Is crypto a gray technology destined for irrelevance?

With $1.4 trillion in blockchain-based digital asset value it might seem strange to think that all the hype may one day go away. Are we creating an enduring industry, or is this a temporary blip that shakes things up but eventually slides into irrelevance? Extremes aside, is there a middle ground of real value that persists but fails to disrupt the world?

The real answer is that no one knows. The more strongly someone thinks they know where the future is headed, the more dislodged they are from reality.  Bluffing confidence is a virtue in many domains, but not in forecasting. This is one area where humility dominates.

That said, my bet is that we're creating something real, enduring, and massively socially useful in crypto. I wouldn't be devoting my life to it otherwise, but the fact that I'm devoting my life to it makes me acutely aware of my own biases. I desperately want to believe that all the work we're doing, and all the value that has thus far been created is real.

Steve Randy Waldman presents a well-thought out article in which he considers crypto to be a "gray technology" whose valuable contributions are best absorbed by regulated industries instead of remaining in the unregulated wild west of "Satoshi-style open blockchains."

"Permissionless, inexpensive, authoritative computation does indeed make possible a tremendous range of new applications and institutions that we are only just beginning to explore."

He begins by acknowledging that there is real value that we're only beginning to explore, and that a large part of this comes from acting as a "gray technology" in which innovators are simply launching products in ways that regulated industries wouldn't be permitted. This permissionlessness certainly drives innovation, but we've seen plenty of examples historically where such things change existing industries rather than replacing them.

Uber and Airbnb are examples of innovate-first-then-ask-permission upstarts that ultimately succeeded. They both challenged archaic and unfair regulations that most people didn't even realize they despised until they fell in love with the new products. Napster is an example of pushing the regulatory boundaries, but then having the innovations that people cared about (easily accessible music and media content) delivered by incumbents who were forced to change.

"Although it is easy to mock, “DeFi” has demonstrated real value. Automated market makers and the near perfect arbitrage finance of “flash loans” represent real technical innovations within the plumbing of finance. Permissionless stablecoins enable experimentation with institutional forms that involve funds flows more complicated than simple payments, experimentation that previously was restricted to firms capable of partnering with conservative and often predatory banks."

The key to making gray technologies widely useful, he argues, is linking them back to the "real world." This means the regulated world. A powerful example he gives is that non-fungile tokens (NFTs) could easily represent real estate titles, but this doesn't become massively useful until legal systems accept the representations and courts enforce claims.

"If that were to happen, then with the help of valuation or appraisal “oracles“, home mortgages could be financed in the same way that people’s speculative crypto positions currently are, via automated collateralized lending platforms like Aave, Compound, or dYdX."

His main argument is that regulation will mature crypto and enable the technology to make an enduring impact across industries. Parts of the crypto world that shun regulation will ultimately recede in relevance as the main benefits are adopted in regulated sectors, which will be permitted to operate openly.

There is no doubt that melding crypto innovations to the "off-chain" world would have explosive impact. Legal systems recognizing digital ownership and enforcing it in the material world would change so much for the better. That said, it doesn't follow that everything going on in the crypto world today will remain disenfranchised from legal protections. Most serious public blockchain projects, like Horizen, have legal entities in regulated jurisdictions and strictly abide by the law.

Not everything happening in blockchain is regulated, but courts around the world are weighing in (largely favorably) that digital assets are property deserving of legal protection. It is not so unreasonable to think that much of DeFi, NFTs, AMMs, algorithmic stable coins, automated lending, etc. will be similarly protected by courts and recognized by regulators.

I love an intelligent debate and Waldman certainly offers a cogent argument. My main point is that the crypto industry is too diverse in tech, protocols, apps, talent, capital, and legal jurisdictions to think of binary outcomes. Parts of the industry will be welcomed by regulators and will induce regulatory change, while other aspects will remain extralegal and therefore less relevant over time as the benefits are subsumed by incumbents or innovators that play by reasonable rules.