in which I forensically analyse the history of the shitcoin industrial complex, pinpoint unscrupulous financiers as the primary culprits, and trace the narrative evolution to try to predict what scams and bullshit will likely come next. enjoy! đ
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naddr1qvâŚzfww* Prologue: this is a prose adaptation of a talk I gave to a private audience in Dubai and then tweaked slightly for a small conference in Sofia. Iâm increasingly thinking it deserves a more general audience, and may be better suited to text anyway. This is probably not its final form, as the desired audience is tradfi capital allocators, hence a PDF is likely on the cards in the near future. For the time being, consider this a first draft, practising what it might look like as prose, and soliciting feedback from the good people of Nostr. Enjoy! *
The title of this essay means absolutely nothing. There is no such thing as âWeb Ďâ because there is no such thing as âWeb 3â. Itâs bullshit. Itâs a scam.
Unfortunately, it has turned out to be extremely powerful bullshit and an extremely profitable scam, and so my goal in writing this essay is to give the reader the tools to navigate all of this and come out the other side without having been scammed or bullshat. In the spirit of not scamming and not bullshitting, I should be clear upfront about the intended readership of this essay, who I am to write it, and who itâs really about.
Who Are You?
I assume the reader is not a shadowy super-coder, but rather is a financial professional. This essay isnât really for Bitcoiners, although if any read it, I hope they still find it interesting. Who I am really writing for are people coming to the space for the first time. Hopefully in your mind you are coming to the _Bitcoin _space, but if you think you are coming to the âcryptoâ space then this may be even more useful.
Who Am I?
I am the founder of a company that makes me not only highly biased but also flagrantly self-interested in the content I am promoting. I run a firm that invests in the Bitcoin ecosystem through a variety of different vehicles. I am not going to mislead you in the slightest in that my primary motivation is for you to allocate capital to us rather than to people I would call scammers and bullshitters. You should listen to them too and make up your own mind, or else whatâs the point, really? How do you know Iâm not scamming or bullshitting you? Exactly. Donât trust. Verify.
In any case, thatâs all assuming you want to âallocate capitalâ at all rather than just buy Bitcoin without a management fee. Iâd like to think the primary difference is that I will be honest about that, and Iâll encourage you to understand as much as you can about what is going on and what you are doing (and if you are at all unsure, I would suggest you arenât ready and you should just buy Bitcoin and learn) rather than bamboozle you with complete nonsense like âWeb 3â.
Who Is This About?
Itâs not at all about people working in crypto. Bitcoiners amongst the readership may be mildly irritated by me going on to give about as charitable an explanation of the role of these people as they have probably ever heard from somebody like me. This is really about financiers. Itâs about the people who have used the mostly unrewarded efforts of developers, academics, entrepreneurs, and so on to siphon money from you to themselves, leaving a trail of useless tech and defrauded retail investors in their wake â and who will continue to do so if you continue to empower them.
Why This Essay?
We are at an interesting point in the development of the entirety of the âcryptoâ industry and I strongly suggest that people like you are going to be pitched all kinds of scams and bullshit in the coming months and years. If you have a little more background on what these people are really talking about, you will hopefully be able to avoid it.
My plan to help with that is presenting a short version and a long version of what blockchains are and are for, how they have historically been deployed in service of scams and bullshit, a high-level theory explaining the narrative evolution behind this sorry history, and a prediction for the near-term future of such shenanigans.
What is a Blockchain For?
A Blockchain is for sound, censorship-resistant, peer-to-peer digital money. It is not for anything else. If a blockchain is functional as money, it may be possible to also _use it _for other things. Some people find that interesting, some people find it infuriating, but donât let that subtlety confuse you. It is not _for _arbitrary computation and storage or âdecentralizing the internetâ or running illegal securities rackets.
It is for money, plain and simple.
How does it achieve that? Proof of work and the difficulty adjustment. These are the innovations from which every other desirable property or feature flows. Proof of work enables censorship resistance. If somebody is trying to sell you on âproof of stakeâ: bullshit. The difficulty adjustment enables precise, predetermined, and _fair _issuance. If somebody is trying to sell you on a token they issue for free and without restriction: scam.
