The Complete Argument Against Crypto

Disclaimer: 99% of the content on is genuinely mine. In rare cases, when I stumble upon pieces I find extraordinary remarkable, often published to more volatile outlets, I “save” them here. The following has been contributed by Stephen Diehl.

People often say we shouldn’t throw the baby out with the bathwater when it comes to crypto because it might be the new internet. I beg to differ. There is no baby. It’s not a new internet. And a complete rejection of the entirety of all crypto is the only intellectually defensible position.

All analysis of technology and engineering needs to embrace scientific skepticism. There is no place for sitting around and singing Kumbaya and listening to the appeals to moderation about logically incoherent ideas. All models that are predicated on contradictions need to be culled and exposed as invalid models. Human progress depends on scientific skepticism and there is no idea that is beyond scrutiny. In this framework, we can logically reject any and all possible crypto projects based on three arguments, that no amount of future technology or regulation could ever fix. These are simply irremovable contradictions that will doom the entirety of the crypto project (and its rebranding as “web3”) to the ash heap of history:

  1. The governance problems of private money are incompatible with democracy and the rule of law.
  2. There are irremovable privacy, scalability, and recentralization contradictions at the core of any and all permissionless blockchain solutions.
  3. There are vast negative externalities that every blockchain-based investment inevitably entails.

Before we expand on (1), (2), (3) in-depth, we will carve out a temporary exception that by “crypto” we are referring to only speculative investment coins (Bitcoin, Dogecoin, Ethereum, etc). This argument excludes three things that sometimes get lumped in with cryptocurrency but whose characteristics and externalities are sufficiently different as to be either excluded or addressed by an alternative argument at the end of this article.

  1. Central bank digital currencies
  2. Permissioned blockchain ledgers
  3. Stablecoins

Governance Problems

Private money issued by corporations or private individuals is an affront to democracy. The very idea is an extreme extension of the neoliberal program that the west has been flirting with since Reagan and Thatcher. Except for this time they want to wrestle control of money from the state and distribute it to private enterprises. This project1 goes back to Friedrich Hayek in 1976 and his book The Denationalization of Money.

The number of conflicts of interest a society like this would have are absolutely mental to consider. Instead of our President or Prime Minister deciding to sanction foreign adversaries, we would then have to go to the likes of plutocrats like Jeff Bezos and crypto exchange CEOs to make the final call about foreign policy. The wars of the future are going to be fought financially and private money issuance would give unelected people, with no public interest obligations, the unaccountable power to wage war on a personal whim. This is an unimaginably awful state of affairs that starts to resemble some cyberpunk neo-feudal dystopia of proxy wars between digital oligarchs. For all the controversy there was about Zuckerberg and Dorsey banning the last president from their social media platforms, the existence of unaccountable private money would exacerbate that very same problem on a titanic geopolitical scale. And yes, democracy is slow, inefficient, imperfect, and rarely if ever lives up to our highest ideals; and yet it is still far better than the tyranny of the unaccountable. Private money is an affront to the very foundations of liberal democracy, an extreme expansion of neoliberalism, and needs to be rejected in its entirety.

Yet, this all even presumes that crypto even worked as private money as its apologists claimed, the saving grace of the crypto project is that the worldview of its developers is so warped by broken ideas and heterodox economics that they can’t even technically design a proper digital currency. This phenomenon manifests at every level of the technology’s design and the internal contradictions its developers ignore, and in the externalities they didn’t—or chose not to—consider.

Irremovable Contradictions of the Technology

Crypto projects have two degrees of freedom in their construction based on two ideas: the public ledger data structure and the consensus algorithm.

If we were to explain a public ledger structure to the lay public, it’s like an append-only spreadsheet that only admits adding new rows. Each row is a transaction between different pseudonymous network participants that credit and debit wallet accounts. Each row once written cannot be modified, cannot be deleted, and every transaction is final. Each of these properties is sold as a feature of a blockchain-based solution, yet in practice, they are software architectural errors when dealing with the real world.

Pseudonymous wallets2 are incompatible with the KYC/AML regime of most countries, which require financial institutions to track the identities of participants transacting above a certain threshold. These laws exist for very good reasons and are used to mitigate and prevent illicit financing, money laundering, terrorism financing, and sanctions evasion.

In practice, in the presence of chain analysis techniques pseudonymous wallets are generally quite discoverable and leak massive amounts of information about the parties transacting to anyone in the public. Unlike traditional bank accounts and banking secrecy laws, anyone’s complete history of all transactions is accessible to anyone who simply has their public wallet address, which may leak vast amounts of personal information that most companies and individuals prefer to keep private under both normal business practices and general public financial privacy norms. This makes transacting in crypto both completely undesirable and potentially dangerous in allowing stalking and the unintentional disclosure of private financials. This is an irremovable contradiction of the public ledger design that the blockchain requires for its very existence.

