Web3 Founders — Focus on Better UX & Balancing Regulation
This post is more about market cycles and its human cost than it is about the underlying nature of much of the fascinating and innovative tech shaping the future of internet and value exchange right now.
Valuations and speculation is very different than value accrual in real terms and from fundamental use cases of tech that may not be apparent.
As far as prices go, perception is all roses on the upswing understandably.
But human nature makes it that even the best companies in the space get complacent, over-leveraged, and greedy, sometimes not even due to their own fault but rather due to fundamental free market forces devoid of any consumer protection or regulation urging them to seek and offer higher yield to compete with other firms.
And then, when the bust inevitably happens, the tide comes out, and we find out who’s been swimming naked. As it turned out in 2022, nearly the entire industry was….
We learned of the societal and human cost of subpar consumer tech as well as unchecked market mania.
Now… No one complains about a bull market, and neither am I.
And frankly, this is to be expected of such a nascent industry and space!
There’s more funding across projects from VCs, opportunity for work, better mood — everything is a bit rosier. Companies come back into web3, the headlines get better, prominent personalities warm up to the tech again… funny how price impacts perception so much.
Soros called it “reflexivity.”
But as with everything in life, the upswing may have a price to be paid when it’s over. At least, that’s what we’ve seen in the 2018 bear market and most recently in the 2022 one which scarred many in ways far beyond just investment losses.
The European Central Bank recently warned about severe collateral damage to society as a result of the unchecked rise of crypto.
Despite what most crypto proponents would say to this for obvious reasons, I believe they’re on to something.
This is because the current state of crypto UX and lack of common sense regulation has made it very dangerous for consumers who lack expertise.
And this is where innovators and investors alike come in to fix this to enable broader adoption and use case alike.
As far as speculation goes, I’ve seen first hand the extreme consequences of crypto’s financial excess, major market dislocations, and the very real human cost — lives ruined, billions of dollars hacked, even suicides, and more.
The real world of unregulated, free markets can be ruthless and I’ve become a champion of common sense regulation, else we risk real financial system instability at some point as the industry grows and gets further entangled with traditional finance, and even if not, everyday people get hurt without protections for consumers that are a given in traditional finance.
I don’t mean to be hyperbolic here and this is not unique to crypto in some sense — but much of it in fact IS unique to crypto.
Also, it’s important to note that much of the carnage we saw in 2022 was due to HUMAN forces and factors — centralized entities such as the hedge funds who got loans from the consumer facing exchanges which committed fraud and went bust, leaving tens of billions of customer funds in limbo / restructuring for maybe even the next decade….
But: DeFi continued to work. And this is remarkable in a way. Blue chip DeFi protocols such as Maker and Aave — lending markets worked without a hitch despite the chaos.
Let me explain.
In 2022, much of blockchain industry (‘s humans) became mired in criminal convictions, lawsuits, historic fraud and bankruptcies of 10+ of the largest global firms including public US companies such as Voyager / private co’s like FTX / Celsius, and the theft of ~$40b+ of millions of customers’ funds.
For those who were present at the time or working in the industry like I was, but too young to remember what 2008 must have felt like for someone in finance in NYC, I imagine the feeling was similar — a period of shock, real PTSD symptoms, sleepless nights, more shock, thinking the entire industry you were involved in was possibly a colossal scam? (it’s not, not entirely) and and more.
As for what’s unique to crypto?
Well, even the best PhDs in the crypto industry get hacked for millions of dollars every single week. The site web3isgoinggreat.com details catastrophes — damages now amount to over $72b. Glaring need for security education and UX exists — I saw this as a serious trend that would threaten web3 adoption since 2020.
94% of all crypto users are Gen Z and millennial — this is a generational regulatory crisis. Over $20b has been hacked from 2021–2022.
Two different crypto founders have been hacked for over $100m and $10m respectively just in the last week as of Feb 2024.
One is a Stanford MBA and ex-Goldman Sachs banker and prominent crypto CEO (Source). The other is also a prominent founder. These are smart, sophisticated, capable investors — not retail.
