Still struggling with the basics of cryptography? You’re not alone

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Cryptocurrency Updates

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Over the past few weeks, I have embarked on a journey that many investors have taken before me. I put a metaphorical wet towel over my head and immersed myself in the world of cryptocurrency.

It was surprisingly difficult. Partly, that’s because crypto, like any field of accelerated innovation, is a cult place where insiders have in-depth knowledge that defines them as a tribe. At present, society is split between a small minority of actors with doctoral level understanding and a kindergarten audience, with few of them.

The other problem is that this world requires an unusual mix of intellectual skills. Alexander Lipton, a friend, Wall Street veteran and math professor, describes the problem in a book he recently co-authored on the subject, Blockchain and Distributed Ledgers.

Cryptocurrencies, the book notes, lie at the intersection of three areas: “(a) cryptography (to ensure the integrity of transactions); (b) game theory (to build consensus on the state of the ledger); and (c) economics (to design appropriate economic initiatives) ”.

Most people can understand two of the three, but “mastering all of them is a difficult task.” In other words, determining whether a particular cryptocurrency is a Ponzi scheme or not requires knowledge of IT, finance, psychology, or anthropology.

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To understand why this is important, consider the issue of “decentralized autonomous organizations” or DAOs, a hallmark of the Ethereum ecosystem. They are quasi-businesses, but they are run by automated computer programs, not humans, to organize participants to complete joint projects (usually funded by cryptocurrencies).

If there was an institution such as a regulator overseeing DAOs, or a well-known bank that manages one, investors could judge whether a DAO was trustworthy based on their level of trust in that institution. But there is none. Instead, trust relies on computer code, which is (supposedly) structured in a way that prompts all DAO participants to behave responsibly (for example, by offering a transparent way to track behavior and ensuring that anyone who behaves badly will be punished).

However, you cannot verify whether the trust is justified unless you understand this computer code. And you probably can’t determine the value of a DAO’s business without knowledge of economics and game theory, which would allow you to determine, for example, whether the community has a common interest in protecting. his value.

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(This is not a theoretical problem. As two recent books, The Infinite Machine and Out of the Ether explain, there was a massive hack on a DAO project in 2016 that almost saw the entire Ethereum system. implode until the community comes together to save it.)

So why are relatively few people understanding all three areas of crypto? Basically our education systems do not yet train students in this way, while institutions such as banks tend to place people with these skills in different departments. The IT team is not the same as the economics research group.

In the regulatory world, the institutions responsible for overseeing IT and finance have also traditionally been separated. And even if you think of financial regulation as “fair”, there is another challenge around definitions. In a country like the United States, products that are securities are regulated by the Securities and Exchange Commission. So if bitcoin is a security, it falls under the SEC.

But if it is also a money or payment system, as many crypto evangelists insist, it should fall under the wing of the Federal Reserve or the Office of the Comptroller of the Currency. If it is best viewed as a commodity such as gold then it is the responsibility of the Commodity Futures Trading Commission.

Crypto evangelists say their tokens are all three. But a world where everyone could take matters into their own hands is a place where no one could really feel empowered to act, especially since regulators are national in scope but the market is cross-border in nature.

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So you don’t just need three knowledge pools to understand cryptocurrencies at a micro level, but also at a macro level: you can’t predict the future of crypto without judging the health of the currency. fiduciary and global financial system, nor without knowledge of IT trends. (A judgment on the value of cryptography is also a prediction of whether breakthrough technologies such as quantum computing could allow cryptographic passwords to be hacked.)

Predicting the future of crypto also requires political and social analysis: will governments try to control this? Could they? Will they work together?

Of course, such epistemological issues are not unique to cryptocurrencies. But it is the speed, scale and ambition that make it so difficult for our institutions to catch up. With our brain.

So if, like me, you feel stuck in the crypto manger, don’t be ashamed. There’s a good reason for this, and it’s the same reason that regulators and organizations need to reorganize for the 21st century, just like schools and universities. In the face of crypto, we need to show curiosity and humility, not qualities normally displayed by educated elites.

Follow Gillian on Twitter @gilliantett and email her at [email protected]

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