What is Crypto For? Matt Levine Wants to Know

like I want to make money for everyone else. You are in for a treat. Matt's just published what I will admit is many thousands of words on the subject of crypto for a special edition of Bloomberg Business Week. He joins us today to talk about what motivated him to do such an intensive dive into the blockchain, why he thinks of crypto as a living laboratory for innovation, and what prompted him to start at the very beginning with one big question, what is crypto for? Matt's a

pleasure to have you on the show. So we've got this. I hesitated to use the word magnimum post because I feel like there's going to be other things that you love, But it's this incredible deconstruction distillation of a question that we tackle on this show pretty much every day, which

is what is crypto? Why did you do that? Crypto is relatively new and big enough to be really interesting, but small enough to be sort of contained, And so what I wanted to do was sort of start from like the first principles of crypto and say, this is like what Toci Nakamoto invented, and like what he typed in a white paper, and then build from there and sort of look at all of the possible ramifications and developments of that, and to try to do it in a way that it turned out to feel to me

quite long, but like less comprehensive than I wanted. Like one wants to be able to say, here's all of crypto and one magazine issue, and of course that's impossible, but it's like more possible with crypto than it is with a lot of other subject matters. And I thought that challenge was really interesting to try to sort of capture, like like from the seed to like what it developed into.

So you talk obviously about the origins, about Makamoto, about the white paper, but you know, over the course of the issue you also delve into things like decentralized finance and leverage and margins. Coming out the end of this, even where you say it's not possible to wrap your arms entirely around the whole thing, is there one thing you feel now that you understand more about why crypto

is than at the beginning. That's an interesting question. I mean, like by the words you just said, the stuff that I wrote about, Like you know, part of it is that I come to this from a background of in finance. Right, I'm not a like a crypto evangelist or a technologist. I'm a person who works in finance, and so I'm interested in looking at like the way that crypto has both split off from traditional finance and found new ways to do things, but also like recreated some of the

good and bad structures of traditional finance. And you know I say in the piece that it recreated two eight right, I mean like it had its own MANI like leveraged financial crisis that has a lot of rhymes with like

what the traditional system did in two eight um. But I mean to your question, like one thing that I think that I didn't fully appreciate and and feel like I appreciate more is the extent to which like people in crypto feel the same way, which is that this is a really fun way to build almost a toy financial system that like works in a pleasing way for the people who use it, and that feels like it gets rid of some of the inefficiencies of the traditional

financial system and makes to makes it just sort of more fun to innovate and to build new products and to trade products. And I think that that is interesting

as a lens on like what crypto is for. Like one thing it's for is like making financial people happy, which has a value in the sense of, like you know, like what are the odds that you'll build like the next important financial product, the next like you know, the future of the banking system, the future of like risk hedging, um, you know on quote unquote the blockchain versus doing it

in traditional finance. Well, if a lot of really smart people are really enthusiastic about being in the cryptosystem, that creates better odds of like doing real economic work in the cryptosystem, just because like it appeals to the people

who are doing that work. Right, you describe it as a blank canvas for all your esthetic views about how markets should work, right, which is something that I think, like I have a lot of aesthetic views about markets, and I think that one thing that I try to do in my writing is suggest that that's like a valid, you know, concern that. And I think that when you talk to people in crypt like they feel the same way.

They're like, this is esthetically cool, Like this is like it is fun to work here, um in a way that they didn't feel when they were at their jobs, you know, in traditional hedge funds or whatever. But one of the things that you managed to do in the copy is there's a strong sense of like you're working out a puzzle, like you're you're riddling through something that seems intellectually very interesting. Do you actually like puzzles? Sure?

I do. You know, I do puzzle hunts, like where you like go around in New York City all all night, like trying to solve puzzles and like it's like a scavenger hunt. But like with cryptography, and you know, I do those and like everyone there works out a high freakincy trading. Like the overlap between like puzzling and you know, financial infrastructure is very, very large, and you know, crypto

obviously appeals to some of the same same dynamics. Well, the idea of a puzzle is that it has kind of a single solution, right, or at least a most a more elegant solution than something else that somebody can come up with. Do you feel like crypto solving for anything in particular? I think that one thing that I wanted to get across is that there are like half a dozen or a dozen big ways to take that question.