A world class DeFi team accidentally sent their entire treasury of millions to the wrong address — it’s inaccessible forever. This is surprisingly common and illustrates why none of this tech is YET fit for mass market use and is dangerous for the average investor to use outside of just buying the ETF or in their Fidelity account or just simple buying assets for cold storage.
Most crypto companies -actually, most companies in general (Uber playbook) prefer to move fast and ask for forgiveness later.
But what about in the case of when the tech and products being built have to do with something deeply personal and also central to societal stability — money?
And in fact, the entire concept of the state — as crypto does?
If expert crypto teams with PhDs and teams of cybersecurity professionals and attorneys cannot keep hundreds of millions in assets from being hacked or lost to technical issues, what chance does the average person have?
In fact, I argue that unless the industry institutes some sort of Self Regulatory Organization SRO with US regulators ASAP, and urgently improves wallet security protocols, we could even be facing widespread concerns when the next inevitable market bust is bigger than the 2022 one — which given the larger upswing, it almost certainly will be.
Crypto wallets and products were (and continue to be) mass marketed across TV, YouTube, the SuperBowl, and more in 2021. Celebrities — many now mired in lawsuits themselves — affiliated themselves with sometimes scrupulous crypto investment schemes knowingly and unknowingly.
Legislators have failed to act and regulators haven’t done much better besides file enforcement lawsuits. Disturbingly, several bankrupt exchanges — FTX, Voyager, Celsius, BlockFi — advertised themselves as being FDIC backed and just as SAFE as banks.
This is what led to carnage and even loss of life in some tragic cases. Especially considering that Gen Z and millenials (most crypto users) grew up in the digital and mobile banking age and don’t really understand the concept of why a regulated bank is all that different from a non bank or exchange in terms of regulation and risk even for just storing dollars.
Consider — what happens when millions of unsuspecting, young and old consumers alike newly using such products get hacked for billions of dollars by foreign actors after they are marketed these products as “better” alternatives to the banking system?
I believe there’s a core theme of considering social and broader responsibility at play here that much of the industry is missing.
But it’s also central to crypto — crypto was inherently meant to subvert state control of money. To allow people to “be their own bank.”
But the reality is, for the vast majority — keep in mind, the average IQ in society is 100 by definition on the normal distribution — being your own bank with experimental tech in its early stages wherein one wrong link can zap away your entire life savings and there is no recourse, no legal options, nothing, nada, zilch; oh, and no transaction limits — it could just as easily happen with $1 as with $5 trillion dollars.
Well, that’s disastrous. There’s very little things more truly dangerous than that for a properly functioning civilized society. Now if people use common sense and are responsible with what amounts they invest into crypto for speculation’s sake, then it’s fine!
But sometimes, there’s a reason for securities laws and consumer protection and deceptive marketing laws alike.
This is the core part of crypto of which I became all to aware from seeing the carnage in 2022. No laws to hold companies accountable. Regulators gave victims the run around yet bailed out Silicon Valley Bank. De facto neobanks like Celsius and Voyager’s estates got bled dry by restructuring firms.
I was lucky to be largely unaffected due to being very responsible with any sort of such risk and only had minor amounts on Voyager and FTX since I was always suspicious about the solvency of any exchanges, however I’ve read of people losing lots of money, many with more dire consequences.
I’m afraid others might not make the same choices given such options.
For example: In 1997, Albania faced civil unrest and the government collapsed after only $2–3b in ponzi schemes collapsed following their move to a market economy. US troops had to be sent in.
The collapse of Luna/Terra ALONE in crypto in May 2022 was for $40 BILLION — though distributed globally. Luna was advertising an interest rate of upwards of 17% APY during a time of rock bottom interest rates in 2021 — this is before rates increased.
As we now know, Luna was completely unsustainable from the start. It was akin to a complex ponzi scheme perpetrated on the global masses seeking yield. The cult thinking we see all too often in crypto combined with the risk seeking yield nature in crypto made it all the more dangerous. Add in normal market mania + the internet. Truly unprecedented times.