The problem Bitcoin solves is both economic and technical and the solution has material technical and economic merit. And itâs for this very specific and irreplicable reason the Bitcoin token has value. If this all sounds extreme to you, then I would suggest that your understanding of the topic is _extremely _misguided, that you are going to be _extremely bullshat and extremely scammed, _and you need to read this essay. Thatâs the short version.
The Long Version
I am sensitive to how extreme this all sounds. After all, hundreds of billions of dollars have been pumped into crypto, not Bitcoin â a huge amount of it is widely used, and many capable, honest, and brilliant people work in the industry. The reader will recall just above I said those people are not the target of my criticism. Iâm not claiming they are all scammers and bullshitters. Sadly, I think itâs more likely they have been scammed and bullshat to some degree also.
I think I have some credibility in pointing this out because, as a VC in the Bitcoin space, I have increasingly seen founders telling me this themselves: that they originally bought into the hype in crypto and ended up wasting an enormous amount of time realizing their idea made no technical or economic sense in that context, so then they came to Bitcoin instead. You hear this one time and itâs an anecdote, but you hear it as many times as I have and it feels more like a representative sample.
What I want to cover next is as charitable a summary of the state of ex-Bitcoin crypto as I possibly can: my contention is that crypto has evolved into 4 rough categories: stablecoins, cryptography R&D, gambling, and scams. And these arenât exclusive, to be clear; there is a lot of overlap, and, in fact, the overlap is arguably the key.
Scams
Scams are tokens, plain and simple. If somebody is trying to profit from the speculative price action of a token they have issued, they are scamming somebody. Maybe they are scamming you, maybe they are scamming retail investors, maybe they are scamming customers or suppliers â if such parties even exist in their cargo cult âbusiness modelâ. Thereâs a scam in there somewhere.
However, it is rarely _just _a scam. There will almost always be components of stablecoins, R&D or gambling too. Hence these are worth really grappling with, taking seriously, giving credit to the extent it is due, but also analyzing critically.
My rough and high-level assessment of this breakdown of crypto is as follows, and Iâll explain what I mean by this below: stablecoins have economic merit but dubious technical merit; R&D has technical merit but no economic merit; and gambling sort of has merit but it depends how you interpret it. Obviously, scams have neither.
Stablecoins
By âsort of technical meritâ I mean that stablecoins have central issuers. You can issue them as tokens on a blockchain but thereâs not really much of a point. The issuer could just run a database connected to the internet with some straightforward signature schemes for transfers and it would make minimal operational difference. In fact, it would be cheaper and faster. _In fact, _you may as well run a Chaumian eCash mint (a decades-old innovation recently resurrected firmly within the _Bitcoin _space) such that your cheaper-and-faster-than-a-blockchain database also grants users transience and privacy rather than the public permanence of a blockchain.
The fact Tron is the most heavily used for stablecoins, in terms of settling the most value, is a testament to this point: it is barely even pretending not to be a database. This works as regulatory arbitrage given regulators think this is âinnovationâ because they are stupid.
That said, it is worth giving some credit here given the abject awfulness of fiat banking and payment rails with which stablecoins arguably most directly compete. Stablecoins are significantly more permissionless in their transfer than any fiat bank liability. And to attest to what seems like their most significant use case, they are permissionless in their _usership _in that only an internet connection and the right software is required rather than various discriminatory jurisdictional and compliance criteria.
However, what âsort of technical meritâ ultimately boils down to, especially in comparison to Bitcoin, is: highly censorable in their exogenous links and, therefore, their value. The assets supposedly backing stablecoins are (by definition) still within the fiat system, even if this novel transfer mechanism of the rights to withdraw them is not. There is frankly a bit of theatre involved in the so-called âdecentralizationâ of stablecoins given shutting down the central issuer is all that is required to make the permissionlessly tradeable decentralized tokens go to zero and be technically unimpeded but functionally useless. The technical innovation of Bitcoin, in contrast, is easily understood in one sense as it being totally indifferent to this kind of attack.
