Trust requires us to give leverage to centralized authorities over our critical records. If you deposit money in a bank, they can unilaterally decide that you can't withdraw it today. Their systems can be down. They can be closed at a time you want access to your money, etc. Or the person at the front desk can simply not like you, and if they're the only branch in town, you're out of luck.
Critically, trust like this comes from scale. The likelihood of a bank screwing you personally over diminishes as the bank grows larger. In other contexts, people call this a network effect, and it is an anti-competitive moat. Even if we completely trust the bank, which we don't, this anti-competitive moat leads to all sorts of problems, like stagnation of service quality (look how long it took us to get same day wire transfers and decent quality online banking).
Decentralized systems democratize trust. They break anti-competitive network effect driven moats. This is a good thing, even if we completely trust our centralized authorities, which again, we should not.
1. We trust the coders to know what is best for us.
2. You can write perfect code so that our money is safe.
3. The price will never plummet.
I've observed:
1. Mt. Gox Failure
2. DAO Failure
3. First BTC price crash
4. USDT regulatory concerns
5. Lack of learning from failures
6. Politics still exist, they just moved to the coding layer
7. Willful ignorance of the scams and crimes cryptocurrencies has enabled
7.1 Because somehow cryptocurrency is better for us.
8. Hype over price security and software security
8.1 Because somehow cryptocurrency is better for us.
Trust in USDT is centralized in the corporation Tether and has none of the benefits you mentioned. Trust in BTC is hoping (praying?) that the price doesn't crash, and software doesn't control the price, humans do.
I can use blockchain apps all of my life and even if there are people (now) making billions of USD worth of Tether transfers, I never will be forced to accept it, because I don't trust them. That is exactly what "democratized trust" looks like.
> 1. We trust the coders to know what is best for us.
> 2. You can write perfect code so that our money is safe.
> 3. The price will never plummet.
Nobody is asking that. The source code is public, read it and decide for yourself. Good luck doing that at your local bank. There are plenty of stablecoins, you don't have to take on crypto exposure.
> 1. Mt. Gox Failure
Totally irrelevant.
> 2. DAO Failure
Sure, a public commons infrastructure will elicit a lot of bad projects. Just like the vast majority of open source projects are bad. This is not an indictment of open source.
> 3. First BTC price crash
Irrelevant.
> 4. USDT regulatory concerns
Use one of the many other stablecoins, then. This is the beauty of the system. It's actually open, so there are a diversity of issuers. You could even start one yourself, if you wanted.
> 5. Lack of learning from failures
There is an enormous amount of learning from failures. If you believe there isn't, you aren't paying attention.
> 6. Politics still exist, they just moved to the coding layer
Yes, this is true. However, this layer is thin, by design. That means the layers above it, which implement most of the relevant functionality, are a diverse ecosystem of choice. Contrast to the thickness of politics in other domains.
> 7. Willful ignorance of the scams and crimes cryptocurrencies has enabled
> 7.1 Because somehow cryptocurrency is better for us.
New technology brings about scams roughly in proportion to its power. The internet enabled tons of scams. Fiat currency enabled tons of scams. Coinage enabled tons of scams. And so did banks, particularly of the fractional reserve variety.
That doesn't mean scams are good or should be tolerated. But it takes time to develop the social and political conventions to deal with them. I believe that process is taking place in crypto, though perhaps not as quickly as we'd like. I think if you look back at the history of other comparable technologies, you will see that crypto is pretty far ahead of the game in this regard, though.
> 8. Hype over price security and software security
> 8.1 Because somehow cryptocurrency is better for us.
Sure. Lots of elements of crypto are overhyped. Overhype comes along with any transformative technology. See hype about carbon nanotubes, nuclear power, 3d printing, etc. Hype is an indictment of people, not technology.
> Nobody is asking that. The source code is public, read it and decide for yourself. Good luck doing that at your local bank. There are plenty of stablecoins, you don't have to take on crypto exposure.
Most people are not advanced coders and will never be. So most people still have to trust a random coder (be it close friend or someone on the news or online). If something happens to your money because someone took advantage of you in the code then good luck getting anything back. At least with banks there are laws around this stuff and you can actually get your money back. For average person this is still the way to go.
There's also a massive unregulated conflict of interest here: reviewing the source code will require experience which someone is unlikely to have without also having a financial interest in expanded use of cryptocurrencies. As we've seen so many times over from all of the cryptocurrency boosters who talked up code or services until a major problem occurred, this can cloud someone's judgement even if they're not intentionally scamming you.