I was never involved in Luna thankfully in any form — the collapse was extremely violent. Regulators globally perked their ears up and today, the founder awaits extradition and trial after being on the run for over a year.
The FTX founder who stole billions of customer funds got convicted on all counts and may spend up to 120 years in prison, though this number is likely to be reduced in his upcoming sentencing. As of now, prosecutors are urging for 40–50 years.
After Luna came the collapse of blue chip crypto companies and exchanges — first Celsius. The letters to the judge in charge of restructuring — customers funds are stuck up to a decade potentially — received harrowing letters.
Ok, that was a CeFi company who lied and gambled customer funds, the founder is convicted and likely spends decades in prison. Just like FTX. But Celsius collapsed because of other hedge funds and due to Luna as well.
It was all connected — true contagion. I realized the core underlying nature of today’s crypto industry had created a monster - the very nature of the market forces without regulation had FORCED these firms to have to offer higher and higher yield to compete in the market. Human nature also had a play in it.
And then, like always, the tide came crashing in. And as the saying goes, we then found out who had been swimming naked all along. Surprise — it was everyone. There’s likely very few people active in crypto and dedicated who weren’t affected in SOME form from the implosion of 2022.
Wait, then who has everyone’s money?
Well, you see — that’s the problem. Per quotes from SBF, at peak of even $2.5T+ in total market cap, only about $200b of that was real money. The rest was all nominal value. Now I have no idea if that can be verified or if it’s true.
Aka if everyone in crypto actually tried to pull all of their money out, the math would not math. Cue the famous SBF interview of him describing how DeFi works to a reporter and he inadvertently described a ponzi scheme and claimed to be in the ponzi business, but it’s pretty good he said. This was with Matt Levine of Bloomberg.
However, this is definitely not the case for protocols like Maker or Aave — these are blue chip DeFi lending protocols. They are unregulated sure, but they are not ponzi schemes. In fact, these DeFi protocols functioned just fine as the implosion happened without even a hint of a hitch. And legitimate tradfi banks like Societe Generale and others have used these protocols to test. Their teams and developers are a cut above your run of the mill random DeFi farm.
But the fact is these are ALL experimental protocols we are dealing with and the rest of society should no longer become collateral damage at least unless they are informed of the extreme risks — and more realistically until core user experience issues are improved so no one ever has to face catastrophic hacks.
We can’t bring these products mass market unless the right infrastructure to do so first is there, else it becomes extremely dangerous very fast.
It is troubling to be advertising such experimental tech to the masses as some alternative, legitimate replacement for the US banking system which comes with whole hosts of protections. I would never want my mother to see these ads when she can hardly manage getting around her new iPhone.
I would never want my children to be fed that message either, yet certain companies in the industry are still doing exactly this in 2024, right now.
This is precisely what happened with Celsius (their marketing was “Unbank Yourself” and “Banks are not your friends”), and continues to happen with hacks every single day.
Now it would be one thing if any of this tech worked without catastrophic risks — which the best founders in the space are working to improve for consumer apps, but right now, it is still so flawed for mass market use as all blockchain transactions are irreversible with zero arbitration or reversal possible, nor any transaction limits.
Yet this is a central feature of blockchain so it’s hard to champion changing that.
I’m not saying there isn’t a use case here as there are in fact several and some very innovative ones at that, but a system that inherently doesn’t allow for user error or one can lose their entire life savings to a wrong address or fraudster and have zero recourse through any regulator or legal means — well, that’s what could lead to severe societal level consequences if such a system were to be mass adopted.
If this continues unchecked, due to the inevitable errors and risks of hacks in dealing with crypto transactions and given that foreign state funded hackers (DPRK et al.) are who you’re up against, the implications could become severe.
The unregulated industry of tokens and products is rife with severe technical issues inadvertently and knowingly financing nefarious causes — human trafficking, money laundering, and much worse.