Any alleged solution to the transaction privacy problem is indistinguishable from money laundering. A theoretical fully private permissionless ledger would lead to a Cambrian explosion of investment fraud and would become a payment vehicle for organized crime, enabling mass illicit financing3, shadow banking4, tax evasion, and crime on a scale unseen in human history if left to run unchecked.

Central to the externalities of all these projects is the capacity to become recentralized. Recentralization5 is a term for blockchain projects which allege decentralization in either their technical design or political imaginaries, yet produce an outcome in which control of the protocol remains centralized in the hands of one or several central parties again6.

On top of the wallet privacy problem, the very maintenance of self-hosted wallets requires end-consumers to have a level of technical fluency, information security, and operational security to keep the private key that is far beyond the average individual. This notion that every citizen should become their own bank is completely untethered to reality. If the proposed solution is that individuals are forced to rely on third-party crypto bank-like structures to maintain their holdings then we arrive at a logical contradiction that undermines the proposition of decentralization and simply recentralizes the solutions that banks already offer.

In addition to the problems with the public ledger data structure, the consensus algorithms used to synchronize the public ledger between participants are all deeply flawed on one of several dimensions: they are either centralized and plutocratic, wasteful, or are an extraneous complexity added purely for regulatory arbitrage.

Proof of Work is a consensus system that maps wasted computational energy to a financial return, both in electronic waste and through carbon emissions from burning fossil fuels to run mining data centers. Proof of work coins like Bitcoin are an environmental disaster7 that burns entire states’ worth of energy and is already escalating climate change, vast amounts of e-waste, and disruption to silicon supply chains. The economies of scale of running mining operations also inevitably result in centralized mining pools which results in a contradiction that leads to recentralization.

The alternate consensus model Proof of Stake is less energy-intensive however its staking model is necessarily deflationary, is not decentralized, and thus results in inevitably plutocratic governance which makes the entire structure have a nearly identical payout structure to that of a pyramid scheme that enriches the already wealthy. This results in a contradiction that again leads to recentralization which undermines the alleged aim of a decentralized project. The externalities of the proof of stake system at scale would exacerbate inequality and encourage extraction from and defrauding of small shareholders.

Any Paxos derivative, PBFT, or Proof of Authority systems are based on a quorum model of pre-chosen validators. In this setup, even if they are permissionless in accepting public transactions, the validation and ordering of these transactions is inherently centralized by a small pool of privileged actors and is thus recentralization. Any other theoretical proposed system which was not quorum-based and required no consumption of time/space/hardware/stake resources would be vulnerable to Sybil attacks which would be unsuitable for the security model of a permissionless network8.

If we attempt to layer logic (so-called “smart contracts”) on top of this permissionless public append-only database architecture we end up with a nightmare environment for software exploits. This is best evidenced by sites like Web3 is Going Great which chronicle the near-daily implosion of many web3 and decentralized finance applications built on smart contracts. Unlike with normal financial software, any anonymous actor in the world can interact with a smart contract, the developers are forced to code in an extremely hostile execution environment in which they must predict all possible attack vectors on their logic before deploying the software. This is only exacerbated by smart-contract language like Solidity which has extremely loose semantics inspired by Javascript and does not easily admit static analysis. Proving both the coherence of developer intent and business intent against a piece of code is an extremely hard (and open) computer science problem that is forced on unwitting developers. In the “code is law” model users who interact with broken or exploitable contracts have no recourse to the courts or law enforcement to rectify fraud and exploits.

The insane software assumptions of smart contracts can only give rise to a digital wild west that effectively turns all possible DeFi enterprises into an all-ports-open honeypot for hackers to exploit, and manifests the terrible idea that smart contracts are just a form of self-service bug bounty9. This all gives rise to an absurd level of platform risk, that could never provide financial services to the general public given the level of fraud and risk management required to even interact with it10.

Transaction reversal and fraud mitigation through due process and the courts is an essential feature of all financial services, and yet adding this capacity to a permissionless system would undermine the very decentralization premise on which it was built. This is an irreconcilable contradiction.

Append-only public data structures, permissionless consensus algorithms, and smart contracts are all technically interesting ideas, but could never be a foundation for finance or for handling any sensitive or personal user data. The technology is not fit for purpose and cannot be fixed.

Negative Externalities

Every single crypto token invites a whole slew of externalities from the inherent contradictions11 that arise out of its alleged currency status while simultaneously being completely unsuitable as a currency12. In the presence of the failure of these cryptocurrencies, all manner of elaborate myth-making13 has formed to post hoc rationalization of crypto tokens not as currencies but as financial assets. However, as financial assets, they are extremely pathological14. A financial asset is a non-physical asset whose value is derived from a contractual claim on income, cashflows, an underlying currency or commodity, or risk transfer between counterparties. A crypto token has no income, and no underlying business or commodity. A token may have a non-zero market value, but its fundamental value can never be anything but zero15.