That’s not what we’re talking about: if I hire a lawyer to review a contract, they’re not making decisions based on a need to boost USD to protect their ability to find a buyer.
Similarly, while they’re both fiat currencies the USD is orders of magnitude stronger (inordinately more use, links to durable value, etc.) which means that my hypothetical lawyer’s ability to shift the value is extremely small.
Even actual government officials have relatively little power this way: there are many of them and the need to get re-elected means they’re far less likely to try the kind of pump and dump scams which are routine in the cryptocurrency world, especially given the likelihood of scrutiny and punishment.
No need for pump and dump when they are raking in their money by trading on insider knowledge, getting favors from lobbyists and by getting their cushy board seats at banks after they leave office.
Really what is worse is that it will create "Software Lawyers", which are like lawyers but worse because they won't be members of a bar association, and might not have your best interest at heart.
> Most people are not advanced coders and will never be. So most people still have to trust a random coder (be it close friend or someone on the news or online). If something happens to your money because someone took advantage of you in the code then good luck getting anything back. At least with banks there are laws around this stuff and you can actually get your money back. For average person this is still the way to go.
That's certainly true. However, you have the option to learn, and the option to review it yourself. You also have the option to choose which experts to delegate your trust to. Whether or not this system is better than the system of just trusting big banks a lot with no ability to verify personally is up to you. It is, however, a novel trust model, and one that it's clear that some people prefer.
I think it's also clear that this model has advantages over the other. The traditional model has advantages as well. Neither is strictly better in all dimensions. Almost no technology is strictly better than its predecessor in all dimensions, though.
So this is like the "Software Lawyer" argument I stated above. If I hire a lawyer to review a contract in finance, I expect him to put his greed aside while he's working for me. This is well regulated, and while isn't perfect, keeps most lawyers honest.
With software there is no regulation. What happens when the software expert finds a bug in a smart contract? Is it illegal to sell the exploit? Can he exploit it for his own good? The smart contract is the contract after all.
Who defines what "conflict of interest" means? The software guy who wrote the smart contract or is it in the smart contract itself? How would I know if there's a backdoor in the smart contract if greed is the primary motivation for a software engineer, and every other software engineer I hire to look at that contract?
Yes, those are problems. Just like the existing textual contract system has problems, so does this new system. The new system is, obviously, much newer. The practices around the modern textual legal system have grown up over hundreds and thousands of years of refining practice. The fact that the crypto ecosystem is not yet as developed in terms of questions like that is unsurprising.
What is true is that crypto enables a new mechanism for doing something vaguely analogous to parts of the existing legal system. This new mechanism has disadvantages to be sure, but it also has advantages (for instance, it is border and jurisdiction neutral, the code runs the same everywhere, no matter what). I am certainly not arguing that crypto is strictly better than the existing legal system. It's not. It is just an alternative that is useful in some situations, and worse in others.
Over time, I think the domains in which it is useful are likely to expand. They are unlikely to replace the entirety of the existing legal system, of course. But I think the existence of a border neutral code layer for asset transfer and custody is a useful thing for certain applications.
There’s a difference between choosing to trust the claims of someone who you believe has expertise that would be expensive or impossible for you to develop yourself, and having no option but to “trust” a certain party in order to perform certain actions. I think when most people talk about “trustlessness” in the context of decentralized systems they’re not saying you would never trust a surgeon, or a pilot, or a YouTuber who reviews smartphones, or an audit of a computer system.
you don't have to trust anyone or examine the code -- simply watch what happens. btc as a protocol has gone a decade without any security flaws discovered or exploited. shitty smart contracts get exploited.
It's not open source versus closed source, and loss of money is never irrelevant.
It's the alignment of what I value (security, safety, government guarantees) versus what you value, which is ... well I don't know.
I feel it's one of the following though:
Decentralized trust is great for the world.
And/Or
You have a huge stake in crypto, and you need others to believe in it as well, or your crypto assets will fail.
I just can't tell whether you're in it for the money or to change society. It's fine if it's both, but your arguments justifying crypto don't share the greed angle.
I just feel like people should know who they're arguing with.
Banks are literally closed source. Crypto is literally closed source. So, yes, it is.
> and loss of money is never irrelevant.
