How Sam Bankman-Fried and the FTX implosion exposes crypto’s spiritual crisis.
As the FTX.com implosion rippled across my timeline this week, and I watched web3 wunderkind Sam Bankman-Fried go from being one of the good ones – a team player, a real pro, Mr. Best Practices, the smartest guy in the room, crypto’s man in DC – to being … well, just another finance guy who blew himself up and took the system down with him (it’s a big club), I thought back to a DM exchange I had with populist lefty policy wonk Matt Stoller during the moon phase of the most recent web3 mania.
It was early December of 2021, and I was trying to crypto-pill Matt. After all, Matt is for breaking up the power of Big Finance, reining in the Federal Reserve, rebuilding the US industrial base, and other things that flag him as the kind of person who should at least be crypto-curious. Yet he thinks crypto – not just web3, but Bitcoin as well – is all a giant scam. As he would write shortly after our exchange:
The amount of utopian bullshit and fake promises on a technology that doesn’t really work as anything but a speculative bubble and money laundering device should be a big red flag. Crypto is a movement based on the theory that the existing nation-state is a system rigged by billionaires, and the right response is to create a different and more corrupt order rigged by different billionaires, money launderers, and dictators. It will of course all end in tears, ironically when the Fed ends its monetary stimulus creating bubbles across the economy. That much we know. But how much ruin this movement engenders will depend on whether and how quickly we can restore the legitimacy of our existing governing systems.
In addition to Matt’s criticisms of web3 in the above piece, he had another knock against it that he had shared with me privately in DMs* and that was only obliquely referenced in his article: the lobbyists that Crypto Inc. had hired to push the industry’s interests in halls of congress were the same standard-issue Conservative Inc. suits who’ve been pushing deregulation, “free markets,” and the hollowing out of the US industrial base for the past few decades. And now these guys were pushing crypto, which immediately pattern-matched to Matt as, “meet the new boss, same as the old boss.”
(*Matt has given me permission to talk about our DM conversation for this piece.)
I countered his negative characterization of the crypto lobby with a “when in Rome” type of argument that went something like: if these lobbying shops have been effective, then this absolutely is who crypto should be hiring to Get Things Done. They are just operating, as one does when one is an operator.
So I had my reasons for why guys who appear to be doing standard-issue bad guy stuff right in front of God and everybody are not necessarily bad. But as of this week, I will admit that regardless of the many disagreements I still have with Matt’s arguments against crypto, the “Type of Guy” analysis part of Matt’s read on the whole space has aged fantastically well – far better than my “operators gonna operate!” response.
Things have turned out exactly like Matt expected based purely on the Type of Guy the crypto industry put in front of the DC blob. This is really not great.
Indeed, if you were trying to design a scenario that would hurt crypto’s chances of getting a fair hearing in Washington, you couldn't do much better than the sequence of events described in this article from The Diff. Crypto still needs allies in the blob, and this FTX fiasco is going to make that harder to do.
Of course, Sam Bankman-Fried was not a lobbyist, but he was a hirer of lobbyists, and one of the prominent public faces of crypto in the nation’s capital. SBF, as Bankman-Fried is known online, was in the thick of the battle of the future of crypto regulations in the US, and with his institutional backing and sterling reputation, he was able to wander the corridors of power and get recognized as Mr. Crypto.
This scorching thread from Jesse Powell, CEO of rival crypto exchange Kraken, pretty well sums it up:
Financial crisis, spiritual crisis
What crypto desperately needs in this moment is a vibe shift away from a mentality that glorifies the grindset hustler moonboi type of guy. This mentality hasn’t so much ignored all the red flags listed in Powell’s excellent thread as it has actually taken them to be valued tribal markers of realness.
But operators gonna operate, right? When in Rome? No, that era is over. The task before us now is to shift the vibe of the entire crypto ecosystem to something that's laser-focused on two key qualities that we require in anyone whose platform we bless with our trades, whose bag we fill, and who speaks in our name:
Transparency by default, fully exploiting the public nature of the blockchain and the power of the latest cryptographic tools.
Strong, provable alignment with a set of higher ideals that go well beyond naked self-interest.
Free-market maximalists and even many centrist libertarians will cry about this second point. Well, they can cry more.
Markets are miraculous tools for achieving certain kinds of ends, but they are not ends in themselves. Markets are the ultimate optimizers, but they cannot tell us what goals to optimize for. Markets can get us where we want to go, but they cannot identify a destination.
We have to decide the ends, the goals, the destination ourselves. And such decisions are made by communities that have come together around shared values and a common vision of human flourishing. Community-centered values and visions are the necessary inputs for markets and even for democratic processes, not the contingent outputs.
Web3 actually does get it
What you may not be aware of if your only view of crypto is the price action and the drama, is that there are important parts of the web3 world that understand well what I’ve just said about subordinating markets to communities and their values. They have learned all this in the past few years from first-hand experience in the crucible of web3.
The current best thinking on web3 communities, the evolution of which I’ve been fortunate to witness across Discords, VR, Twitter, and other web3 spaces over the past year and a half, is that you build aligned communities first, and once you’ve laid a foundation of shared values, norms, and goals, then you can thoughtfully, intentionally introduce crypto assets like tokens as a market-based coordination mechanism.
One of the main lessons of the DAO era has been that starting with the token first tends to attract moonbois who have a fundamentally predatory relationship to any community they join. They show up to score early tokens, which they then flip to bag holders before moving on to the next Discord. They don’t care what happens after they cash out.
If your goal in starting a DAO is to actually accomplish something important in the world (other than enriching early speculators), then this token-first, pump-and-dump paradigm is actively harmful. It will strangle any real community in the cradle.
The moonboi persona SBF represented – i.e., the type of guy who publicly flaunts a legion of red flags in a kind of crypto-capitalist May Day parade – was already depreciated in savvier web3 circles well before the crypto bubble was ever pricked by the fed. The next wave of crypto communities will start with values and a vision – something like Balaji’s “One Commandment” – and once they’ve gathered enough people who are on the same page about what they want to accomplish in the world and how, they’ll introduce tokens for incentives, reputation, access, and other elements of governance.
Many of these communities will no doubt end up back on the same old path of pump-and-dump. But a few will actually achieve real things in the real world, and they’ll do it with combinations of markets and governance structures that no one has ever seen before.
If the DeFi 1.0 era was about using web3 as a kind of lab for rapid financial innovation, then the DeFi 2.0 era – or whatever we decide to call crypto’s post-moonboi era – will be about using web3 as a lab for rapid political innovation. Governance models, market structures, and whole ideologies will blossom, grow, die out, and seed the next wave of social arrangements.
In the near-term, crypto as a whole will get smaller and more focused. We might even think of it as entering its Pope Benedict XVI phase, as the then Cardinal Joseph Ratzinger put it in his 1970 book, Faith and the Future:
The church will become small and will have to start afresh more or less from the beginning… She will no longer be able to inhabit many of the edifices she built in prosperity. As the number of her adherents diminishes ... she will lose many of her social privileges ... As a small society, the Church will make much bigger demands on the initiative of her individual members ...
This is good, actually, and I am here for it. Enough of the “free market” fundamentalists. Enough of the moonbois, the SBFs and the Do Kwons, the team players, the East Coast ladder climbers from a handful of feeder schools. We need smaller communities that are in it for more than a quick buck. That means there will be less money in crypto until we can learn to build things that are worth investing not just our dollars but our lives into, and that’s the way it should be. Communities first, then coins. Human values, then market value.