Why Privacy Coins Will Fail (And How To Make Them Succeed)(Repost)
Some heterodox ideas about the future of crypto-as-currency
Another oldie from minordissent.com. Honestly kinda cringe how cautious and bad at writing I was only 6 months ago (originally published in February), but I don’t care enough to spend time to make it better. Overall it’s a fairly solid post with some first principle ideas on the future of crypto-as-currency that most fail to understand, though you may have to work a bit for it ;).
Enjoy.
Preface
Before you get triggered and dismiss these ideas without consideration because they threaten your mental model on crypto, let me assure you: I am on your team.
I am pro privacy. I was using secure email since before Proton Mail was even founded. And Firefox with noscript, HTTPS everywhere, and UBlockOrigin before Brave was even conceived or TOR Browser had any traction beyond hackers and criminals.
I am pro privacy coins. I have actually used and own or have owned XMR, ZEC, DASH, and PIVX and philosophically support all of them.
I want privacy coins to succeed. I will not be satisfied with privacy coins being a niche market relegated to privacy spergs and criminals. I want everyone to have privacy.
Thus, my critiques are because I believe that solving these problems is necessary for the privacy and censorship-resistance of money to flourish.
Also, while privacy coins are technically the focus of this article, most of these ideas apply more broadly to crypto-as-currency in general and thus are worth understanding even if you don’t care much about privacy coins specifically.
Lastly, none of this really matters, because all these problems will get solved by market forces whether you believe them or not. However, being aware of the game theoretics of this market can help you predict and thus make money off these developments (or at least inflate your ego about how smart and predictive you are, which is just as important) and making spergs like you rich and powerful (or at least high in self esteem) is important to me. If nothing else, I enjoyed exploring these ideas and hopefully you will too.
Onward, plebs!
1. Convenience matters to people 100x more than privacy
99% of people use Gmail, <1% use proton mail.
99% use Google (or other search engines that sell your data), <1% use DuckDuckGo.
And ProtonMail and DuckDuckGo are at least 90% as convenient as the Google options. Imagine if they were only 10%. We’d be in the fractions of fractions of a percent.
Why? Because, for 99%, privacy is a “nice to have” while convenience is a “need to have”. Sure, privacy is infinitely more important philosophically, but even if you might base your decisions on high level philosophical abstractions (you don’t, but you probably do more than the average person), the overwhelming majority of people don’t at all.
The only people who care about privacy-first apps are:
1. Turbo privacy spergs who use XMR, ZEC, TOR because of philosophical reasons/it’s a fun technical challenge.
2. Criminals, because, if they don’t, they will go to jail.
These people make up probably 0.1% of the population.
The people who care about privacy-second are:
1. Semi privacy spergs (people like me and probably you who will choose some inconvenience to have privacy features; we use proton mail, duckduckgo, Brave, privacy extensions, maybe a VPN, etc; and support things like XMR, ZEC, and TOR, etc)
These people make up probably 1% of the population.
To everyone else: privacy is in the stack somewhere, but it’s far lower. And this will never change (to any significant degree).
So, if you want people to care about your privacy platform at all, it needs to have all of the function and utility of the non-private option with the added bonus of privacy.
Even popular apps that are highly secure, such as Telegram or iMessage, aren’t mass adopted because they are highly secure. They are mass adopted because they are awesome apps with features no other has and big network effects. Privacy is just a cherry on top (for 99% of users).
If you want privacy platforms to outcompete non-privacy platforms, they must provide ten times, not half, the utility (more on this later).
2. Humans Care About Kind, Not Degree
Object properties exist along a continuum of degree, but human utility operates along a binary (occasionally ternary or quaternary) of kind.
wat???
Let me explain via example:
You could gather 1000 items—from children, to shoes, to rocks, to scissors, to $20 knives, to $100 knives, to $1000 knives—and rank order them based on cutting ability.
In the realm of human action there is no continuum though, only a binary of “things which can cut [thing I’m trying to cut]” and “thing which cannot cut [thing I’m trying to cut]”. (This is also where the gender spectrum debate comes from, but that’s a-whole-nother post).
If your objective is to cut a piece of paper: A shoe or a child are both useless. While a $2 pair of scissors and a $1000 knife are both sufficient.
The continuum beyond the binary of "can or cannot cut this paper" irrelevant. If your shoe is made in the USA or China, constructed from real leather or suede, costs $5 or $100, or might be slightly less insufficient than a child doesn't matter. Its “kind” is still "thing that is not good for cutting paper".