Loss of money from centralized exchanges is irrelevant to the decentralized consensus technology. These are completely orthogonal concerns. Normal financial institutions get hacked, and they also operate ponzi schemes. The fact that this can happen to comparable centralized crypto services is orthogonal to the technology.
> It's the alignment of what I value (security, safety, government guarantees) versus what you value, which is ... well I don't know.
I think i've pretty clearly articulated what I think the technology is for. Just go back and read what i've said.
> I just feel like people should know who they're arguing with.
Of course i'm invested in it, to a degree. Anyone who believes in a technology should be invested in that technology. You shouldn't trust them if they're not, because if they haven't invested, they don't actually believe in it.
That being said, crypto very well may not turn out to be useful for the world. It enables new possibilities for social and economic organization. Technologies like that are very rare, and they are usually transformative and tremendously economically valuable. This one could be an exception, but it'd probably be the first.
Awesome. I appreciate that. That tacit acknowledgement is lacking in all pro-crypto posts.
Most silicon valley companies want to make a shit ton of money with their VC capital. They say things like, "We'll make the world better..." but that's really just what they tell themselves so they can feel better about making a metric shit ton of money. And there's nothing wrong with that since that's what drives the economy.
But it's unchecked greed that caused 2008, and that was human behavior.
If anything crypto appears to enable more bad human behavior: money laundering for drugs and human trafficking, rug pulls, stable coins that may or may not be literally printing money, payoffs for ransomware and blackmail...
At what point do you check your greed and want to solve the unsexy problems that crypto creates in our society?
> Awesome. I appreciate that. That tacit acknowledgement is lacking in all pro-crypto posts.
To put a more fine point on it, i'd say about 10-15% of my net worth is exposed to crypto.
> Most silicon valley companies want to make a shit ton of money with their VC capital. They say things like, "We'll make the world better..." but that's really just what they tell themselves so they can feel better about making a metric shit ton of money. And there's nothing wrong with that since that's what drives the economy.
This is certainly true, but I think it's a little misleading. If you actually believe a technology is transformative, investing in it probably makes sense. So the fact that VCs are talking their own book IMO is mostly just evidence that they believe what they're saying.
Certainly it's true that occasionally people say things they don't believe in order to offload bad assets on unsuspecting retail investors. And some of the crypto VCs might be doing that sometimes, but if they believed that, they wouldn't keep investing in the category, I don't think.
> But it's unchecked greed that caused 2008, and that was human behavior.
True, but unchecked greed also caused the industrial revolution, so, it has some benefits too.
> If anything crypto appears to enable more bad human behavior: money laundering for drugs and human trafficking, rug pulls, stable coins that may or may not be literally printing money, payoffs for ransomware and blackmail...
Crypto definitely enables lots of bad things. No question about that. It also enables some good things though, like the ability to safely (in relative terms) store value outside of kleptocratic and/or irresponsible regimes (e.g. venezuela).
It also facilitates a certain kind of forced transparency. For instance, let's say a country has problems with government officials seizing property deeds. The officials simply change the title and say "sorry you actually never owned this land". A citizen has no recourse here, they can't even prove the government did this, because the government warehouses all the records. If, instead, every property transfer had to be recorded on a decentralized blockchain to be considered legitimate, then at the very least any citizen to whom this happened could prove to the public that it was stolen from them. Of course, that doesn't mean they get it back, because physical possession still flows to the people with the guns. But it does mean they can no longer effectively deny it, and I think that has a lot of value in regions of the world with less trustworthy governance.
> At what point do you check your greed and want to solve the unsexy problems that crypto creates in our society?
Well, a lot of the problems crypto has created are really revealing problems that were latent anyway. Ransomware is really the problem of insecure software, for instance.
The problem of money laundering is an interesting one, and I think sort of poses a philosophical problem about event ordering. What I mean by that is that what crypto really gives people is genuine monetary self-sovereignty. Having that self-sovereignty enables money laundering and tax evasion, for sure.
However, I have to believe that in a world in which monetary self-sovereignty was the norm before the surveilled financial system (e.g. supposing crypto was created before SWIFT), we would view that sort of sovereignty as a fundamental right.