But so does some of the traditional banking system — several banks have been charged by regulators over the years for similar- but the difference is, they are required by law to adhere to KYC/AML, are audited public companies, and the end consumer — the “little guy” — does not get hurt in anywhere near the same manner.
With the crypto market now recovering ($1.4T net inflows since Oct 2023 to Feb 2024), I fear the collateral damage may truly be a price too big to bear this time around when the downswing comes unless regulators and legislators act urgently to create SOME common sense framework that doesn’t stifle the industry entirely.
This time, there could likely be a larger Luna/Terra ($40b ponzi scheme collapse), billions in hacks, as well as a larger FTX, Celsius, and Voyager et al. as the mania takes hold and when the bear finally comes.
I am concerned deeply about any populist anti-crypto sentiments this could eventually lead to if too many get harmed or hacked. Recall the Occupy Wall Street movement in the GFC.
My concern is — this time we see a 10x bigger movement but against the crypto industry from millions of burned investors — because crypto has been marketed as a populist savior for real financial anxieties and worries largely faced by the middle and working classes yet they are in fact the ones who have faced the causalities.
And if crypto becomes synonymous with financial ruin, scams, hacks, and even legal issues galore — then that seriously hampers mass adoption.
And if this does end up happening barring some radical improvements in crypto wallet security and regulation urgently to protect consumers and prevent large firm blowups, then what happens when the societal mood re: crypto shifts as a result if this isn’t prevented?
Blockchain be may neutral tech but prominent leaders in the crypto industry can’t seriously champion to displace the nation state and financial system, subvert capital controls, and build tech to evade KYC/AML.
None of that is realistic in an era of mass adoption — this is not a niche industry any longer and must blend with what the masses need and what regulators require. It’s no longer a fringe cypherpunk thing.
We cannot forget the very real risk of some huge anti crypto response if investors continue to be ruined in ways far more sinister and catastrophic than is ever possible in regulated markets.
Because that’s the sort of mood shift that impacts courts and governments — both of those entities are people, after all.
If the next bear market is even 2x as worse — in the last one, 10+ exchanges went bust and many of their execs went to prison or are mired in criminal and civil lawsuits alike — 2x worse would already be too much to bear.
Do we see calls for reparative justice? Do we see wealth redistributed just as in past large scale financial frauds (Madoff et al.)?
And, what is the endgame here? Of course, no one can predict the future, and that’s just how markets work.
In March of 2024 — right now — when BTC is hardly at $60 something K in USD value — the Nigerian government has arrested Binance executives and is threatening fines of $10b for influencing capital outflows from the Naira.
If BTC eventually goes to $250K and even $1M, keep in mind that nation states and central banks are going to take every necessary action to protect their currency and prevent capital flight — even going as far as to criminalize these actions.
And what do states have at their disposal to enforce such actions? Well, recall that the authority of a state’s currency is backed by their military.
It’s not hard to envision a scenario in which crypto becomes a problematic faux pas — socially ostracized, made illegal to transact in, cut off from the banking system, and otherwise extremely divisive.
This is crucial to understand before you invest in crypto or involve yourself in the industry professionally and you really fully believe in it, or even if you work for a crypto native or web3 firm— if push comes to shove, how far are you willing to go to take legal and or political risk?
Did you know you were taking such risk in some cases?
This would be assuaged with clear regulatory frameworks.
Right now, the number of creditors of failed crypto exchanges from 2022 number in the MILLIONS in the US alone.
The majority of these victims are Gen Z and millennial users of crypto who came in as users and investors unbeknownst to the extreme technical issues, security risks, and plethora of other issues.
Hopefully I can educate others of these risks and benefits alike.
Now on a longer term time horizon, perhaps in a future beyond the advent of the nation state, wherein space travel is a norm, it’s easier to see a real use case for crypto and stateless currency much more freely used.
But we don’t yet live in that world. These are complicated questions and topics that call into question the very nature of the state, money itself, and more.