A crypto tokens market value will always be subject to wild shocks and insane volatility because it has no demand generated from any real economic activity other than gambling. There is no economic mechanism for the price of these assets to ever stabilize. The purpose of markets is to do price discovery on goods and services. If you remove the exchange of goods and services from the equation, then you have a gambling parlor.

Crypto tokens may indeed make something that is fun to gamble on as a form of recursive speculation on the sentiment of what the next greater fool will buy it for, but ultimately this is a zero-sum gambling game that is completely economically non-productive and abandons any pretense of utility whatsoever. The absence of any fundamentals of the asset encourages only one way of getting an edge on the market, not by having greater insight into the investment, but by market manipulation and the formation of cartels to manipulate the price of crypto assets.

Speculative investment tokens present as almost indistinguishable from multilevel marketing schemes16 (MLM) in which early participants are encouraged to recruit into the scheme to recover their losses and create exit liquidity for a massively negative-sum game that can only ever pay out a tiny fraction of early insiders. Thus the scheme requires the construction of a socially corrosive culture of “hodl”ing these hot potato investments under the veneer of either phony populism17, predatory inclusion and appeals to wealth generation for marginalized individuals, or the creation of a self-organizing high control group18 which artificially creates demand and maintains an environment where inflows into the scheme are synthetically warped to exceed outflows.

These speculative tokens have no future. They are indistinguishable from digital multilevel marketing schemes and differ only in that they wrap themselves in impenetrable technical and financial obscurantism19, libertarian politics20, techno-solutionism21, and empty appeals to the inevitability of some imagined hyper financialized future which can never be realized because of the internal contradictions the technologies are built on22. This all serves as a cover for post hoc rationalization of investing in this toxic asset class built purely on the theory of the greater fool and for cartels of insiders to enrich themselves by defrauding the public at a mass scale using historically-banned financial scams and opaque market making23.

Exceptional Cases

Central bank digital currencies (CBDCs) are a controversial topic. They do not fall under this argument because at least hypothetically they are governed by a nation-state, they could function as a currency, and the centralized and private design of such a system does not admit the same negative externalities that arise out of permissionless blockchain systems. CBDCs are however controversial because they expand the surveillance apparatus of the state to levels that may not be acceptable within financial privacy norms.

So-called permissioned blockchain systems or “distributed ledger technology” are a controversial topic in software24. However, their controversy is rooted in software architecture concerns rather than public harm concerns since these technologies are not attempting to reinvent money from first principles and have no speculative “get rich quick” component and thus have little if any negative externalities25. This nearly 30-year old pattern is likely a software architectural dead-end, or only applicable in niches as to be almost useless in practice. Others and myself have written about this extensively.

Stablecoins are also an exception because they completely lack a speculative component since their value is allegedly derived from a peg to an actual currency. However, the problem with all existing stablecoins26 as they’re currently implemented is that they depend on other crypto networks such as Ethereum, EOS, Tron, Algorand, Solana, and Stellar. Since these chains are funded by speculative MLM tokens they inherit the problems and externalities of their parent platform. It is at least theoretically possible that a stablecoin could be built without dependence on the speculative MLM tokens, however, in such a hypothetical scenario a stablecoin that complied with KYC/AML which offered a dollar derivative account stored on a private distributed ledger would almost be indistinguishable from a bank without any insurance on customer funds. Even if this was not a regressive idea27 and was somehow desirable, it begs another existential question about the fundamental value of the recentralization of banks with no clear story for what the value add would be if it were brought within the regulatory perimeter with consumer protections28.

The ideas and implications of widespread public crypto use are all terrible and are making the world a worse place29. These are not problems that can be fixed with newer or shinier future software technology. These are intractable problems baked into the design of every possible permissionless blockchain network that attempts to be a solution for private money or an investment.

The theoretical upsides of every crypto project are entirely illusory30, it is a solution in search of a problem and its very foundations are predicated on logical contradictions and software architectural flaws that cannot be resolved. And conversely, the downsides of all of crypto’s externalities are massive and become more pronounced every day it is allowed to continue to exist. It is a project that from a purely utilitarian perspective can never not create more net suffering than good by its very design. Crypto is like an evil genie that only fulfills neoliberal grifters’ darkest wishes, and this genie needs to be put back in the bottle because it is an abomination.

There is no golden path possible with crypto. Every future where it succeeds can only lead to one of various anarcho-capitalist or techno-feudalistic hells. A complete rejection of the entirety of the cryptocurrency project is the only intellectually defensible position left.

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