Prime time for the May 10th Fluidity summit in Brooklyn was marked by the prize fight pitting NYU Stern Professor and crypto sceptic, Nouriel Roubini, known as Dr. Doom, against industry luminary and crypto legend Joe Lubin, co-founder of Ethereum and founder of ConsenSys, who defended crypto under the apt moniker – Mr. Dreamy.
Operating in the cutthroat worlds of academia and the pits of New York’s traditional finance industry, Nouriel Roubini came out brawling with the ring of the debate bell, while Joe Lubin, perhaps softened by the consensus ideals espoused by Ethereum and the crypto community, was bloodied.
Nouriel Roubini began his attack by reviewing financial industry history. He pointed to the 2008 housing and financial crisis as the beginning of the recent disappointment with centralized financial institutions and the trigger for growing interest in decentralization.
He made the point that financial crises are nothing new, and that in mankind’s early history, when economies were more decentralized, economic and financial crises were also far more virulent. Dr. Roubini argued that the rise of central banks and Keynesian monetary and fiscal policy smooths economic activity in a way that decentralization never can.
However, he conceded that there is a need for more transparency and democratization of the financial industry. However, he believes that Fintech was addressing this through AI, machine learning, big data, internet of things, and other non-blockchain based solutions.
He mentioned the rise of Alipay, Wechat Pay, PayPal, Venmo, Square, and other payment technologies as the true democratizers in the modern financial system.
Joe Lubin responded by discussing how blockchain technology is at its core a next generation database technology. It allows parties to trustlessly interact with one another and with counterparties and allows the tracking of digital and real-world commodities in a revolutionary way.
Real world goods, like tuna being delivered for a sushi dinner, can be monitored in real time with a clear record of ownership from the moment the product is pulled from the water. In addition, blockchain can address the need for more trustworthy systems to develop on the Internet allowing people to reclaim sovereignty over their online identity and so begin to repair broken aspects of the Internet.
Mr. Lubin pointed to a future where legally enforceable smart contracts on the blockchain will revolutionize voting, ownership and financial systems and allow creators and economic producers to access consumers and markets directly without going through costly intermediaries.
It was at this point that Dr. Doom went straight for the takedown. Nouriel Roubini argued that contrary to crypto and blockchain enthusiasts’ claims that these technologies would make the world more decentralized, “Cryptoland” itself was already highly centralized and would become more so with time. He laid out four key arguments for his viewpoint.
First, mining is already centralized. The largest mining company in the world controls approximately 25% of Bitcoin mining activity and 40% of Ethereum mining activity. The top three companies control more than 60% of all mining activity and the top five control 75%.
He argued that centralization will become more problematic as blockchains move from proof of work to proof of stake to increase transaction speeds. Second, there has been a move towards the accumulation of power by exchanges, and already 99% of all crypto transactions take place on centralized exchanges rather than through decentralized exchanges. Additionally, central exchanges are hackable and not safe, and even decentralized exchanges have been hacked.
Third, the ecosystem itself is created and developed by a small cabal of computer scientists, not by the general population. He cited the common referral of Vitalik Buterin as Ethereum’s “benevolent dictator”. Nouriel also cited the case of the DAO and that when something goes wrong, the code can be changed.
To him, this means that the code is not law, and coders are the judge, jury and prosecutor of cryptocurrencies. Finally, he pointed to a dark truth that while crypto claims to be a mechanism to promote the fair distribute of wealth, cryptocurrency wealth is instead highly concentrated.
The GINI coefficient, which represents the distribution of wealth in an economy, spans a range of 1 to 0. 1 represents an economy with all wealth concentrated in the hands of one person and 0 represents an economy with perfectly distributed wealth.
Nouriel cited Bitcoin as having a coefficient of 0.88, while the GINI coefficient of the U.S. economy is less than 0.5, and that of North Korea is 0.85. Therefore, Bitcoin represents an economy where wealth is more concentrated in the hands of a select few than that of the least transparent national economy, where most wealth is controlled by the Kim family.
Dr. Roubini continued his scathing attacks. He maintained that cryptocurrencies do not meet three requirements for money. Cryptos fail to be a unit of account as goods and services are not yet widely priced in cryptocurrencies, they do not meet the standard of a means of payment due to their inherent scalability limits on the number of transactions and problems with security, and that they cannot be a store of value as they are too volatile.
He pointed to issues in the ICO ecosystem stating 81% of new token issuances are scams, 11% are failing, and only 8% are actively traded on exchanges. He further likened ICOs and their core business model to cartels. He argued that utility and consumer tokens work to minimize the value of goods and services by restricting access to them, allowing only a small group of people to enjoy privileged access.
He argued that tokens muddy price discovery by creating a multitude of tokens with varying prices for similar goods and services, and that tokens were creating a world of bartering, throwing us back to the age of the Flintstones. Nouriel finally argued that writing down your personal key on a piece of paper to keep it safe from hacking was analogous to days past when people lacked trust in banks and kept their money hidden in their homes under their mattresses.
In this past, money was still destroyed by rats who ate the paper and stolen by robbers who went door to door, and that essentially keys stored on paper or kept in a bank offered no advantage.
Joe Lubin unfortunately failed to offer a strong defense of cryptocurrencies, and instead of providing strong counterpoints to Dr. Roubini’s arguments, pointed to a dreamy future where technologies such as Ethereum, ConsenSys, and Air Swap will work to create a fairer, more transparent, and more equal society.
While blockchain technology and cryptocurrencies do hold the potential to create an economic utopia, Dr. Doom’s analysis of the current state demands that we take a step back and consider how we as a community need to resolve these real issues and move forward to create the world we have envisioned.