thank you for paying to get past our paywall. Some of your money is going towards paying for our servers to deliver one more impression of an article to your browser. Not very much of it, though, Most of it is

going to me, ha ha thanks. One possible future is that the world will be increasingly like that, at least for some people. Technological progress will make the basic necessities of life increasingly abundant and also less fun. The physical world will become more homogeneous and boring, and everyone will spend more of their time online. Their friendships and romances and family life will occur on computers. Their lives will

get meaning from stuff that happens on computers. One possibility here is that this will just be nice and egalitarian. Everyone can find their own communities and live in the limitless abundance of the Internet. The other possibility is that in an Internet world, the essential goods will be positional. Being in the cool internet chat room will be desirable the way living in a fancy house in a good

neighborhood is desirable now. Having a cool online avatar will be desirable in the way that wearing a nice watch is desirable now. And if crypto is a way to make those things scarce, to make the desirable avatars a limited edition available only to trend setting, early adopters and rich people, then you can make money selling them. This all seems bad to me, But what do I know? Two rare monkey JPEGs. I guess we have to talk about n f t s again. Remember, an n f

T is just a token with a number. If you buy a bitcoin, your bitcoin is identical to anyone else's bitcoin. If you buy in an f T it has a number, there will be some series of n f T s, some E r C token series with a name. Let's call them tedious Tamarinds, and each n f T in that series will have a number, and tedious Tamarin number sixty three will be distinguished from tedious Tamarin number sixty

four by having a different number. I'm being as trivial as possible, but of course everything on the Internet is distinguished from everything else on the Internet by having a different series of numbers. That's all Internet culture is numbers,

encoding pictures and sounds and text and arguments. There's no reason in principle why the number sixty three should not encode a Tamarin who looks bored but really cool, while the number sixty four encodes a Tamarin who looks bored and kind of schlubby, and so you might pay more for number sixty three because he looks cooler. What this means technically is interesting. The paradigmatic n f T is

some piece of digital art. Tedious Tamarinds is a series of one thousand digital drawings of slightly different monkeys with board expressions, and different tamarinds will be worth more depending on how cool they look. Commonly, an n f T series will have a handful of possible attributes. A tamarin might be smoking a cigarette or wearing a funny hat, or yawning or closing its eyes, and tamarinds will be worth more depending on how many attributes they have and

how rare those attributes are. You can imagine the value of different n f T s within a series being based on purely esthetic considerations, but mostly not. But what does it mean to say that the n f T is a piece of digital art. The art does not live on the blockchain. As the well known software engineer and hacker who goes by the name Maxi Marlin Spike wrote in a blog post, instead of storing the data on chain, n f T s instead contain a u

r L that points to the data. What surprised me about the standards was that there's no hash commitment for the data located at the u r L. Looking at many of the n f T s on popular market places being sold for tens, hundreds or millions of dollars, that u r L often just points to some vps

running Apache somewhere. Anyone with access to that machine, anyone who buys that domain name in the future, or anyone who compromises that machine can change the image, title, description, etcetera for the n f T to whatever they'd like at any time, regardless of whether or not they own the token. There's nothing in the n f T spec that tells you what the image should be or even allows you to confirm whether something is the correct image.

If you buy an n f T, what you own is a notation on the blockchain that says you own a pointer to some web server. On that web server, there's probably a picture of a monkey, but that's none of the blockchain's business. Meanwhile, the intellectual property rights to that picture of a monkey are certainly none of the

blockchain's business. It's not uncommon for the person or companies selling the n f T series to one own the IP rights to the pictures of the monkeys and to promise to transfer those rights or some of them to individual holders of the n f T s. But if that happens, it happens off the blockchain. Those promises are or aren't enforceable through the normal legal system, and it's not all that uncommon for the person selling the n f T series not to own the I P rights.

Early in the n f T boom, it was common for people to make n f T s of the Mona Lisa or the Brooklyn Bridge. It's just a token with a number. Why can't that number refer to the Brooklyn Bridge. In some ways, this technical silliness makes n f T s more culturally interesting. If you buy an n f T, all you're getting is a very thin signifier, some fragile pointer to some piece of digital art. And yet people do pay a lot of money for n

f T s the right sort of monkey picture. These n f t s may not represent ownership in any particularly binding sense, but they represent a feeling of ownership, and they also represent a form of community. The most famous n f T collection is, of course, the board Ape Yacht Club, a series of ten thousand jpeg images of monkeys on ethereum, some of which sell for millions of dollars. There's no physical yacht club, but there are

I r L parties for board Ape owners. Various celebrities, art dealers, and venture capitalists own apes, and owning an ape is a way to join an exclusive club, and that club has its norms, and those norms include it is cool to use a picture of your ape as your Twitter profile picture, and it is not cool to use a picture of an ape you don't own as your Twitter profile picture. The technological and legal connections between blockchain and jpeg and ownership are a bit thin, but

the connections are enforced cultural Lee Three, the metaverse. I plan to go to my grave not knowing what the metaverse is, so I'm certainly not going to explain it to you. But one thing it is is that you can buy some real estate on the Internet. Like there will be a picture of a house on the Internet, and you can have an avatar on the Internet that lives in the house, and the avatar can walk from your Internet house to the Internet store where it can

buy some Internet groceries. It will be like a computer game, but more all consuming and much more boring. How much should your house in the metaverse cost? Two plausible answers might be it should cost as much as a house it's a house, or it should be basically free. It's just a file on a computer. There's essentially infinite space in the metaverse, and nobody has to actually nail together

the house. The second answer strikes me as correct, but that's no fun for the people selling houses on the Internet. So scarcity. The Internet houses are in f t s. The goal is to make some of them scarce and prestigious. Having an Internet house next door to Elon Musk's Internet house is desirable. Let's assume and only a couple of Internet houses can be next door to Elon Musk's Internet house.

Why they're all on computers. You could put a million Internet houses next door to Elon's Internet house, but you don't. You make the positional goods scarce. This is dumb, but I mean, look at Facebook Meta Now, what are the odds that fifty years from now the center of the world economy will be digital goods? What are the odds that we will all spend most of our time and money seeking status and romance and connection and entertainment on

the Internet. If most goods end up being digital, if most people make their money by producing digital goods, then monitoring and mertoring the distribution of those goods will be an important economic function. Digital scarcity. I'm sorry to be this type of guy, but it's hard not to think of the movie The Matrix. You know, the premise everyone is a sack of meat in a bath of nutrients with their brains plugged into a remarkably realistic simulation of

late nineties America. Why a remarkably realistic simulation of late nineties America? Why does Neo, the main character, have to go to work at a boring desk job if he's just a brain in a vat being fed a soothing simulation by the machines? Agent Smith explains, did you know that the first Matrix was designed to be a perfect human world where none suffered, where everyone would be happy. It was a disaster. No one would accept the program. Entire crops were lost. Some believed that we lacked the

programming language to describe your perfect world. But I believe that as a species, human beings define their reality through misery and suffering. So the perfect world was a dream that you're primitive cerebrum kept trying to wake up from. So they simulated late capitalism instead. Even in a world where all the goods are digital and available in limitless abundance, you still have to have a simulated desk job to pay for them. Digital scarcity. Thank you Matt Levine, and

thank you Mark Ledoff. As a reminder, if you're looking for these episodes in the Crypto Feed will be publishing them every Sunday through December. If you'd like to read this issue in print form, you can head on over to Bloomberg dot com slash the Crypto story. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts.

Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky Vergolina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Verriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidrn. I'm Stacy Maria Shmael. We'll be back tomorrow