Similarly, your $2 pair of scissors and $1000 knife are both "thing that is good for cutting paper" and so the downside of the fact that the latter costs $1000 is the same situation but in reverse. Going deeper down the continuum after you reach "thing that is good for cutting paper" has no additional benefit, and thus its additional cost (whether it be financial or otherwise) is not justifiable.
If your objective is to run a world class Sushi restaurant though, the kind-distinction is far further down the spectrum. A shoe, a child, a $2 pair of scissors, and a $100 knife are all equally useless. They fall under "things that are not good for cutting expensive sushi", regardless of whether they are on sale, or "new and improved", yours vs someone else’s, etc.
Here too there is a degree that becomes irrelevant: a $1M diamond tipped micro saw (I just made this up) is not better than your $1000 Sushi knife.
This cognitive framework—that value is subjective and is dictated by your individual goals—applies to everyone all the time, a calculation we are constantly running in the background with everything we buy, every product we use, and even company we keep or the people we date. It’s why some people have $800 4K monitors while most are happy with $100 1080p ones. Or why most gamers are happy with a $300 xbox while some cannot believe you wouldn’t pay $3000 to play your game on a 1440p curved ultrawide at max settings with 120 FPS you reprehensible and abominable console peasant. Or why most are happy to drink a $10 bottle of Jack Daniels while me n’ the boys won’t settle for anything less than 10-year-aged $100+ sipping whiskey. Because different goals (I want to be able to read emails vs I want to play immersive competitive multiplayer games; I want to get drunk vs I want to have a pleasant tasting experience, etc) dictate the marginal utility of any good.
Now sure, this binary can be shifted by circumstance—whether it be because I can't find my $100 knife so must use my $20 one or because technology, culture, economy, etc shifted—but that the binary exists does not.
So, bringing this back to money:
If my goal is to send money to grandma my distinction of kind is something like "can I easily send money grandma can use?". I will unconsciously go through the calculation of variables like how well I know the platform, how easy it is to access, what’s available to me, how trustworthy it is, how easy it is for grandma to set up, etc which then will populate a continuum of something like Cash > Check > Venmo > Bitcoin > XMR and then conclude that Cash or Check are "things that work" while Venmo, Bitcoin, and XMR are "things that don't work".
If however I am a turbo privacy sperg or a criminal my distinction of kind is something like “can I send money untraceably online?”. When this group performs the same calculation they get a continuum of something like XMR > ZEC > mailed Cash > Bitcoin > Paypal > Credit Card, then conclude that XMR and ZEC are something that work, while mailed cash, bitcoin, and Paypal are something that don't.
And semi privacy spergs like me are something like “can I send money quickly and ideally securely?”. But since there is not a convenient ways to send transactions privately, crypto's are all nopes, so we’ll just stick with venmo (begrudgingly).
The TLDR on this is: your amazing innovations of zksnarks or tumblrs or whatever else, are to the average money spender what $1000 knives or leather-instead-of-suede boots are to someone trying to cut a piece of paper. They are either insufficient or unnecessary overkill.
Until you can nail this kind distinction, where it is a "yes" and also the most practical "yes" then: NO MASS ADOPTION 4 U.
3. Network effects and first mover advantage matter
Projects like Secret Network meet the first requirement of being equally as functional with the added benefit of privacy (or at least should soon) for smart contracts (a use case we for sure know crypto solves. We have a long time before we know whether medium of exchange really is 10x better via crypto). So will secret network take off?
Well, Turbo privacy spergs and criminals will use them as long as they are ~50% as functional, and semi privacy spergs like me will probably use them as long as they are 90%+ as functional.
But even if Secret Network, or Proton Mail, or DuckDuckGo, become twice as good as the non-privacy options they replace, they still will not receive mass adoption. Because there are many more factors that make a differentiation in kind relevant for most.
First mover advantage is real, and it matters. Almost every coin since Bitcoin is “better” than Bitcoin. Yet Bitcoin crushes them (and will probably eat them/their tech eventually). Such results occur in most domains—whether it be email providers, cell phones, cryptocurrencies, or ideas. Why?
Because Pareto (note: one of the most important concepts about how reality works that has ever been devised so you should definitely learn about it).
Power begets power. Money begets money. Influence begets influence. Being first to market dominance means you become a gravity well for everything that will make you even more dominant.
Similarly, network effects are real, and they matter.
The fact that I can use my Gmail account to log in on most websites is not because Gmail is smart, it’s because Gmail is big. Millions of other businesses choose to integrate Gmail into their system for the convenience of users. This further compounds their power.
