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A Letter to Jamie Dimon
And anyone else still struggling to understand cryptocurrencies
Dear Jamie,
My name is Adam Ludwin and I run a company called Chain. I have been working in and around the cryptocurrency market for several years.
Last week you said a few things about Bitcoin:
It's easy to believe cryptocurrencies have no inherent value. Or that governments will crush them.
It's also becoming fashionable to believe the opposite: that they will disrupt banks, governments, and Silicon Valley giants once and for all.
Neither extreme is true.
The reality is nuanced and important. Which is why I've decided to write you this briefing note. I hope it helps you appreciate cryptocurrencies more deeply.
Let me start by stating that I believe:
- The market for cryptocurrencies is overheated and irrationally exuberant
- There are a lot of poseurs creating them, and some scammers, too
- There are a lot of conflicts of interest, self-serving hype, and obfuscation
- Very few people in the media understand what's going on
- Very few people in finance understand what's going on
- Very few people in technology understand what's going on
- Very few people in academia or government understand what's going on
- Very few people buying cryptocurrencies understand what's going on
- It's very possible I don't understand what's going on
Also:
- Banks and governments aren't going away
- Traditional software isn't going away
In short: there's a lot of noise. But there is also signal. To find it, we need to start by defining cryptocurrency.
Without a working definition we are lost. Most people arguing about cryptocurrencies are talking past each other because they don't stop to ask the other side what they think cryptocurrencies are for.
Here's my definition: cryptocurrencies are a new asset class that enable decentralized applications.
If this is true, your point of view on cryptocurrencies has very little to do with what you think about them in comparison to traditional currencies or securities, and everything to do with your opinion of decentralized applications and their value relative to current software models.
Don't have an opinion on decentralized applications? Then you can't possibly have one on cryptocurrencies yet, so read on.
And since this isn't about cryptocurrencies vs. fiat currencies let's stop using the word currency. It's a head fake. It has way too much baggage and I notice that when you talk about Bitcoin in public you keep comparing it to the Dollar, Euro, and Yen. That comparison won't help you understand what's going on. In fact, it's getting in the way. So for the rest of this note, I will refer to cryptocurrencies as crypto assets.
So, to repeat: crypto assets are a new asset class that enable decentralized applications.
And like every other asset class, they exist as a mechanism to allocate resources to a specific form of organization. Despite the myopic focus on trading crypto assets recently, they don't exist solely to be traded. That is, in principle at least, they don't exist for their own sake.
To understand what I mean, think about other asset classes and what form of organization they serve:
- Corporate equities serve companies
- Government bonds serve nations, states, municipalities
- Mortgages serve property owners
And now:
- Crypto assets serve decentralized applications
Decentralized applications are a new form of organization and a new form of software. They're a new model for creating, financing, and operating software services in a way that is decentralized top-to-bottom. That doesn't make them better or worse than existing software models or the corporate entities that create them. As we'll see later, there are major trade-offs. What we can say is simply that they are radically different from software as we know it today and radically different from the forms of organization we are used to.
How different? Imagine the following: you grew up in a rainforest and I brought you a cactus and told you it was a tree. How would you react? You'd probably laugh and say it's not a tree because there's no point in a tree being a stumpy water tank covered in armor — after all, water is abundant here in the rainforest! This, roughly, is the reaction of many people working in Silicon Valley to decentralized applications.
But I digress. I owe you an important explanation:
What is a decentralized application?
A decentralized application is a way to create a service that no single entity operates.
We'll come to the question of whether that's useful in a moment. But first, you need to understand how they work.
Let's go back to the birth of this idea.