Like I think if you asked Satoshi Nakamoto what he's solving for, you get a different answer from what if you ask like metallic pewter and what he's solving for. Right, Like there are the sort of basic building box of crypto. You can say, the thing we're solving for is uh,

decentralized censorship resistant money flows. We want to be able to like send money to each other without worrying that the government of Russia Venezuela will take our money way from this, or you can say we're solving for like a really resilient worldwide computer that can run programs that like you know, instantiate a stock exchange, rather than having those that exchange like live you know, in the the computers of a of a corporation, or you're saying like

we're solving for like allowing communities of web users to like cat sure the value of that community for themselves rather than give it to Facebook or whatever. Or you can like have a bunch of different you know other uh sort of big themes that you're trying to do in crypto, and and there's sort of room for allow those things. And uh so, no, I don't think there's like one thing crypto is for, but I think there's

like a dozen things. I think some of them are uh implausible you know goals, and I think some of them are like bad goals. Like when I read about like weeb three is going to make everyone an owner, you know, everyone an investor in like the books they read, I'm like, well that just sounds bad. Um So, I think there's a lot of like you know, and I think different people have different like aesthetic ue on that.

But like, I do think there are some goals that are you know, like we're gonna build a decentralized financial system that is permission lists and allows people to uh like build products without like negotiating is those with with six major banks before they like start building a product, Like that's a that's a goal that like, I think it's kind of cool, and I think there's like a real, you know, sort of goal of a lot of people

on crypto. There's also this over ching theme that of everything you've described there that kind of comes down to the inter relationship of trust, of money, and of community, whether you trust that community with your money or not. What do you think if you were to use one of the examples from your story and like, you know, help somebody understand why you think trust and community are so important in understanding crypto, what would you tell them.

I think that there's this sort of like folk story about crypto that like it is about avoiding trusts, Like people didn't like trusting banks, so uh, they invented crypto, which is like trust less and uses code in lieu of trust. And I think one thing that I try to get across is that trust has to sort of sneak in the back door somehow, right. I mean, one way that it sneaks in is the obvious way, which is that people are like I like, managing our own

private keys is hard. I'm going to trust in exchange to hold my crypto for me, or like I'm going to trust a crypto lender to get yield from me, and then like sometimes that trust is wildly misplaced. You think, like, like our norms of trust that that are in the background are so strong that these people who are like I want to avoid trust, I'm not going to trust any banks ever again, go and trust Celsius and then

Celsius loses their money. But the other thing is that like when you sort of look at the mechanics of crypto and you look at the mechanics of how blockchains work, it's not like the stuff operates automatically with nobody um verifying transactions or whatever. It's that it the transactions are verified by the community, by a distributed community of people, and it is sort of hard to get that community to change its mind right to say we're going to

reverse this transaction that we think is bad. But it's not impossible. And so like one example is, you know the famous like story earlier in the history of ethereum is like there's the hack of the Tao, where like this early to centralized the ton of this organization got it's you know, smart contract hacked and lost all this money, and like the people in the ethereum community came together and said that was bad. We're gonna just reverse it.

We're gonna just all get together and make the blockchain and say something different because we think that was bad. Right, So there's this notion that um Like it turns out that money as a concept is kind of embedded in community and embedded in in in sort of social values,

and you don't get away from that in crypto. You do it in a different way with more technology, but you still have that sort of basic need for community and trust, Like you don't need money if there are no other people in the ecosystem, right, And you can think of money as like an objective thing, or you can think of money as being a sort of social credit system, where like money is like what you have done for society to get the money and what society

owes you in exchange for the money. And I think that, like, there's this notion in crypto where people like the idea of it being an objective thing, where like your bitcoin live in your private keys, and like no one can take it away from you, and the government, you know, doesn't have any say in it, and I think that you see that that's not quite true, and that like even in crypto money is socially determined, and like it's just a different sort of social group that determines how

much money you have and whether you can spend it. Coming up, you'll hear more from Bloomberg opinion columnist Matt Levine on all things digital assets. We'll be right back. You have. They're both an existential and positivist definition of money. How would you define bitcoin with like those same sorts of parameters. One thing it was designed to do, Let's give a person an ability to send digital cash without

using a bank. And it's not so much doing that in the sense that like bitcoin is not great cash because it's value is volatile. But like um, but it is it's now you know, it's, as they say, a story of value. It's now a nice investment commodity. UM, it's a it's a thing that you can trade. UM. And I just you read some Toshi Nakamoto's white paper, which is from like two thousand, like early two to nine, and you feel the sense of disappointment in the banking system.

