Buyers, Beware: Everything You Need To Know When Considering Crypto

A deep dive into Matt Levine's "The Crypto Story" summarizing financial systems, NFTs, blockchains and risks.

Photo Source: Kanchanara on Unsplash

It’s not often we come across an article so rich in information that we believe it alone will teach us everything we need to know about a specific area. After discovering “The Crypto Story” by Matt Levine in Bloomberg, we knew we had to share it with all of you.

Warning, this is a very long article, and it may take a few hours to read. But don’t worry, we summarized the main points for you below. From Web 3 and blockchains to NFTs and different financial systems, we (and Matt Levine) have got you covered.

Circling back to 2008, Satoshi Nakamoto invented crypto, more specifically Bitcoin, as an electronic payment system. The goal was to allow two parties to directly transact without involvement of a third party, such as a bank.

But why was this needed? What is the purpose of crypto?

1. Trust in financial systems today is reliant on banks and large financial industry companies.

As Levine puts it, “modern life consists in large parts of entries in databases.”

If you have deposited money in the bank, that money is now in your bank’s database. If you have invested shares in stocks, you are now on a list in the database of the company or whoever owns that stock.

And we trust these databases and database owners because it’s the easy thing to do. It’s easy to look at big companies and invest because you may associate your future success based on how successful you assume they are. It’s easy to keep your money in the bank where no one can steal it based on the assumption they are required to give you all the money back.

However, not everyone shares this trust. Not everyone trusts banks and not everyone trusts the laws regulating them. After recessions, this has proven to be a valid fear.

But can crypto really be trusted instead? After all, Satoshi Nakamoto doesn’t even exist! This name is a pseudonym, covering up the real, anonymous inventor.

2. Web 3 wants to decentralize this trust, but the financial system behind crypto must be trusted not to break.

One main issue in crypto is known as the “Blockchain Trilemma.” Blockchains can be only two out of three factors: Secure, Decentralized or Scalable.

Photo Source: Bloomberg

A scalable blockchain can process many transactions quickly. A decentralized blockchain doesn’t need multiple trusted parties. A secure blockchain is encrypted to protect transactions.

Whichever two factors a blockchain chooses to possess can determine whether or not they are reliable. To trust a crypto financial system, you need to ensure the coding won’t fail or the transactions and accounts won’t be hacked.

Bitcoin and Ethereum are two systems that chose decentralization and security, but run slower. For fast and centralized systems, Levine provided the following example, “If your consensus mechanism is ‘We trust six computers to verify all transactions,’ that’s going to be faster than Bitcoin’s proof-of-work algorithm. But if someone hacks those six computers, look out.”

3. NFTs are minted after they are sold, and there is a chance their appearance can be compromised.

Although NFTs and Bitcoins both act as tokens, they serve different roles. All bitcoins are identical, but NFTs are numbered to determine different values.

Let’s look at the Bored Ape Yacht Club NFTs as an example. Every NFT with a different number represents an ape with a different outfit or expression. Some numbered NFTs that look “cooler” will be worth more than others.

As far as compromising appearance goes, consider the following blog statement by the well-known, but anonymous, software engineer and hacker Moxie Marlinspike, “... Anyone with access to that machine, anyone who buys that domain name in the future, or anyone who compromises that machine can change the image, title, description, etc for the NFT to whatever they’d like at any time (regardless of whether or not they “own” the token). There’s nothing in the NFT spec that tells you what the image “should” be, or even allows you to confirm whether something is the “correct” image.”

Essentially, owning an NFT is like owning a web server with a picture on it, and that picture is likely beyond the blockchain’s control.

4. It’s easy to lose it all.

There are no password resets in blockchains.

When you own Bitcoin, you have a public Bitcoin address and a private key to access the Bitcoin in that address. Without both the public address and private key, you lose that Bitcoin.

There are ways to keep track of these, such as “software wallets,” which are usually desktop or phone apps or browser extensions.

If you don’t trust yourself to manage private crypto keys, there are ways to earn from crypto without holding crypto. Companies such as CME Group Inc. offer Bitcoin Futures, which is a trusted, centralized way to participate in crypto through betting. Consider Levine’s hypothetical example, ““I’m just going to enter into a bet with a hedge fund on the price of Bitcoin. For every dollar that Bitcoin goes up, the hedge fund will pay us $5; for every dollar that it goes down, we’ll pay them $5.” However, buying futures is expensive, so it’s not a highly considered option.

We hope this summary gives you enough information if you are considering crypto or just want to learn more about it. For more information, read the full article below.

Best,

Ariana for the Don’t Count Us Out Yet Team