This is why the 10x rule is a thing (I cant find the link on this but it’s a commonly understood view in the start up scene. TLDR if you want to supplant an existing service that already has mass adoption, you can’t be only 1.5x, nor 2x, nor even 5x better than that existing service. If you wang any chance of dethroning it, you must be 10x better). Having a product that is 2x as good or even 5x as good doesn’t matter because the product itself is only one tiny fraction of the equation that determines whether people will use it.
This is why, for example, crypto communities are built in telegram, not Signal, even though it’s even more private. Because the network effect and features and size and convenience matter far more than the marginal increase in privacy (kind, over degree).
Given that privacy is a “nice to have” for 99%, privacy-anything in the crypto space will continue to be a niche market until your privacy platform is at bare minimum 5x better than your competition, and it’s private.
4. Store of value/price stability happens first. Medium of exchange happens later.
The biggest debate in the cryptocurrency community is how something becomes money. The entire Bitcoin Cash/Bitcoin SV fiasco is clear evidence of this.
Back in 2014, this debate was reasonable.
Today, I don’t see how it’s still contestable. Bitcoin won. Over. And over. And over. And over. Despite that it went against Satoshi’s vision. Sorry. Satoshi got something wrong. He may be one of the smartest people on earth and built one of the most important inventions in human history but that doesn’t make him God. Now the question is simply: what exactly did he miss? (edit: assuming he actually did miss it. What’s also possible if not likely is that the Bitcoin early adopters missed it, and because there were far more of them than there were of him, they drove the narrative of what it was “supposed” to be and were just wrong).
As far as I can tell, it’s that he thought a money could become a currency before it was widely regarded as a store of value.
In retrospect, (<- One of the top 5 most important Bitcoin articles ever. Your opinion on Bitcion’s future is basically invalid if you haven’t read it.) it’s clear that every medium of exchange in history started out first as a store of value and only became used as a currency after everyone involved trusted that it had value.
The process seems to function something like this:
There are 7 key properties of allow something to enter the competition of becoming money:
Scarcity — it has low supply. Precious metals good, Sand bad.
Durability — difficult to damage or destroy; persists through time. Mountain good, food bad.
Verifiability — easily identified as authentic. Gold good, sick note from your mom to get you out of school bad.
Fungibility — one piece can be swapped proportionally for another of similar size, weight, or denomination. Dollar bills good, race horses bad.
Divisibility — can be subdivided while maintaining proportional value. Blocks of cheese good, human beings bad.
Portability — easy to store and transport. Dollar bills good, gold okay, cows bad.
Established History — history of maintaining all it’s properties and enough time for most to agree on it’s value. Gold great, dollars good, bitcoin okay, newer coins bad.
To be considered for the role of a store of value, something must be (ordered approximately by how heavily they’re weighted) scarce, durable, and verifiable.
This is why art, family heirlooms, real estate, and shiny Pokémon cards can be used as stores of value despite making shitty currencies.
There are lots of things that are very portable, fungible, and divisible (sand, rocks, tulips, feet pics) and yet they’ve never been money because they fail the first list of prerequisites to being a store of value.
Only once things have proven themselves good stores of value over time, do a small subset of them that are also portable, fungible, and divisible then get to compete for the role of medium of exchange.
Over time the one that cumulatively scores the best on all these metrics, and maintains it score over time (established history) survives the natural selection process and becomes the de facto money (because any network is subject to network effects and thus one will always end up with 90% of the user base).
I can understand how Satoshi may have missed this given that the invention of Bitcoin is seemingly what sparked anyone to even care to figure out how this process works.
But today, ten years later, there is no excuse for nocoiners like Schiff and Medium of Exchange Coiners like Bitcoin Cash-ers to not know this.
“Gold was valued as jewelry then became money”
No. gold was valued because it was scarce, durable, and verifiable. It just so happened to also be malleable and portable, so people eventually started making it into jewelry so they transport it, and given that only wealthy people had gold to be made into jewelry, eventually this led to people just wearing jewelry as a way of signalling wealth. There are lots of pretty rocks that we made jewelry out of that never become a MoE.
“Gold’s intrinsic value as a commodity is why it became money”
Wrong again. Gold had functionally no use case other than as a store or signal of wealth until very recently. Further, gold as a commodity actually reduces its value by increasing velocity as well as increasing demand for mining (thus increasing total supply). Gold would likely be worth far more if it never found any industrial applications.
For these reasons: Bitcoin and its children/competitors make generally poor mediums of exchange (for now). And it’s not because of tx fees or confirmation times. It’s because no one wants to use a volatile, untrusted asset as a medium of exchange.
