TL;DR All of crypto is accepting and suffering from an association with toxic financial speculation, but not all of crypto needs to be.
Crypto is already at the last step: moral uproar over crypto is flooding the internet. Regulators are coming, though the decentralized nature of blockchains presents them with a unique challenge.
Some of the so-called web3 movement is about fighting the battle for populist speculation. Maybe that’s a battle worth fighting, and maybe not—again, look to history, or maybe to Devil Take The Hindmost and Speculative Communities (both of which I’ve only read some of).
A huge portion of the crypto design space, though—coops, art, mutual aid, crowdfunding, grants, international payments, and more—doesn’t require speculation and so suffers its downsides needlessly. We, people working in these areas, shouldn’t take this lying down. We should consciously limit or remove speculation from our systems whenever possible, and we should make sure the world knows it. This blog proposes some steps towards doing that.
I’m sure you can find a million definitions of financial speculation, but here’s what I mean in this piece:
Speculation is buying or selling something based on its perceived future value, rather than its perceived present value.
An asset can be speculated on if it has:
The creator of an asset can profit from speculation if:
Speculation on an asset can also be encouraged if the asset is concretely connected to future growth, i.e. it grants governance rights or profit-sharing in a project.
Without speculation, people fund things because they value their utility: I contribute to a graphic novel Kickstarter only because I want the graphic novel.
With speculation, people fund things for both utility AND financial upside: I invest in a publishing company because I want to see certain books published and because I will gain financially if the publisher succeeds.
The unreasonable effectiveness of speculation as a fund-raising tool is perhaps the main reason speculation is so popular in crypto (and crypto’s questionably legal lowering of the barrier to it may be the main reason crypto is popular at all).
Speculation creates an incentive to invest in things that will succeed: things that will create lots of good for society in the future. Speculators have a financial interest in discovering and accelerating such projects, and so, in theory, speculation leads to more good things created more quickly.
This one is arguable. Many people become wealthy speculating, but lots lose money, too.
It’s possible this point has become more relevant today, because of the internet and other new technologies globalizing markets while lowering barriers to entry. If, in today’s environment, odds of a new venture’s success are lower than ever—but successful ventures are more profitable—then speculation is more important than ever, and it should not be restricted to the already wealthy.
Adding speculation into a system creates a powerful extrinsic incentive that can override intrinsic incentives.
In other words, start with a community that cares about art or stories or games, add a speculative asset representing membership in that community, and suddenly people start caring about the market price of the asset. They may start viewing everything the community does in terms of its effect on the price of membership. Too much of that and the essence of the community is destroyed. So:
Similarly, speculation can corrupt social curation and recommendation:
In a non-speculative venture, the steps to success are generally:
Speculation, cynically, lets you skip step 2:
And indeed, we see way too many crypto projects doing just this. Building the idea is how businesses are supposed to do good for society. Skip that step and you have at best a waste of time and money, at worst an outright pre-meditated fraud.
Speculation adds an extra reason to buy things — it’s a little like adding a free lottery ticket into every purchase. If you liked golf already, how can you resist buying new clubs when you’ll get to play with them AND there’s a chance you could resell them in a few years for 10x returns? It’s very easy to convince yourself to make that purchase, and much of the moral outrage surrounding populist speculation revolves around speculation as anti-social gambling, enticing people to spend irresponsibly.
When bubbles pop, sure there are a few Ivar Kreugers, but there are a lot more Jane Doe’s that lose their retirement savings because they, or their pensions, fell for this trap.
To design a system with little or no speculation, simply don’t do all the things from the definition above.
Use assets that have at least one of:
Have no skin in the speculation game:
Do not encourage speculation by connecting an asset’s value to future growth, such as by granting governance power or profit-sharing rights to asset holders.
These design principles are all gradients: secondary markets vary widely in who can access them and their liquidity; asset lifespans can be more or less unpredictable; more or fewer assets can be retained by creators; and so on. Despite that complexity, I think this is a decent checklist to help systems designers think comprehensively about speculation.
Little to no speculation:
It seems likely that regulation will eventually change the speculative landscape of crypto soon enough: it has often happened that way. But in the mean time:
In my humble opinion, crypto builders should:
Sometimes, we all want to do something that’s just for fun or just about art and isn’t about making money. Designing speculation out of projects that don’t need it and communicating that will help people find their fun and avoid fraud. It’s good for the space.
For everyone else: before you use a crypto product, first try to understand the role speculation plays in it, using this framework or another. Crypto, for better or worse is pretty radically transparent: if you don’t like what speculation does to projects, you should be able to avoid it.
P.S. To make this stuff more pro-user, we could even consider creating a third party certification body or DAO that evaluates the level of speculation in a project’s token designs and gives it a rating for “speculatability.”