On the other hand, by âeconomic meritâ I mean that they are extremely widely used and valued as a means of providing dollar shadow banking and often superior payment rails. Those in crypto often love pointing to this and many Bitcoiners tie themselves in knots trying to explain it away, whereas I see it as essentially unrelated to Bitcoin. Clearly there is a superficial connection, but you could create any superficial connection by âtokenizingâ things for no particularly good _technical _reason. I think itâs a different industry entirely. Itâs more like a subindustry within _fintech _â part banking, part payments â that for the time being relies on bamboozling regulators with all the nonsense Iâm drawing attention to.
And good for them, frankly. If fiat banking isnât going to be backed by real money anyway, then it _at least _ought to be permissionless. It should really be Chaumian eCash if it isnât just Bitcoin, and it is regulation alone that makes it so awful in the first place. Making money usable and not a tool of dystopian control is, at this point, a political problem, not a technical one. Stablecoins are frankly a step in the right direction, especially insofar as they acclimatize users to digital assets. But I would still caution that they arguably donât have sufficient technical merit to withstand what feels like an inevitable political attack âŚ
Cryptography R&D
âTechnical meritâ for R&D is more or less self-explanatory, but the context is worth appreciating. Itâs only really in crypto and mostly in Ethereum more specifically that people can permissionlessly experiment with arbitrarily complex cryptographic schemes that operate on real, enormous value. There are a lot of people who understandably find this attractive given their projects are essentially academic and trying out their ideas in the wild is more interesting, arguably more worthwhile, and certainly more fun than putting research essays on ArXiv or submitting them to a journal.
But ⌠the value being manipulated is at best stablecoins and at worst baseless hype. If it isnât a stablecoin then it probably exists in the first place because of either gambling or scams â and even there the line is very blurry.
Gambling
Gambling is an interesting lens to adopt on all this because itâs literally a trillion-dollar industry. And itâs real. Itâs consensual; itâs not criminal; itâs legitimate economic activity that generates enormous profits for those who facilitate it well.
So, gambling has economic merit in that sense. But itâs tricky in this context how to characterize it because you could also argue itâs deeply dishonest gambling in that the gamblers donât realize they are playing a negative sum game against the house. They think they are doing something akin to speculating on securities, which may be just as stupid depending on how itâs done, but at least has real economic utility and contributes to capital formation.
The difference here is that what is being speculated on _has no economic merit. _So, if thatâs your gauge of merit, then here there is none. And itâs a very blurry line between this and an outright scam. Maybe the people involved _think _of what they are doing as amazing R&D, and maybe itâs inadvertently just a scam; maybe they know itâs all nonsense, but they think they can profit within the negative sum game because there are greater fools. In any case, I think gambling is a very helpful characterization of a lot of the behavior of the users and the real economic function of the industry.
Thereâs an interesting social component to all this because crypto people will often get mad at Bitcoiners because Bitcoiners tend not to care about either stablecoins or crypto R&D: theyâll say, why donât you like stablecoins, they have clear economic merit? And the answer is they have dubious technical merit. Or, why donât you like our next-gen Zero Knowledge scaling protocol, it has clear technical merit? And the answer is it has no economic merit.
If youâre happy with one but not the other, itâs easy to think of Bitcoiners as being closed-minded or dogmatic or whatever, but, ultimately, I think itâs just about discipline. Whatâs the point in being excited by something that half works, and that you know why will never fully work? So to be frank, a lot of this may be well-intentioned, but itâs kindaâ bullshit. It very probably ultimately rests on gambling and not at all whatever its stated purpose is ⌠or itâs just a scam.
How Did We Get Here?
The following is by no means exhaustive and the framing is deliberately a little tongue-in-cheek. As well as being accurate enough (if unavoidably biased), my goal here is primarily to set up my prediction for what is coming next.
2015 reality: Ethereum launches narrative: âthe world computerâ
In 2015, Ethereum launched. The narrative here was that we are building âthe world computerâ and we can now have decentralized uncensorable computation. Never mind that anybody with a laptop has an uncensorable and decentralized computing device. And keep in mind this question of, â_what data might it ever be relevant to compute over in this manner (whatever that means in the first place)?â _The answer will become clearer and clearer âŚ
2016-17 reality: ICO bubble narrative: âWeb 3â / âDAppsâ
Regardless, at the end of 2015 we get the proposal and adoption of ERC20: a standard for issuing fungible tokens within Ethereum contracts, which is why in 2016 _but especially in 2017 _we get the ICO bubble. The narrative changes. Now we are concerned with âWeb 2â companies being huge, powerful, and centralized. What if, instead, users could cooperatively own the application, control their own data, and participate in the economic upside that their usage is creating?