As a thought experiment, consider a world in which DNA sequencing was invented 100 years ago, and up until 10 years ago the government had been collecting everyone's DNA at birth. They had then been going on to solve all sorts of crimes with it, and probably occasionally harass protesters and dissidents and other undesirables and so on. But then in 2010 someone invents a pill that you can take that alters the DNA base pairs that are used for that surveillance (without side effects). This pill would re-establish the biological privacy that we accept as a natural right today. However, undoubtedly people would make the same arguments you're making now, that this is a great step backward in our crime fighting ability, etc, And they'd be absolutely right.
But I think the question we want to ask here is what makes sense as a set of natural rights in this context?Should people have sovereignty over their own money? Transactional privacy? If not, why should they have biological or medical privacy then? It seems to me that the lack of financial privacy is a contingent artifact of the evolutionary path of technology, not some moral truth arrived at through democratic means.
Doesn’t the entire NFT market rely on trusting that the company you bought your “certified original one of a kind URL pointing to the image they host” doesn’t cease to exist?
I’m not at all an expert, but I’m pretty sure the answer is no? Aren’t a lot of these NFTs some simple fixed-size collection of random vectors that when run through a generative art algorithm generates a unique variation of an avatar image?
The correct answer is yes. You're still paying to host the content even if you add new ways to pay to update a shortlink. ENS has to point somewhere and that someone will want to be paid for their time and resources.
No. ENS records are on the blockchain. Once you executed the contract that gives you ownership to a name, it will be yours for the time you paid it for. The ENS developers can not revoke it and they can not change the underlying records or subdomains.
Still yes: ENS records are a pointer, not the data itself. You will need to pay to host that data and you will need to pay every time you change the ENS pointer.
Depending on the amount of data (and your willingness to pay to have it on the blockchain) you can put it on the blockchain directly just fine. Some of these "art" NFTs can perfectly be simple base64 encoded PNGs or SVGs and wouldn't cost too much to have them stored directly.
But forget about this case... even if "you are not storing the data directly with ENS". So what?! Do I get to host my website with my DNS server? Do I get free email service with my MX records?
The whole thing I was talking about with ENS is that it is a decentralized way to get an identity online, not to have a free website. I am failing to see your point.
> So what? Do I get to host my website with my DNS server? I am failing to see your point.
You responded to someone who was talking about “certified original one of a kind URL pointing to the image they host”. In that case, you are dependent on them continuing to exist or exiting gracefully (i.e. do their contracts allow you to change the target?).
If you mirror it in time, you can of course pay to update it to point somewhere else but it again highlights that all of this infrastructure is very expensively duplicating an existing decentralized system but worse performance and reliability than the web.
No. I responded that NFTs are not just about "digital art in specific URLs". DId you read the comment I linked to before or did you just want to "well, actually" me and argue a strawman?
There was no "described scenario". OP was asking whether "the NFT market rely on trusting that the company doesn't cease to exist" and my response is that an ENS domain or a unlock-protocol lock are NFTs with utility on their own and that you never get to lose because of something that happens off-chain.
It doesn't matter whether the data is stored on a blockchain or elsewhere. Storing data is costly and storing it on a blockchain is even more costly. Someone has to pay for the cost or it won't be stored.
Yes, and again... so what? My argument from the beginning (and from the comment I linked) is that NFTs are not about storing data. The NFT "market" is not just about storing JPEGs at specific urls.
Using Bored Apes (or any "digital art" project) as an argument against the "whole" of NFT is just a strawman. That is my point.
NFTs are simply single issue tokens that can optionally be part of a collection. While most NFTs today take the form of a link to decentralized storage on solutions such as IPFS or Arweave, it is completely possible for an NFT to provide value as a token. For example you can have a project where NFTs provide access to services, as well as optionally have links to art. But you really don't need to have the art aspect at all, you can use them as access tokens or whatever you want really.
So it’s either an expensive way to claim ownership of a resource provided other people are trusted to do the actual work of hosting that resource, or it’s an expensive way to replace JWT’s. Exciting. Truly.
Expensive on Ethereum's base layer. Don't forget the many layer-2 solutions. Loopring is about to launch its marketplace, ImmutableX is already live as well.
Real estate title is a good example of something that could be handled this way more cheaply than it is now. Title to any physical asset could be handled this way, too.
> could be handled this way more cheaply than it is now
I don't see how that's possible. Right now, at its core a real-estate title is a row in a database managed by the local government (whether a row in sql, a row in excel, or a row in a physical document).
That system, with a centralized way to ensure it is unique etc, is strictly cheaper than any blockchain / NFT can be for storing that same row of data.
