The crypto scene is giving off serious 2016 vibes. That year saw big banks seek to remake the crypto space on their terms under the slogan “blockchain not Bitcoin.” It didn’t end well. The banks burned through buckets of money but achieved little, while decentralized blockchains—the very thing the banks wanted to stamp out—flourished like never before. Now, we’re seeing the same movie all over again, and it’s likely to end the same way.
If you missed it, legacy financial firms on Wall Street have been making a flurry of announcements to tout their embrace of blockchain. That includes a pilot program to issue tokenized stocks that is being carried out by clearing and settlement giant DTCC and firms like JPMorgan and Morgan Stanley. Meanwhile, the London Stock Exchange says it will roll out 24/7 blockchain-based stock trading later this year.
It all sounds grand and innovative, but look a little closer, and some obvious questions emerge. The biggest is: Just what do these firms mean by blockchain? For crypto natives, blockchain means software like Bitcoin or Ethereum that is decentralized, indelible, and permissionless. For the banks, it turns out, blockchain means “DTCC’s Hyperledger Besu network or [the] Canton Network” and, in the case of the LSE, something or other involving Microsoft’s Azure cloud.
If you want a less charitable description, you can call these projects “databases controlled by a button.” That’s courtesy of Columbia professor Omid Malekan, who penned a scathing essay that predicts the current wave of permissioned blockchain mania is destined to fail. Malekan makes his case not by appealing to lofty ideals of decentralization, but rather by citing the cold logic of power and competition. He argues, correctly, that any permissioned chain will favor certain corporate interests over others and that, in the long term, no such chain can achieve widespread adoption. To believe otherwise, he says, is “to believe Visa wants Mastercard to succeed.”
Even more brutally, he writes: “On enterprise networks, the cryptography is bloat and the consensus a charade. Fake decentralization is only effective in VC pitches and on conference panels. It will fail in the real world.”
That sounds about right. As happened in 2016, the current vogue for permissioned blockchains will create a spate of cushy consulting gigs and boring conference talks, but little in the way of game-changing innovation. In the meantime, the less polished but battle-hardened Ethereum will emerge yet again as the more sensible software layer to power the next era of financial innovation.
Jeff John Roberts
@jeffjohnroberts
DECENTRALIZED NEWS
The odds of the CLARITY Act passing this year are dwindling fast amid Senate delays and midterm politics (UnHerd)
The OG exchange BitMEX, which was founded by crypto legend Arthur Hayes and created 100x leveraged perps, is shutting down (The Block)
The SEC will pay $150,000 to resolve a FOIA investigation after Coinbase revealed the agency, under Gary Gensler, deleted a trove of text messages related to its anti-crypto campaign (WSJ)
Traders are using perps on platforms like Hyperliquid and Gate as a way to circumvent CCP restrictions on owning Chinese equities, and to gain exposure to buzzy AI stocks (FT)
A variety of technical measures, most notably one called the “relative strength index,” suggest that Bitcoin has hit a bottom and that prices will start climbing (Bloomberg)
MAIN CHARACTER OF THE WEEK
Robinhood CEO Vlad Tenev became this week’s main character after hackers took over his Twitter account to shill a meme coin.
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Pssst governments: You can only print so much money...