2018-19 reality: crypto winter narrative: âmistakes were madeâ
In 2018 this all falls apart, so donât worry about it, moving on âŚ
2020-21 reality: defi summer narrative: âdecentralized financeâ
By 2020 the narrative was different once again. It is more or less realized by this point that utility tokens make no technical or economic sense. You canât introduce artificial scarcity in capital goods where there should be abundance and deflation and expect anybody to care, never mind to value your concoction. On the other hand, âsecuritiesâ ought to be scarce and in some sense ought to function as tradeable ledger entries. Maybe they could be tokenized and computed on in a censorship-resistant and decentralized manner?
So, we get a boom in âdefiâ which, for what itâs worth, fellow Axiom co-founder Anders Larson and I predicted in our essay Only The Strong Survive, in September 2021, would be a complete disaster because, amongst a myriad of other illiterate insanities, there was approximately zero grounding of these securities in productive capital. The ecosystem was entirely self-referential â grounded _not even _in the questionable economic merit of stablecoins but firmly in gambling and scams; in leverage, rehypothecation, and securitization of precisely nothing whatsoever productive.
2022 reality: shitcoinpocalypse narrative: âmistakes were madeâ
And we were absolutely right because in 2022 everything collapsed. First Terra/Luna imploded â a âdefiâ project which essentially presented to the world the argument that a fractional reserve bank issuing fiduciary media can literally never go bankrupt because it can always cover a deposit shortfall by issuing more equity. While briefly flirting with a capitalization of around fifty f***ing billion dollars, and endorsed and fawned over by all manner of illiterate charlatans with gigantic and unsuspecting audiences, this argument was eventually rejected by the market as utterly imbecilic, as analyzed by myself and Nic Carter in All Falls Down.
This triggered a credit contagion that soon after took down 3 Arrows Capital, Celsius, Voyager, BlockFi, and others. FTX limped along by what we now understand to be something like defrauding their way out of debt, but eventually also collapsed later that year. If _Only The Strong Survive _was a pre-mortem of all of this, then the reader may want to read Green Eggs And Ham, also by myself and Anders Larson, as a kind of post-mortem.
2023-today reality: Bitcoin multisigs narrative: âBitcoin renaissanceâ
And now a lot of this stuff is moving to Bitcoin. It is outside the scope of this essay to explain this in much detail but there have been a handful of developments in Bitcoin recently which, regardless of their intended purpose, seem to have as a collective side effect that a lot of these same shenanigans can now be implemented (or can _pretend _to be implemented) in a more Bitcoin-native context.
So, the new narrative is something like:
_âthese things didnât work, not because they are terrible ideas that collapse to moon math wrappers around gambling and scams under any remotely critical analysis, but rather because they werenât on Bitcoin. But also, since it has only recently become possible to (at least pretend to) implement them on Bitcoin, they are now worthwhile. We have wandered in the wilderness but learned our lessons and found the promised land._â
Technical and Economic Merit
Letâs consider all this through the lens of technical and economic merit once again. Or rather, the alleged merit given the stated goal. Ignore for now whether there is any merit:
2015 technical goal: new computing paradigm economic goal: x% of GDP?
The original idea of âcryptoâ allegedly has the merit of the next revolution in computing. Goodness knows how big that market is; probably a decent chunk of global GDP â if it meant anything, which it doesnât.
2016-17 technical goal: disrupting company formation economic goal: y% of S&P?
ICOs then become a little bit more specific. Now they are merely disrupting how we organize companies. Whatâs that worth? Some portion of the value of the companies that can now be decentralized and tokenized I guess? Who knows âŚ
2018-19 nothing to see here
Nothing happened then, donât worry about it.
2020-21 technical goal: decentralize finance economic goal: z% of NYSE, CME, ISDA?