The reason real estate titles are expensive now is that there are significant legal burdens and human overhead on top of this database row.
NFTs can't be used like a real estate title unless we also add the same legal frameworks and human processes on top of them. The only bit the NFT actually replaces is that database row, not the expensive other stuff.
Now, you might claim "ah, but with NFTs you may be able to cut out some middle-men. If the token is legally binding, then you can transact directly and skip a lot of mess". But, of course, we could build that _already_ with the existing system by letting the owner of a row in the existing sql/excel/paper database digitally sign a statement saying "I transfer this ownership to X, this is legally binding". If we can get the law to recognize NFTs, then getting them to recognize this cheaper, far simpler, cryptographic operation would be both cheaper and easier.
... Or that's my take I guess. I'm curious to hear yours though!
Do you think an NFT-based real estate ownership system will be cheaper because we'll rebuild the system from scratch, and rebuilding the existing system without NFTs would be similarly cheap?
Or is there a fundamental reason NFTs are cheaper here than building the same thing on top of a centrally managed government-owned database?
Your cheap jab says more about your lack of imagination about potential use-cases than about whatever shortcomings the technology has at the moment.
Okta is a multi-billion business and could also be characterized as "an expensive way to replace JWTs". Authz/authn is one of the most common use cases that every application developer needs to implement. How much would you like to bet that in 5 years time NFT-based authn/authz will be bigger than Okta's market?
The value of Okta is in its centralization - the reputability of the brand and the existence of a conscious entity equipped with the power of reason that can use their centralized superpowers to resolve unexpected issues as they come up. And if there’s anything I know about software, it’s that unexpected issues always come up.
Remove that and you have all the existing scams of crypto, except now your personal information and account access is at stake in addition to your money.
As for bets, I’ll happily wager my expected future net worth against these projects by simply not investing in them. If you feel differently, do differently. I don’t care.
Clearly you have a strong dislike for the tech, and that's fine I don't care of course, but do keep in mind that there are ways to isolate risk pretty easily. Even if the technology doesn't result in a huge change in how auth is done to scale in the way that Okta does, there is value in simplifying authentication / authorization workflows for users that decide they want to participate in the web3 ecosystem.
As a solo developer making applications in the ecosystem, it's a breath of fresh air to not deal with Oauth+OIDC workflows and utilize wallet connectivity + token authorization to very elegantly handle these scenarios on smaller projects. End user experiences are pretty great too, I quite enjoy being able to authenticate into a website without needing to associate everything with my email address and/or rely on 3rd parties to provide trust solutions such as SSO via Google/FB/Okta/whatever.
And yes, the risk is higher in a decentralized model because if my private keys are compromised on most wallet types, then I can lose my funds / identity. There are solutions to help lower this risk however.
The best examples right now are honestly NFT marketplaces or DeFi, however you can authenticate with these services without needing to have any funds available on your wallet.
If you're curious and want to try out the flow, you can download a web3 wallet like MetaMask - https://metamask.io/ - this is a popular web wallet extension for Ethereum and EVM platforms. If you want to try out Solana, I recommend https://phantom.app/
I personally like Solana more than EVM chains at the moment but it doesn't cost anything for you to try either.
Once you have the extension and create your wallet, you can navigate to an NFT marketplace, and connect your wallet.
You can then click on the connect / select wallet button, and it will allow for you to connect your wallet to the website. This will authenticate you into their website, there's some additional steps on Opensea IIRC if you want to construct a full profile, but the base authentication only requires this. And like I mentioned, you can authenticate in this manner without owning a single dollar worth of crypto.
For the projects that allow for you to interface with chains / wallets, I've used these:
Essentially what it comes down to is a user has a wallet, that is typically a web wallet via extension, but you can of course use hardware wallets if you'd like, however those do require you to own one, so if you just want to play around with the ecosystem, these extensions are the easiest to use. These above projects are javascript APIs that allow for interacting with wallets and onchain programs.
Note that both of these are frontend solutions. There are backend solutions for both chains.
> Remove that and you have all the existing scams of crypto, except now your personal information and account access is at stake in addition to your money.
No, precisely the opposite. It's only with crypto that you can have a system that can authenticate you and authorize you to access resources without caring about any of your "real world" data. And if you are worried that your "wallet" might be hacked, you can simply use different ones for each different purpose. Your "money" crypto wallet does not need to be the same as your "online identity" wallet.
