Thread by @smdiehl

Some pundits compare blockchain to the dot-com bubble or the early internet.

This is complete nonsense. (1/) 🧵

You work in tech long enough, you start to understand the bubbly nature of it all. And that timing trends is just part of the whole structure of how things work, and how even bullshit can actually drive innovation if incentives are aligned. (2/)

And we've seen a TON of them even just in my time:

Agile, big data, blogging, cloud, CMS, data science, DevOps, IoT, intranets, Java, LANs, Linux, online advertising, microservices, PaaS, PDAs, search engines, social media, Web 2.0 ... the list goes on on and on.
(3/)

It's easy to just say, oh well cryptocoins are just another one these bubbly trends just like the others.

But they're not. There's a BIG secret difference.

And that secret is what makes the whole crypto space so prone to outright naked scams. (4/)

To understand why let's talk about the 'The Secret Life of Tech Startups' and how a company's financial incentive structure is its fate. (5/)

Most companies start life as a tiny Delaware C-corporation run by a few people with an idea to take a product to market. They sell shares in the company to early investors to raise seed capital to test the market. (6/)

Most of startups die at this point. Most ideas suck, the tech sucks, or there's no market for them and the company dissolves.

A few of them survive because the idea gains traction and there are customers who start to pay for the product or service. (7/)

At which point the company goes to a more sophisticated set of investors, pitches and says "Look at the market traction, there's something real here!". If the idea is good they raise more capital and begin to hire employees and address a larger market. (8/)

The founders and early employees take stock in the company as a form of compensation tied to the company's performance. An important point about that stock is that it is tied to what's called a 'vesting schedule'. (9/)

This an important restriction that limits when stock can be sold, to whom, and aligns incentives of employees with that of the company. A common vesting schedules requires at least one year of employment to start vesting and four years receive all shares. (10/)

A company at this stage is completely private, so its shares can't be sold to the general public until there's an initial offering. Which means there's a very tiny pool of insiders whose incentives are aligned to take the company public by making the product successful. (11/)

The company will likely continue raising external capital for many years to fund its growth, by approaching more and more investors, showing growth metrics and raising the private valuation of the company in proportion its growth and revenue. (12/)

The valuation is sort of a fuzzy number. But when the company does eventually go public, it will have to rationalize this valuation of its stock to the general public in it's S-1 filing in terms of its future revenue, product, and market size. (13/)

In the dot-com bubble, we saw a lot of public offerings of company that the public or Wall Street just didn't know how to value. Because the internet was so new.

We saw the rise of Google, Amazon, eBay, PayPal but also WebVan, Pets dot com, Kozmo etc. (14/)

There was a ton of froth in that market, but realize that Pets dot com is an early failed version of Chewy, and WebVan was an early failed version of Postmates.

There was a theoretical market need, the dot-com era one was just done very poorly. (15/)

A tiny few outright frauds made it to IPO, but most did not. It's easy to fool some people, but not all people. Majority of the bad ideas died as private companies because their products made no sense or weren't profitable. (16/)

The stock in these companies became as worthless as toilet paper because it was tied to the performance of the company, which couldn't take the product to market or public because it was unprofitable. (17/)

"Nothing important has ever been built without irrational exuberance."

There was a lot of irrational exuberance in dotcom era. There was also lot of new important technology built (browsers, search engines, etc).

A lot of failed products. But there were real products. (18/)

Now enter the cryptocurrency era, where there is absolutely a ton of irrational exuberance except with one key difference:

Instead of people raising equity, they're raising money for ventures on unregistered security tokens acting like company stock. (19/)

Now we have "blockchain network" companies, except instead of taking a product to market their stock/token IS the product.

It's as if WebVan skipped the whole van part and just sold shares in some abstract WebVan directly without the pretense of doing deliveries.
(20/)

Unlike stock, these tokens are immediately liquid, unregulated, can be sold to the general public, and completely detached from any revenue, traction, customers or any economic activity the company pretends to do.

These "companies" are purely synthetic financial products. (21/)

When your stock doesn't align incentives with any economic activity or product, capitalism does its natural thing and insiders are not incentivized to do anything BUT maximize the liquidity and value of their own shares at any cost for their own gain.
(22/)

In 17th century Russia, emperors used to build completely empty fortresses called Potemkin Villages to discourage invasion by creating the illusion of armies. And that's effectively what most crypto companies are. Illusions built around a token that does nothing. (23/)

The only business in crypto is trading tokens and facilitating the trading of tokens.

It's completely circular and non-economics, crypto tokens exist only to further more trading of crypto tokens. It's speculation purely for the sake of speculation. (24/)

And that's the big difference between the early web and the speculative sham market we see today.

The incentive structures around crypto startups whose only "product" is offering tokens doesn't produce any real products or services like the successes of the dotcom era. (25/)

Chasing illusions in this market is like what Oscar Wilde said of fox hunting: "The unspeakable in pursuit of the uneatable."

There is no Amazon, Google, or Microsoft of crypto and there never will be. Because incentives around it can only produce get-rich-quick schemes. (26/)

With crypto when you brush off the froth and speculation there is literally nothing there.

Nothing.

It's all an illusion built around insider pump-and-dump schemes, philosopher engineers building bridges to nowhere, pyramid schemes, and outright scams.

/fin