Defi becomes more specific again. Now we are merely tokenizing financial contracts, expanding access, removing middlemen, and so on. So that should probably be worth some percentage of capital markets activity?
2022 nothing to see here
Oops, never mind âŚ
2023-today technical goal: now itâs on Bitcoin! economic goal: i% of ⌠Bitcoin?
⌠and now itâs on Bitcoin apparently.
In Hindsight âŚ
I think the most amusing analysis of all this is as follows: it starts off completely insane, it gets more and more restrained each time â you could cheekily argue it starts to make more and more sense â but it also gets closer to Bitcoin every time. Itâs clearly narrowing in on just: Bitcoin.
This is people realizing, painfully, over decades, what blockchains are for! They are not for âdecentralizing everythingâ They are for censorship-resistant, sound, peer-to-peer digital money.
And I think this is _also _why we get the current state of crypto from earlier in the essay. As it starts to make more and more sense (by getting closer and closer to Bitcoin) you have realizations like the following: digital gift vouchers for artificially scarce and extremely expensive computation arenât money, so we need âreal moneyâ in here for it to have economic merit, so you get stablecoins. Also, well we have a rich programming environment that seems technically interesting but also the severe technical handicap of being unable to do even a billionth of a billionth of a billionth of all the computations in the world, so you get crypto R&D. These emerge as a kind of patch, and they have _some _merit in isolation, whereas the long-term trajectory is actually just to converge on Bitcoin.
Itâs an open and fascinating question if there are any learnings from these that can still be transplanted to Bitcoin. For stablecoins, this strikes me as less clear, given the dubious technical merit is introduced by using a blockchain at all, not just a blockchain other than Bitcoin. However, efforts to create Bitcoin balances (tokenized or otherwise) that are stable relative to some external price are to be applauded, if still heavily scrutinized for what technical merit they _really _have.
It seems far more likely that crypto R&D will prove useful in a Bitcoin context to some or other degree, and in this case the economic merit is in fact solved by moving to Bitcoin, provided the necessary technical merit can be mimicked. At the time of writing, this is a source of both hope and dread: hope given the possibility of viable avenues of development (although still highly uncertain); dread given how early steps in this direction are already being misrepresented in the pursuit of bullshit and scams. I will return to both shortly.
Narrative Evolution
Back to the table just above, I want to make three quick observations that tie together my entire argument and get us to the end of the essay:
Firstly, the bubbles always follow the price of Bitcoin. Hopefully I donât need to include a price chart for the reader to grasp this immediately.
Secondly, itâs important that the narrative always changes. Absolutely ungodly amounts of money were raised for this crap following the_ Bitcoin _bull runs of 2017 and 2021. The people doing this couldnât point to the previous absolute disaster, so they had to spin something along the lines of: âwe learned our lessons and weâve refined the use case.â This should sound familiar from just above.
Thirdly, however, regardless of whatever refinement theyâve come up with, the consequence of the new ânarrativeâ is always, âbuy my tokenâ.
Always.
It doesnât matter what buzzword salad is in the middle. Itâs always âBitcoin is cool, xyz, fughayzi fughahzi, buy my token.â
This is why I am very much tempted to not care so much about developers, academics, entrepreneurs, and so on, and in fact for my null hypothesis to be that they are more likely to have been victims than perpetrators. I donât think they even end up in a position to contribute without the key group whom I do blame. When you put all these pieces together, what I think falls out of this analysis is as follows:
**The entire cycle of shitcoinery can be traced to unscrupulous financiers convincing capital allocators who donât know any better, in a bull market that, yes, Bitcoin is cool, but what they are doing is related, cooler, and that they deserve a fee. **
Let us label this the Capital Cycle Theory of Shitcoinery. I think that everything else about which one might want to complain is downstream of this core realization.
Avoiding It
Given everything Iâve covered this is simple and this is pretty much the end of the essay.
You need to be aware of why this is happening now. If it hasnât happened to you already (intended readership in the capital allocation business, that is) I guarantee itâs about to: with ETFs and the halving just past, we seem to be starting a Bitcoin bull run, these people have already raised ridiculous amounts of money on scams and bullshit that have mostly imploded. They may have lost a lot of money, or they may even have dumped on retail and got an excellent âreturnâ. But in any case, they need a new narrative.