The whole point of a medium of exchange is that it allows me to efficiently barter across time and space. I sell my labor energy (or its creations), for money and then use that money to buy other people’s labor energy (or its creations) in the future. It saves me from having to drag my cow around town looking for someone who wants it and will trade for bananas I want, which could take forever, and likely would require several steps (ex: The only guy who wants my cow sells boots and the guy who has banana's wants chickens so I have to trade my cow for boots, then my boots for chickens, then my chickens for bananas. Super inefficient and why we invented money). If I couldn’t trust the medium of exchange to maintain its value (SoV needs to maintain or go up but MoE needs to stay stable), it defeats the entire point of a medium of exchange (I'd rather waste the time of bartering, or tolerate the long term downward trend of fiat, than suffer price instability of Bitcoin in the middle of my transaction).
This is why Bitcoin and its children aren’t (today) a better medium of exchange than dollars. And there is no change you can make to them to make it better at this. Or at least no change you’d want to make that would actually matter (ex turning it into a defecto stablecoin).
The only use case for a new, untested, and volatile platform is doing things you can’t already do but which you want 10x more than the existing alternative.
Which is why the only use case for privacy coins right now is—as Bitcoin during its early years was—to do illegal things or for privacy/tech spergs to be privacy/tech spergs.
The only way for something to be a store of value and a medium of exchange is for it to have a stable price.
And the only way you get a stable price is through adequate established history (or, thanks to smart contract tech, by pegging it to something with an adequate established history).
The only money which meets these requirements at the moment is fiat (Gold used to be good but hasn't been for at least a century).
So you either have to wait a decade or two until everyone concludes on the price of your token and it stabilizes in price (and also we have built out all the MoE infrastructure for Bitcoin) before you get off the ground…
Or you use something like secret network to make DAI and ZEC have a baby (which will eventually probably shift the peg away from USD onto BTC or at least Yuan).
And only then are just getting started! You still have the problem of who cares that it’s private and why would I go through all the effort of switching when it’s not 10x better than what I’m using now?
Conclusion
Until we find some way to stabilize the price of privacy coins (which doesn’t destroy the integrity of the decentralized and secure nature), they will never be used as a medium of exchange (This logic also applies to anyone else who wants any crypto to be an MoE).
And until that medium of exchange is 10x times easier to use and more effective than the ones we have now (USD, primarily) it will never be mass adopted.
That doesn’t mean Monero or Zcash or Dash or PIVX can’t go up in price. They probably will, because in crypto number go up (as long as the govt doesn’t blacklist them from all regulated platforms) but they will, minus a few likely spikes, continue to bleed to Bitcoin.
And if you even care about the previous paragraph, it simply affirms my point that privacy coins are (today) shitty currencies, given that even you, an ardent supporter, are using it as a store of value rather than currency.
Unless you think private store of value is a use case (which it actually might be but not until Bitcoin breaks $10T at least), it's only because you think that they can outpace Bitcoin in price. Which. they. definitely. can’t (and If you believe that any of these will ever break their all-time highs relative to Bitcoin, I’d be happy to bet 1M sats on it. Email me).
With that said: privacy coins are in some sense more important than Bitcoin. Or at least they use a similar technology to solve a different problem Bitcoin can’t touch. Bitcoin (if it succeeds) solves the federal reserve problem. But it does not solve the privacy problem (if anything, it could make it worse).
Privacy coins don't need to solve the Federal Reserve problem, nor the I Want More Money problem. Bitcoin has got the covered. (and that's a good thing because they suck at it).
They need to solve the how to scale private transactions problem. So start there.
Good dae.
—Max
I agree with you.
Scenarios that come to mind:
1st = Nobody (99%) cares about privacy ever: Total privacy is just a niche market (selling illegal stuff, hiding wealth if you're rich (think of a replacement for offshore bank accs)). In this case XMR (I will use XMR because it's the main one) would go up slowly over time in USD value. Will it go higher measured in BTC? Probably no.
2nd = privacy becomes more and more relevant as BTC becomes the de-facto SOV or MOE when people finally realize that it can all be tracked. In this scenario XMR would be worth it but several years down the line (let's say at least 10 years = 2 more cycles).
3rd = privacy is relevant for the common guy but it gets implemented into BTC somehow, making it a semi-private cryptocurrency, enough for most people to still use it. In this scenario XMR survives as a very niche crypto.
I would love for XMR to become the real MOE, but seeing how the average guy cares jack shit about privacy the 3rd scenario seems the most plausible. The trend is for first-movers to become bigger and bigger while the dev community provides solutions to the most pressing problems (fees, speed, privacy, etc). The same is happening with ETH and LINK.
Nonetheless, I still hold a stack of XMR just in case, cause this world is crazy and anything can happen.