> No they don't, they are trustless. They do exactly the opposite.
They allow anyone to build a trusted application. That is the sense in which they democratize trust. Prior to crypto, anyone building a stateful software application that ran remotely had to be trusted by their users. Their users had to have personal faith in the credibility and trustworthiness of the organization. Even if the organization was ostensibly open source, there was no way to validate what the code on their servers was doing, or where the data was going. Crypto changes that.
It enables anyone to write an application, deploy it, and guarantee to its users that it does what the code says it does. That is a new thing in the history of software. Whether or not you think that thing is valuable is up to you. That it is new, and that crypto does it, is not.
I see no reason to believe trust comes from scale. Trust comes from the rule of law. And rule of law requires institutions, and ultimately a central authority, that must be able to use coercive force to maintain law and order and to enforce private contracts. A decentralised system is incompatible with that.
Yes, and the stability of all those things come from scale. Institutions are strong for several reasons, but one of the most important is size.
You would, or at least, should, trust a small bank less than a large one, all else equal. You should trust a small government less than a large one, all else equal. This is a simple function of incentives. If a bank is large, your size relative to it is small. You can't damage it financially, you can only damage it asymmetrically via its reputation. Since your assets are tiny compared to the value of its reputation, it pays to treat you well enough to avoid reputational damage. A small bank, on the other hand, gains more in relative terms from taking your money.
To address you more specifically:
> And rule of law requires institutions, and ultimately a central authority, that must be able to use coercive force to maintain law and order and to enforce private contracts. A decentralised system is incompatible with that.
Which coercive authority is more powerful, 1 guy with a gun, or 2? How about 100 vs 1000? Trust comes from power and relative size. If you are small relative to a powerful actor, and that actor's power derives from collective trust, screwing people over is bad, unless the person they're screwing is large relative to them.
I don't agree that a large bank is less likely to take my money and therefore more trustworthy. First of all, I don't need to trust that a bank won't take my money, in order to do business with it. I have to trust that if the bank takes my money, authorities will intervene and I'll get my money back. That's how things work in a functioning society. People don't have to trust each and every one of the individual parties that they transact economically with, like they would in a system without a central authority. Instead, they only have to trust that the central authority will assert their power to uphold the rule of law. And the law applies equally to small and large banks, and to everyone else, so there's absolutely nothing that would suggest I should trust more a large bank over a small one.
If you think that JPMorgan is equally likely to steal your money as some small scale local bank, I think we're just going to have to agree to disagree here. I think the historical evidence is super clear on this point, not to mention the incentives.
The probability of any counter-party in any context choosing to screw you over is proportional, all else equal, to the size of the assets of yours they can steal, relative to the size of their stake in continuing to operate in the community. If a bank has $1mm in assets and you have 100k deposited with them, it's much more worth their while to steal from you than if they have $1bn in assets.
Now, those are not the only factors that impact the probability that you get stolen from. The institutions of the society in which they are embedded matter as well. But holding those institutions constant, i'd argue this is the primary factor that matters.
Here in Europe the possibility that a bank could steal money from its clients is not a concern that people have, because it's not something that happens or that people think could happen. There's no way a bank can steal your money and get away with it. Therefore the idea that a bank of this or that size is more or less likely to steal your money is quite strange. Maybe it's different in other parts of the world, although I don't think it is.
I believe what you mean is that it's something that doesn't happen frequently. But do you know why that is?
It's not because banks are unable to steal customer's deposits. It's because of the capital investment these banks have made in their reputations. That capital investment is in the form of fixed infrastructure, real estate, licenses, and reputations. It's that capital investment, and the threat of losing it if they break the law, that keeps your money safe.
That all works pretty well at keeping money safe, as you noted. But it has another effect. It makes it extremely expensive to start a bank, or other financial service. This is what crypto democratizes. It makes it possible to start a financial service without massive capital investment in things like this.
Sorry, that doesn't make any sense. We don't live in a society where crime is prevented by reputation. Laws and law enforcement prevent crime, not reputation. Second, a bank's reputation comes from its past behaviour, not from the amount of capital it has invested. Banks invest in capital because providing financial services requires large amounts of capital. Crypto is not going to magically let you provide financial services without investing similar amounts of capital.
> Laws and law enforcement prevent crime, not reputation
Enforcement, by definition, does not prevent crime. It may deter crime. But a bank cannot be put in prison. The damage to a bank from stealing its clients money is reputational, the loss of their business.