Itâs _possible _they have a viable narrative around stablecoins, R&D, both, and that they are as wary of scams as I have suggested here that they should be. I donât want to insult anybody who merely has a different investment thesis to me if they are otherwise reasonable in their outlook and honest in their dealings.
However, if they are only now realizing how pointless and disingenuous every preceding crypto narrative has been after 7 years and hundreds of billions of dollars â or if they still donât realize it at all; if their track record shows they were deeply involved, handsomely rewarded, and yet created nothing of lasting value; if they say things like âthe builders are coming back to Bitcoinâ: be very, very suspicious. Be on the lookout for tokens, which is to say, be on the lookout for scams.
What is especially frustrating is that the technical spin of the âlayer twosâ that are all the rage at the time of writing, that âthe builders are coming back to Bitcoinâ to build, and that you, the capital-allocating reader, will almost certainly be pitched, is in and of itself pretty reasonable. They just donât require tokens and they donât require gambling to support the token prices. What they do require is _sound adherence to Bitcoinâs technical and economic merit. _At the very least, they require honest communication about the design trade-offs so far and planned for, and what, if any, economic and technical merit is left over after these trade-offs have been made.
Narrative aside, the _reality _of 99% of these projects is that they are private execution environments tied to multisigs custodying user deposits. Which is to say, on the one hand, that they are cargo culting âcrypto R&Dâ from Ethereum that isnât technically possible in Bitcoin in order to feign technical merit, and on the other, that _they arenât layer twos at all. _Once again, they may as well be Chaumian eCash mints, except for the fact that this would make the intended token scam all but impossible to pull off.
Casey Rodarmor, creator of the Ordinals protocol, recently joked on the _Hell Money _podcast he co-hosts, responding to the idea that âeverybody is building an L2 nowâ:
âItâs the same sad sack playbook as on Ethereum being recapitulated on Bitcoin. Thatâs how you get a VC check on Ethereum. They are all glorified multisigs, so they are like, âhey letâs port our glorified multisig to Bitcoin and get a VC check.â I was talking to a friend of mine who is working on an interesting project, an open-source analyzer that does transaction clustering, and I was like, âmaybe you could do this in this way and raise some VC money,â and he said, âyeah, okay, but whatâs the point in raising VC money?â And I said, âno, no, no, this is the end! This is the goal! You raise VC money and then you cut yourself checks from that VC money until it runs out and then you raise more at a 10x valuation. This is the new economy, guys!â
The 1% that are legitimately trying to bring the learnings from crypto R&D to Bitcoin in a technically and economically sound manner will hopefully win in the long run (and even this is somewhat speculative at the time of writing) but will likely get little to no attention amidst this bull market flurry of scams and bullshit.
Axiom will do its best to source and invest in these companies (we already have!) but we are resigned to it being a much more difficult sell to capital allocators in light of the Capital Cycle Theory of Shitcoinery. To be brutally honest, this entire essay can fairly be considered cope on my part in light of having lost this battle in the past and facing up to the very real prospect of losing it in the near future too. Oh well, at least I tried.
Wrapping Up
The essence of the Capital Cycle Theory of Shitcoinery is that the problems Iâve described ultimately come from bamboozling people just like you with technical sounding nonsense like âWeb 3â so you think itâs all a lot more complicated than it really is. Just buy Bitcoin. Thatâs certainly the first thing you should do anyway, and it might be the only thing you ever need to do.
If you really, really want to take the extra risk of investing in the Bitcoin ecosystem, the team at Axiom would be happy to speak with you. But we are never going to talk you out of buying Bitcoin. There is no world in which Bitcoin does poorly and we do well, or in which we promise something âbetter than Bitcoin,â and thereâs no point in engaging with us at all if you donât already believe most of this.
If thatâs of interest to you, weâd love to talk. If not, just buy Bitcoin. In any case: fair warning, we are heading into a Bitcoin bull market and the scams and the bullshit are coming. Good luck avoiding them.
Allen Farrington, June 2024
