One vision of future is that people will earn money playing games and trading between each other.

People in Philippines earn their livelihood playing crypto game Axie Infinity, a phenomenon that started during the pandemic out of economic hardship. Elsewhere, the market value of NFTs surpassed $40B, as people exchange tokens that have some text string written in them (i.e. non-fungible) and there are now books on earning passive income from NFTs, because, you know, there is nothing people cannot turn into a market.

A circular self-sustaining speculative system propelled by easy money? You could say that this is what smart contract blockchains achieved so far and I would mostly agree.

But in the same breath, you could say that the vision of cypherpunk future that smart contract blockchains aspire to is incredibly inspirational, powerful and relatable. Seems to me that every 10 years or so, a technology comes around that inventors believe is revolutionary enough to forget the practical constraints of the world.

If you really wanted to throw a rock at bitcoin, you could say that it is a long excel table of transactions. There is a code and that code safeguards who can add to the list, i.e. send bitcoin. Its value has grown so much not because of that code, but because it is like a pandora’s box, once released into the world it can never be put back. The genesis block in 2009 at the peak of the GFC was the Emperor’s-New-Clothes moment for the global monetary system, something that was not clear back then, but is increasingly apparent in hindsight. You can copy the code, but you cannot copy bitcoin because it is that one excel table that people are using and it is that one excel table that has all the transactions going back to 2009.

Ok, so an excel table that allows you to transfer unlimited value with a single click and no one can stop you. Goes pretty far toward realizing that cypherpunk vision, no?

But wait, what if we make a better excel table, one that can also perform programs (smart contracts) wouldn’t that be better? Because then the better excel table can not only add transactions to the list; it can also add transactions to the list when some pre-determined conditions are met. So, for example, the better excel table could create a loan agreement between two people. One sends collateral to an address to get a loan from another person. If the terms of the agreement are not met because the borrower doesn’t pay interest to the lender’s address, for example, the collateral would be liquidated by the smart contract. All of this automatic, but even more importantly outside of control of people.

Aha! This sure sounds like the cypherpunk visions come true. If you could convert even complex legal financial instruments like a loan or insurance to a code, then the whole economies can be run anonymously between people peer-to-peer with no involvement from government or corporations, in a more egalitarian world of future, where socio-economic structures are not determined by elite intrigues?

“Hello,” a distant voice of reality.

It is not too difficult to get concerned about the fact that anonymity prohibits credit creation. In DeFi, you cannot get a loan unless you deposit a (much) larger collateral because anonymous parties do not have, by definition, any creditworthiness (and also because crypto is volatile and the value of the collateral can fluctuate).

This applies to other instruments as well. If a farmer wants to hedge his harvest because he is unsure of weather next year, he’d like to buy insurance, which is really just a derivative contract for an investor. If in a hypothetical scenario that a crop future is encoded in a smart contract, both the farmer and investor cannot just maintain a margin to be in the future, but have to pay up in full, i.e. there is no credit, this is immensely limited. 

This is not a matter of a lack complexity either. You may be able to encode a complex legal contract into a code, but the code can only reach and take what is on blockchain.

There is no eye for an eye in finance and credit is the blood of real economy. The (many) smart contract blockchain powered decentralized financial applications seem to ignore that. So far, they are operating systems “powered by crypto tokens, for the purpose of moving around tokens.”