A Taxonomy of Shitcoins: Introduction

Over the next few weeks, I'll be releasing a series of articles about cryptocurrency that focus on the shitty things that coin creators design into their coins. Sometimes it is by 

Broken Promises

Cryptocurrency technology has the potential to radically transform and improve human social and economic outcomes for all humans. I believe that this is a fundamentally good technology, something I've been waiting for all my life.

The benefits are legion: 

• increased trust
• decreased transactional friction
• more efficient markets
• autonomous agency
• transparent governance

However, they all have human implementations, and for the vast majority of coins I've seen, even the major ones, are fundamentally and intentionally flawed by some design choice, usually borne of greed. I hope to expose here that many of these choices will not only lead to a crippled cryptoeconomic system, but more importantly, it will lead to the the coins themselves being worthless as they are replaced by cryptoeconomic systems without these built-in flaws.

Economic Darwinism

It's important to understand that the entire value of these coins lies in the hope that supporters place in the currency to alleviate the problems with the current economic system and ultimately replace it. 

Most modern economic systems are composed of:

• A centrally-banked fiat currency
• A banking system for holding and lending
• A method of peer to peer "cash" transfer
• A legal system for business contract enforcement
• An exchange for sale and transfer of ownership contracts
• A government to set rules, provide security, and enforce order
• A taxation system to pay for the government

An economic system might be judged on its outcomes:

• individual freedom
• net productivity
• rate of poverty
• wealth equality
• innovation
• morality
• security
• sustainability
• happiness and life satisfaction

The last, of course, is the ethereal goal that all cryptocurrency supporters are interested in, either for themselves, or for others, but this is, of course, highly-dependent on the other outcomes leading to it. There is a reason why, for instance, wealth inequality is bad for freedom and innovation and productivity and everything else. I shall elaborate on these connections when addressing the specific issues.

Right now there is no real competition for the centrally-banked fiat system. There are two reasons for this:

1. It's actually pretty good at facilitating commercial growth, innovation, and productivity gains. The last 50 years have been incredible by these measures even after abandoning the gold standard. We don't have any way to know whether this is causal or incidental. 
2. The government that you paid for will literally kill you if you choose not to participate.

Let that second part sink in. Ross Ulbricht chose to use an entirely different economic system and ignore the laws of the dominant one. They took his wealth, sold it to Tim Draper, and sent him to jail. If he had refused, he'd be dead. This threat of the current economic system trumps all other features. It is the reason why other inferior economic systems persist in North Korea and Venuzuela and Iran and Haiti and truly all over the world, maybe even in the most civilized societies. I just want to be clear that in present day, it is not a positive economic outcome that decides which economic system wins, it's the ability for that system to create and maintain a threat of violence over it's own people to prevent them from switching. There are some good reasons for this, and I'm not ready to argue for or against the legitimacy of use of force, but I do want to point out that it is of primary importance.

It's all about the people

Clayton Christensen's book, "The Innovators Dilemma", was a seminal work in the economic theory of disruption, explaining why it was that small startups, using a new but inferior technology, could rise to dominance over entire industries in a fraction of the time it took to build those industries, and yet, the largest and best-managed and most innovative firms were unable to stop their own destruction. 

If I have to summarize the book, I would say:

• A dominant, well-managed, and innovative firm invents a new technology
• The technology enables an inferior product at a much lower price with higher supply elasticity
• The market for this product is tiny with much smaller margin, smaller than they can sustain
• An upstart uses the technology to cater to the under-served market at a loss
• The new market innovates to grow more demand at higher value
• The old market innovates away their demand for the expensive product
• The technology improves to increase margins and become profitable

The key here is that this process is driven by innovation within the under-served market of individual users that the new technology enables and the old system kept out. If your new system does not unlock the creativity and productivity of more individuals than the old system, it will get crushed by the incumbents. 

For cryptocurrency, the process might go something like:

• A massive and powerful system of incumbents exist to control the economy
• Something comes along that gives the vast majority of the population better economic opportunities than the old system
• This economy enables more innovation than the old one, and grows faster
• Eventually, this economy serves everyone better, even the enforcers of the old economy

It's that last part I want to focus on. Capitalism beat feudalism because it granted economic power to to innovative people that ended up building ships and sailing around the world for treasure instead of subsistence farming at the behest of their lord, but more importantly, the kings and lords and knights got rich too by investing in them. American slavery was an inferior system to sharecropping because sharecroppers built and bought machines that would eventually make the landowners rich, and yet they went to war to keep their obsolete system. 

The greedy get crushed

This is not about rising up and taking action or 'raising awareness' or any of that other social justice warrior bullshit. This is about how control always loses to huge numbers of innovative people. When you are designing a cryptocurrency, or choosing to invest in it, it's important to realize that the things that you think will make you rich, might eventually kill you. Right now, the market is driven almost entirely by "Un-creative Brokers", a term coined by Bill Draper in the 80s, which I can't even find on Google anymore. The term was mean to suggest that investors are really bad at determining market value, even if they are really good at determining value to other investors. Eventually the market and the people win though, possibly well-after your crypto-lambo dreams come true, but most will lose in a speculative swing of the zeitgeist. At some point, even investors will understand that the economic system that will win is the one that gives maximum benefit to the maximum number of creative agents. 

Technical difficulties

I'll also go into some technical issues relating to security, scalability, speed and inability to perform the operations that are claimed or expected of the cryptosystem. These shouldn't require much introduction.