The dirty little secret of smart contract blockchain powered micro-economies that we like to call DeFi is that they are remarkably reminiscent of a Ponzi scheme .. a Ponzi scheme with incredible future potential, but nevertheless, in its current state, a Ponzi.

…big operating system powered by crypto tokens, for the purpose of moving around… crypto tokens. — Lyn Alden

They have no connection whatsoever with anything productive in the real world. To the extent, they are able to pay high interest rates, this is because new money flowing in pays for the old.

And I kind of very much think that all DeFi users, traders and investors alike know this, and are ok with this long-term big, short-term game-only theme.

The issue is that to this day, people make direct comparisons between this smart contract open economy of future and bitcoin.

Bitcoin is a successful creation of artificial scarcity, I wrote before:

You and I can type up some numbers and letters on our computers (f5d8ee39a430901c91a591…) but they would mean nothing. The trick is to achieve an agreement among all users that this string of numbers and letters is scarce. If you send that string of numbers and letters to someone else, the database updates, something gets deducted somewhere and added somewhere else. And because that something is scarce, it is valuable. This is what bitcoin can do and it can do it well.

Being the first that has done this, bitcoin has, is and will be facing the suspicion that it is a Ponzi scheme. In reality, bitcoin is nothing like; bubbles don’t burst three times in a decade and come back stronger on each reversal.

But, if it is indeed completely abstract, and if it is lacking the higher-level programmability of the ethereum-like blockchains, then why does it have value?

It is both intuitive and ironic that some of the harshest critics of bitcoin are gold investors, who glorify the long-term importance of “owning physical,” meaning that it is always more to own gold in its physical forms than certificates based on it because certificates are only a guarantee of a counterparty; they can be manipulated, inflated, canceled, etc. They do, of course, know that “abstracting away” the physical in the form of certificates, titles and the vast universe of other layers of products derived from and built on top of underlying assets are THE invention of finance that keeps the wheels of economy spinning, but they stress the importance of owning physical because it is counterparty-free.

Again, because it is counterparty-free.

The ironic bit is that they are unwilling to see that someone in 2009 created something that performs the role of gold (scarce, counterparty-free), but in a superior way (perfectly transferable over communication channels).

Bitcoin, a new base layer of monetary system.

When you send someone money from your bank account to someone else’s bank account abroad, no money or gold or other valuable thing ever moves. Instead, the banks have accounts with each other. The bank of your recipient deducts some money from that account it has with your bank, and immediately adds it to account of its customer, your recipient. Just zeros and ones. When you do this locally, when you send money to someone else’s bank account within the same country, the central bank (e.g. FED using FEDwire) adds money to its account with the bank of the recipient and deducts money from its account with your bank.

You can see how this system is fragmented (thousands of intermediaries each keep their own version of truth) and very old from a technology perspective, since this is what money truly is:

…money and the vast universe of financial products that sit on top of it are wholly abstract social constructs that are moved around as zeros and ones between intermediaries using computers running very old code on multitude of patched together networks. Imagine hundreds of millions of lines of near machine-level (i.e. human unreadable) code consisting of instructions in number & letter combinations and low-level commands like “ADD,” “EXECUTE” and ”INIT.”

OK, the system works, but it does not work well enough to be adequate for the internet world we live in. Yes, you should be able to send value as easy as sending an email.

With the advent of cryptocurrencies, it is becoming acutely evident to everyone that this fragmented system of thousands of databases should really be replaced with a single database.

This is what bitcoin is: the layer 0 — one unified, government-free database that financial system will build new layers on top of. You can go further and say that in the same way that the wealth of countries (and their ability to take out loans) was determined by their ownership and control of gold before 1971 and the U.S. dollar after 1971, countries will have to have bitcoin.