How over leverage the banking system was, how much it was built on debt, and how how like poorly that

turned out. And then you fast forward to you know, this year, and you think about like all of the levered, interconnected crypto financial institutions that were like we're going to use loans against crypto to speculate on more crypto um, And I don't know, it's just funny that like, uh, like one one way to say what crypto, what bitcoin was designed to do was it was it was a way to have money without debt, Like debt is so deeply ingrained in the modern banking system, Like your dollars

are just someone else's debt, Like that's what money is. It's the debt of a bank in the first instance, and that you know, the bank has debts that you know holds those other people's debts. So everything is debt. Everything is sort of dollars are built out of debt. And Bitcoin was not that right, Like bitcoin was a bitcoin is not someone's debt. It's just this independent thing that exists on the blockchain. And I think that certainly

early in bitcoin's life, like that was very appealing. There's a lot of sort of hard money, like people who are suspicious of fractional reserve banking who have found bitcoin very appealing, And I think if you look at the cryptosystem now, it's like, well, there's a lot of leverage in this system because like that's how you make money, and it's I don't know, I think it's fun to see that creeping back in For me as a sort

of person who likes traditional finance. Obviously if you lost your money on Celsius, you don't find it that's fun. There's an incredible momentum about the way that your story moves forward from you know, like the white people to where we are today and the kind of the highs and lows of getting there. But it does seem like a lot of crypto, as you just identified, is hell

bent on reinventing trad five. I mean part of that is what I said about you know, the people who worked at hedge funds were like, this is okay, but I would like to make more money and have uh like more fun, more ability to just kind of make stuff up and like sort of like build the market structure that I want to see rather than the one that like exists on the New York Stock Exchange. Um. So, like I think like the early phase of crypto is

very much not people wanting to reinvent trad fire. It was people who were wanting to get out from the system of trad five. But then you could make a lot of money in it. And so all these people who worked at hedge funds and like making money, we're like, I'm gonna make a hedge fund in crypto, and so like it's just like it's just a sociological fact of like that it's reinventing trad five because um, you know, the people who come to it are people who want

to make money. But it is also like there is a charming naivetite some of crypto, where like it's some of the people invent in crypto are not coming from Trapfi. They're coming from you know, their twenty two and they just finished their computer science degree or whatever, right, and they're like, I'm going to build like this sort of exchange and like they haven't sort of seen the ways

for things to go wrong. And so some of the leverage products are like, you know, if you work at a bank and someone says to you, let's take some risky assets and lower them twenty to one because we'll make more money, You're like, wait a minute, I've heard that one before, but if you work in crypto, you may not have heard it before. And then like literally may not have heard it before. We're not like sentient in two thousand. Yes, as I remind myself constantly, one

of the animating impulses of crypto is ownership and monetization. Thereof, Yeah, I don't know if that's yeah, I mean yes, but it's certainly one. That's again, I want to be careful that, like that's one strand. And I think you can have sort of crypto views that are not like everything needs to be monetized, um, but why because? Um? Because like like when you say crypto, one thing you mean is

like venture capitalists on Twitter talking up their investments. And if you ask a venture capitalist why everything has to be monetized, like they'll they'll be like, what are you talking about? Why would things not be monetized? Um? So that's I mean, that's why answer to why? And I don't know, I mean like I think that like there's this notion of like kind of like season control of

your economic destiny. That is that is like a real sort of like running theme and a lot of crypto where it's like people who are like, I don't like banks. I don't I want to make money the stuff that I do on my computer. I wanted to bring value to me. And I think that, um, that's part of the animating impulse. The other thing is just like you know, I think of like the sort of web three notion.

I do think that there is this belief that is not totally untrue that there was sort of a golden age of like building the Web where there was a lot of like open protocols that people worked on in their spare time in order to like let everyone use email and email as this sort of like you know, like you can have Gmail, but like the sort of bones of it are just open source and everyone can

use them. Um. And then there was like a second phase where Facebook was like we're gonna We're gonna like make social networking a like a walled garden, and like that turned out to be incredibly lucrative, and I think that there's there's like a backlash to that where people are like, wait, the Internet is incredibly lucrative and all the value is going to Mark Zuckerberg, Like what if

it went to us instead? What if we found a way to do something that looks like an open protocol but captures money and the money goes to someone other than Mark, goes to goes to Andres and Horrowitz, but still like um and so I I think that's like a that's like a reasonable impulse where it's like building Internet protocols is incredibly valuable, but like, how can we do it in a way where the value accrues to

the users of the protocol? Like I when I when I push like a little on that notion, when I think about what does it mean for the value to recruit to the users of the product, I'm like, this is all pretty annoying, but like at a high level, I understand that impulse. It's such a pleasure to have you on that. Thank you. You can find more of Matt's opinion columns on the Bloomberg Terminal on Bloomberg dot com or follow him on Twitter. He's at Matt Underscore Levine.

That's m A T. T. Underscore L E V I N E. And of course you should check out the special edition of the Bloomberg Business Week magazine dedicated to all things crypto. On the next episode of Bloomberg Crypto, what you thought there wasn't anything else we could possibly say about the merge, Think again. We're gonna be talking about how the biggest ever upgrades to the Ethereum blockchain may have minted an entirely new class of crypto kingpins.

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