Has the Bear Market Called Crypto's Bluff?

When crises decimate an economy, governments try to look like they are doing something about it. The Great Depression spurred the New Deal, which included both banking regulations and a basic poverty-reducing safety net. The Great Recession brought about far less after millions lost their homes, but Congress could at least pretend that it passed necessary financial reforms.

But when the crypto economy collapsed over the past couple of years, with stablecoins losing their peg and non-fungible tokens (NFTs) revealing themselves as worthless jpegs, what did the ecosystem learn?

Nathan Schneider is professor of media studies at the University of Colorado Boulder, where he directs the Media Enterprise Design Lab. He is also the organizer of Exit to Community, the Metagovernance Project and Start.coop. This essay is based on a X thread here.

Stuff fell apart, and people got hurt. But crypto leaders didn't take responsibility. Instead, they turned to governments to clean up the mess with lawsuits and prosecutions, while also demanding favorable regulations. Unsurprisingly, especially after getting caught playing footsie with Sam Bankman-Fried, lawmakers have not been buying it.

The past year has called crypto's bluff, at least on the claim that this tech would be the basis of a better, fairer, more just financial system. As legions of newcomers saw their tokens become worthless, the protocol designers offered little consolation that this wouldn't happen again.

Many people have concluded, with good reason, that maybe crypto really is just about evading the law to do shady stuff. I cannot yet tell my relative who lost his house in the past year's crash that anything has changed.

What if the response had been different? What if crypto-world had tried to build infrastructure that is actually worth trusting? It still can. Protocol design is policy-making, and protocols can be designed with better policy. Being decentralized does not free an economic infrastructure from the need to be trustworthy and safe.

Allow me to paint a picture of what a serious response to the crypto collapse would look like. There are projects out there exploring each of these things—but none of them have reached the level of confidence-inducing, systemic change.

During the Terra-Luna collapse in 2022, Ethereum co-creator Vitalik Buterin suggested something like deposit insurance for crypto protocols. This and similar protections should be obvious. Average participants will not have much power in protocols through governance processes, so they should have confidence that the protocols will not rug-pull them. Protocols that don't include reasonable protections for users in their smart contracts should not be trusted.

End the era of trusting crypto bros. Core protocols should require certain levels of transparency for contracts that run on them. FTX-style shadow transactions should not be possible for public services. In public stock markets, regular disclosures are required of all listed companies; the real-time data on crypto ledgers means that we should be able to expect more transparency from DeFi, not less. Privacy for users, but bright sunlight for public services.

What makes me most hopeful about crypto is its capacity to enable more creative and democratic kinds of governance for online life. But too often the promise of decentralized governance conflicts with the reality of projects that hand power to a few insiders with little accountability. Clear and decentralized governance should be expected for public apps—to ensure they walk the walk of democratizing talk. Systems should be transparent and audited.

An organization I help lead, the Metagovernance Project, is working to enable this for decentralized autonomous organizations (DAOs) with the DAOStar standards. But standards-setting should support, not inhibit, the kinds of governance innovation that sets crypto apart.

Before state courts get involved, participants should have a chance to bring their grievances before a well-designed, independent, decentralized court system. Tools like Kleros and Aragon Court show that such systems are possible, though there is still a lot of room for improvement. Nobody should trust a contract that doesn't include recourse.

Despite using crypto wallets for almost a decade, just a few weeks ago I fell for a scam. Many times, I have made some kind of error on a transaction. Ledgers are immutable, but transactions need not be. Any contract worth trusting should be able to reverse transactions that can be proven erroneous or fraudulent. Reversible tokens exist and should be used far more widely, particularly for consumer applications. Combined with clear policies and adjudication, restitution is a requirement for any system that humans are expected to use.

There are already enough casinos for the wealthy in the fiat financial system. For crypto to be worth having, it needs to make good on the ambition of truly enabling more widespread access to ownership and economic power. Already, old-world investors have managed to co-opt most major crypto projects. To change that, it is necessary to intentionally design financial tools that enable ordinary people to access capital and participate fully. Techniques like quadratic funding point the way toward systems that privilege people over concentrated wealth.

That is only a bare-bones list of what a mature, internet-native economy should include. Protocols could, for instance, include policies that protect a wide range of human rights and support ecological balance. What else would people in your life want to see to make a virtual economy trustworthy?

The story isn't over. The development of the layer-two ecosystem opens doors for a race to the top—toward infrastructure worthy of taking seriously. I can't emphasize this enough: Protocol design is policy-making, and each new protocol is a chance to make better policies.

I don't think, however, relying solely on markets and investor incentives will do the trick. Reliance on economics alone is a limitation on governance, as well as on design at every level.

See also: Tokenization Might Be a $5T Opportunity: Bernstein

If there is still promise in crypto, it means recognizing that the ecosystem is a commons, and it must be designed accordingly. Design not for the speculators, but for those with the most to gain and the least margin for error.

We need something better than the status quo, not something worse. And as bad as the status quo is, crypto has a lot of catching up to do.