> Second, a bank's reputation comes from its past behaviour, not from the amount of capital it has invested
It comes from both. Past behavior, and the amount of capital invested. If a bank has $1mm in assets, would you deposit $10mm? I wouldn't.
> Crypto is not going to magically let you provide financial services without investing similar amounts of capital.
Yes, it will. In fact, it already has. DeFi provides many of the same services banks do, for a miniscule fraction of the capital investment. You can deploy a contract right now that provides services like margin lending for a few dollars. Building the infrastructure and trust to do that at a bank would take you decades, and tens of millions of dollars in capital expense.
No, a bank can't go to prison, but its executives can. Further, a bank is a registered corporation and a legal holder assets which can be seized by courts. This means it can't escape legal action. The courts would seize the stolen money and return it to the rightful owner, while the bank would be fined and/or stripped of its license. The size of the bank is irrelevant, as far as the rule of law is concerned, because a key principle behind the rule of law is equality before the law. Therefore, no, nobody thinks that because a bank is small it's more likely to steal their money. That's a bizarre idea. The size of banks, and firms in general, is explained entirely by economies of scale. It has nothing to do with reputation, or the fear that they will steal your money. (No offence, but you sound like someone from a communist country who is unfamiliar with how the capitalist system work.) Lastly, deploying a contract is not the same thing as providing financial services. You can deploy a contract in conventional finance too without investing any capital at all. This is not what banks do. The problem with DeFi is that it's crippled because of its intrinsic limitations, namely the fact that smart contracts lack coercive power. As a result, most real-life contracts (such as a simple signature loan agreement) are unenforceable in DeFi, and therefore not possible at all.
> No, a bank can't go to prison, but its executives can. Further, a bank is a registered corporation and a legal holder assets which can be seized by courts. This means it can't escape legal action. The courts would seize the stolen money and return it to the rightful owner, while the bank would be fined and/or stripped of its license. The size of the bank is irrelevant, as far as the rule of law is concerned, because a key principle behind the rule of law is equality before the law.
But the principals of the bank can abscond with the value before the law has a chance to react. The thing that prevents them from doing so is their investment in the bank's reputation. The size of that investment is correlated to the bank's scale.
> Therefore, no, nobody thinks that because a bank is small it's more likely to steal their money. That's a bizarre idea. The size of banks, and firms in general, is explained entirely by economies of scale. It has nothing to do with reputation, or the fear that they will steal your money. (No offence, but you sound like someone from a communist country who is unfamiliar with how the capitalist system work.)
I work in quantitative finance. I think i'm doing capitalism just fine. It's understandable for you not to be aware of the dynamics of these things, because you probably don't deal with large enough amounts of money to think about what percentage of assets you are at a bank or financial institution. However, anyone who has started a hedge fund has confronted this problem: Nobody wants to be more than 10% of your assets under management. If all you have is a million dollars, all anyone wants to invest is 100k. The same is true for banks, or any depository institution.
You wouldn't deposit $10,000 at a bank that only has $1,000 in other deposits. Google isn't going to deposit $10bn at a bank that only has $1bn. You can't trust someone to hold your assets that is small relative to your deposit, for a few reasons, but a big one is that the incentives are all wrong.
> The problem with DeFi is that it's crippled because of its intrinsic limitations, namely the fact that smart contracts lack coercive power. As a result, most real-life contracts (such as a simple signature loan agreement) are unenforceable in DeFi, and therefore not possible at all.
DeFi does not require coercive power to do what it does. DeFi is structurally incapable of violating its own contracts. They do what they say, always. They do not require a legal system to enforce their tenets.
This has advantages, and it has disadvantages. The disadvantage is that it is highly inflexible. The advantage is that it is deterministic and certain. Sometimes you want one, sometimes you want the other. They are both useful in different circumstances.
> But the principals of the bank can abscond with the value before the law has a chance to react. The thing that prevents them from doing so is their investment in the bank's reputation. The size of that investment is correlated to the bank's scale.
Do you seriously not see that this doesn't make any sense? Why would a criminal bank executive who's willing to run away with the bank's money care about the damage being done to the bank's reputation? They don't have any issue with stealing money from the bank but somehow they wouldn't want to damage its reputation?
> I work in quantitative finance.
