https://www.bloomberg.com/features/2022-the-crypto-story/

BW-CRYPTO-LEDE-LO-LO__1920.mp4

There was a moment not so long ago when I thought, “What if I’ve had this crypto thing all wrong?” I’m a doubting normie who, if I’m being honest, hasn’t always understood this alternate universe that’s been percolating and expanding for more than a decade now. If you’re a disciple, this new dimension is the future. If you’re a skeptic, this upside-down world is just a modern Ponzi scheme that’s going to end badly—and the recent “crypto winter” is evidence of its long-overdue ending. But crypto has dug itself into finance, into technology, and into our heads. And if crypto isn’t going away, we’d better attempt to understand it. Which is why we asked the finest finance writer around, Matt Levine of Bloomberg Opinion, to write a cover-to-cover issue of Bloomberg Businessweek, something a single author has done only one other time in the magazine’s 93-year history (“What Is Code?,” by Paul Ford). What follows is his brilliant explanation of what this maddening, often absurd, and always fascinating technology means, and where it might go. —Joel Weber, Editor, Bloomberg Businessweek

Featured in Bloomberg Businessweek, Oct. 31, 2022. Subscribe now.

I Ledgers, Bitcoin, Blockchains

A.

Life in Databases

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MODERN LIFE CONSISTS IN LARGE PART OF ENTRIES IN DATABASES.

If you have money, what you have is an entry in your bank’s database saying how much money you have. If you have a share of stock, what you have is generally an entry on a list—kept by the company or, more likely, some central intermediary1—of who owns stock.

These intermediaries include the Depository Trust & Clearing Corp., which owns most of the shares of most US companies on behalf of everyone else. If you own stock, what you have is an entry on DTCC’s list entitling you to some of the shares DTCC holds, and it has an entry on a company’s list of how many shares it owns.

If you own a house, things are slightly different. There’s a house involved. But your ownership of that house is probably written down in some database; in the US this often means there’s a record of you buying the house—your title—in a filing cabinet in the basement of some county clerk’s office. (It’s not a very good database.) In many ways the important thing here is the house: You have a key to the front door; your stuff is there; your neighbors will be unsurprised to see you leaving the house in the morning and would be surprised to see someone else coming back in. But in many other ways the important thing is the entry in the database. A bank will want to make sure you have the title before giving you a mortgage; a buyer will want to do the proper procedures to that record before paying you for the house. The key will not suffice.

Lots of other stuff. Much of modern life occurs online. It’s not quite true that your social life and your career and your reputation consist of entries in the databases of Meta Platforms and Google and Microsoft, but it’s not quite false, either.

Some of this stuff has to do with computers. It’s far more convenient for the money to be computer entries than sacks of gold or even paper bills. Some of it is deeper than that, though. What could it mean to own a house? One possibility is the state of nature: Owning a house means 1 you’re in the house, and 2 if someone else tries to move in, you’re bigger than them, so you can kick them out. But if they’re bigger than you, now they own the house.

Another possibility is what you might think of as a village. Owning a house means you live there and your neighbors all know you live there, and if someone else tries to move in, then you and your neighbors combined are bigger than them. Homeownership is mediated socially by a high-trust network of peers.

Neighborhoods, where everybody knows your name.

A third possibility is what you might think of as a government. Owning a house means the government thinks you own the house, and if someone else tries to move in, then the government will kick them out.2 Homeownership is mediated socially by a government. The database is a way for the government to keep track. You don’t have to trust any particular person; you have to trust the rule of law.

You don’t need to live there, because the government’s knowledge is sufficient. You can rent out the house: Someone else can move in with your permission. If you revoke the permission, you can go to the government, and it will—subject to landlord-tenant law, etc.—kick the person out.

Money is a bit like that, too. Sacks of gold are a fairly straightforward form of it, but they’re heavy. A system in which your trusted banker holds on to your sacks for you and writes you letters of credit, and you can draw on those letters at branches of the bank run by your banker’s cousin—that’s pretty good, though it relies on trust between you and the banker, as well as the banker and the banker’s cousin. A system of impersonal banking in which the tellers are strangers and you probably use an ATM anyway requires trust in the system, trust that the banks are constrained by government regulation or reputation or market forces and so will behave properly.