I very much doubt that. It's clear that you don't understand incentives, and that you're unfamiliar with basic economic concepts such as the minimum efficient scale of a business. The notion that the amount of a bank's capital is the result of the bank wanting to maximise its reputation is not found in the scientific literature, nor it is supported by any economic theory, nor by common sense. Feel free to prove me wrong by providing a reference.
> DeFi does not require coercive power to do what it does.
That's because it doesn't have coercive power and therefore it can only do stuff that doesn't require coercive power, such as over-collateralised loans and voluntary exchanges, but this is just a tiny subset of finance. For example, under-collateralised loans, mortgages, bond indentures, basic enforcement of property rights, all that requires an authority with coercive power.
> Do you seriously not see that this doesn't make any sense? Why would a criminal bank executive who's willing to run away with the bank's money care about the damage being done to the bank's reputation? They don't have any issue with stealing money from the bank but somehow they wouldn't want to damage its reputation?
The executives and shareholders have the incentives. Their incentives cause them to create mechanisms to incentivize and validate the people below them. Simple.
> I very much doubt that. It's clear that you don't understand incentives, and that you're unfamiliar with basic economic concepts such as the minimum efficient scale of a business. The notion that the amount of a bank's capital is the result of the bank wanting to maximise its reputation is not found in the scientific literature, nor it is supported by any economic theory, nor by common sense. Feel free to prove me wrong by providing a reference.
I'm certainly not going to provide you a reference as I value my privacy more than winning this argument. But it's true, whether or not you want to believe it.
Go ask anyone you know working in finance if they'd allocate $10mm to a manager with $1mm in assets. Go ask anyone running a hedge fund if they'd allocate $10bn to a brokerage managing only $1bn. Go ask anyone with a hundred million dollars to deposit if they'd deposit $50mm in a bank that only has $10mm in assets. This is no mystery. It's not some secret knowledge that only I possess. Anyone in a position to do these things has thought about these problems, and can and will tell you the same thing: hell no I wouldn't do that.
We can bring this back to a concrete level you've probably had experience with, if you like. Let's say you have a wealthy friend, worth a few tens of millions. And let's say you have another less well off friend, say someone that makes 20k/year. The three of you are walking around town, but both of your friends forgot their wallets at home. Your rich friend sees something expensive, say, $1000 he wants to buy. He asks you to spot him the money and he'll pay you back later. Your poor friend asks you the same thing. Who do you feel more comfortable lending to?
Deposits at banks are loans to that bank. Every lender on the face of the planet looks at the creditworthiness of their borrower. Creditworthiness comes from assets and income. The legal system matters too, of course. Interest rates will be lower under strong legal systems. The legal system is one of several parameters in the creditworthiness/interest rate function. The other parameters are assets, income, and reputation. If we think a little more abstractly, we can simply file 'reputation' under the 'assets' column.
Again, this is not a mystery. You just aren't used to thinking of your bank deposits as loans, because of the FDIC. But they absolutely are loans. Every time you deposit a paycheck you're lending your bank money. You are acting as a creditor, just not a very smart one. And you don't have to be smart, because the government has de-risked your loans for you, at least, until you hit the FDIC deposit insurance limit.
Read literally any credit valuation model from any finance textbook or Wikipedia. Every single one will ask "How big is your loan relative to the income and assets of your borrower?", without exception.
> That's because it doesn't have coercive power and therefore it can only do stuff that doesn't require coercive power, such as over-collateralised loans and voluntary exchanges, but this is just a tiny subset of finance. For example, under-collateralised loans, mortgages, bond indentures, basic enforcement of property rights, all that requires an authority with coercive power.
Great, we've already made progress then. A tiny subset of finance. That is more than nothing. You're well on your way to getting it.
But I only asked for a reference to a journal article that supports your assertion that the size of banks is the result of banks investing capital in order to build a reputation.
I'm not really interested in hearing more of your crackpot theories.
Critically, trust like this comes from scale. The likelihood of a bank screwing you personally over diminishes as the bank grows larger. In other contexts, people call this a network effect, and it is an anti-competitive moat. Even if we completely trust the bank, which we don't, this anti-competitive moat leads to all sorts of problems, like stagnation of service quality (look how long it took us to get same day wire transfers and decent quality online banking).
Decentralized systems democratize trust. They break anti-competitive network effect driven moats. This is a good thing, even if we completely trust our centralized authorities, which again, we should not.