definitely i think the good democrat / guy with a real worldview (EA) was compelling to me. and plus the story of a smart trader who didn't buy into the crypto stuff. but man this is so crazy.

— Eric Newcomer (@EricNewcomer) November 9, 2022

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There are a few different ways to interpret Sam Bankman-Fried’s political activism:²

• That he believed in the causes he supported sincerely and made a mistake with his business.
• That he supported the causes cynically as a way to curry favor and hide his fraud.
• That he believed he was some sort of savior gripped with an ends-justify-the-means mindset that led him to believe fraud was actually the right course of action.

In the end, whichever explanation is true doesn’t really matter: the real world impact was that customers lost around $10 billion in assets, and counting. What is interesting is that all of the explanations are an outgrowth of the view that business ought to be about more than business: to simply want to make money is somehow wrong; business is only good insofar as it is dedicated to furthering goals that don’t have anything to do with the business in question.

To put it another way, there tends to be cynicism about the idea of changing the world by building a business; entrepreneurs are judged by whether their intentions beyond business are sufficiently large and politically correct. That, though, is precisely why Bankman-Fried was viewed with such credulousness: he had the “right” ambitions and the “right” politics, so of course he was running the “right” business; he wasn’t one of those “true believers” who simply wanted to get rich off of blockchains.

In the end, though, the person who arguably comes out of this disaster looking the best is Changpeng Zhao (CZ), the founder and CEO of Binance, and the person whose tweet started the run that revealed FTX’s insolvency.³ No one, as far as I know, holds up CZ as any sort of activist or political actor for anything outside of crypto; isn’t that better? Perhaps had Bankman-Fried done nothing but run Alameda Research and FTX there would have been more focus on his actual business; too many folks, though, including journalists and venture capitalists, were too busy looking at things everyone claims are important but which were, in the end, a diversion from massive fraud.

Crypto and the Theory Narrative

I never wrote about Bankman-Fried; for what it’s worth, I always found his narrative suspect (this isn’t a brag, as I will explain in a moment). More broadly, I never wrote much about crypto-currency based financial applications either, beyond this article which was mostly about Bitcoin,⁴ and this article that argued that digital currencies didn’t make sense in the physical world but had utility in a virtual one.⁵ This was mostly a matter of uncertainty: yes, many of the financial instruments on exchanges like FTX were modeled on products that were first created on Wall Street, but at the end of the day Wall Street is undergirded by actual companies building actual products (and even then, things can quite obviously go sideways). Crypto-currency financial applications were undergirded by electricity and collective belief, and nothing more, and yet so many smart people seemed on-board.

What I did write about was Technological Revolutions and the possibility that crypto was the birth of something new; why Aggregation Theory would apply to crypto not despite, but because, of its decentralization; and Internet 3.0 and the theory that political considerations would drive decentralization. That last Article was explicitly not about cryptocurrencies, but it certainly fit the general crypto narrative of decentralization being an important response to the increased centralization of the Web 2.0 era.

What was weird in retrospect is that the Internet 3.0 Article was written a week after the article about Aggregation Theory and OpenSea, where I wrote:

One of the reasons that crypto is so interesting, at least in a theoretical sense, is that it seems like a natural antidote to Aggregators; I’ve suggested as such. After all, Aggregators are a product of abundance; scarcity is the opposite. The OpenSea example, though, is a reminder that I have forgotten one of my own arguments about Aggregators: demand matters more than supply…What is striking is that the primary way that most users interact with Web 3 are via centralized companies like Coinbase and FTX on the exchange side, Discord for communication and community, and OpenSea for NFTs. It is also not a surprise: centralized companies deliver a better user experience, which encompasses everything from UI to security to at least knocking down the value of your stolen assets on your behalf; a better user experience leads to more users, which increases power over supply, further enhancing the user experience, in the virtuous cycle described by Aggregation Theory.

That Aggregation Theory applies to Web 3 is not some sort of condemnation of the idea; it is, perhaps, a challenge to the insistence that crypto is something fundamentally different than the web. That’s fine — as I wrote before the break, the Internet is already pretty great, and its full value is only just starting to be exploited. And, as I argued in The Great Bifurcation, the most likely outcome is that crypto provides a useful layer on what already exists, as opposed to replacing it.

Of the three Articles I listed, this one seems to be the most correct, and I think the reason is obvious: that was the only Article written about an actual product — OpenSea — while the other ones were about theory and narrative. When that narrative was likely wrong — that crypto is the foundation of a new technological revolution, for example — then the output that resulted was wrong, not unlike Musk’s wrong narrative leading to major mistakes at Twitter.

What I regret more, though, was keeping quiet about my uncertainty about what exactly all of these folks were creating these complex financial products out of: here I suffered from my own diversionary narrative, paying too much heed to the reputation and viewpoint of people certain that there was a there there, instead of being honest that while I could see the utility of a blockchain as a distributed-but-very-slow database, all of these financial instruments seemed to be based on, well, nothing.

The FTX case is not, technically speaking, about cryptocurrency utility; it is a pretty straight-forward case of fraud. Moreover, it was, as I noted in passing in that OpenSea article, a problem of centralization, as opposed to true DeFi. Such disclaimers do, though, have a whiff of “communism just hasn’t been done properly”: I already made the case that centralization is an inevitability at scale, and in terms of utility, that’s the entire problem. An entire financial ecosystem with a void in terms of underlying assets may not be fraud in a legal sense, but it sure seems fraudulent in terms of intrinsic value. I am disappointed in myself for not saying so before.

AI and the Product Narrative

Peter Thiel said in a 2018 debate with Reid Hoffman:

One axis that I am struck by is the centralization versus decentralization axis…for example, two of the areas of tech that people are very excited about in Silicon Valley today are crypto on the one hand and AI on the other. Even though I think these things are under-determined, I do think these two map in a way politically very tightly on this centralization-decentralization thing. Crypto is decentralizing, AI is centralizing, or if you want to frame in a more ideologically, you could say crypto is libertarian, and AI is communist…

AI is communist in the sense it’s about big data, it’s about big governments controlling all the data, knowing more about you than you know about yourself, so a bureaucrat in Moscow could in fact set the prices of potatoes in Leningrad and hold the whole system together. If you look at the Chinese Communist Party, it loves AI and it hates crypto, so it actually fits pretty closely on that level, and I think that’s a purely technological version of this debate. There probably are ways that AI could be libertarian and there are ways that crypto could be communist, but I think that’s harder to do.

This is a narrative that makes all kind of sense in theory; I just noted, though, that my crypto Article that holds up the best is based on a realized product, and my takeaway was the opposite: crypto in practice and at scale tends towards centralization. What has been an even bigger surprise, though, is the degree to which it is AI that appears to have the potential for far more decentralization than anyone thought. I wrote earlier this fall in The AI Unbundling:

This, by extension, hints at an even more surprising takeaway: the widespread assumption — including by yours truly — that AI is fundamentally centralizing may be mistaken. If not just data but clean data was presumed to be a prerequisite, then it seemed obvious that massively centralized platforms with the resources to both harvest and clean data — Google, Facebook, etc. — would have a big advantage. This, I would admit, was also a conclusion I was particularly susceptible to, given my focus on Aggregation Theory and its description of how the Internet, contrary to initial assumptions, leads to centralization.

The initial roll-out of large language models seemed to confirm this point of view: the two most prominent large language models have come from OpenAI and Google; while both describe how their text (GPT and GLaM, respectively) and image (DALL-E and Imagen, respectively) generation models work, you either access them through OpenAI’s controlled API, or in the case of Google don’t access them at all. But then came this summer’s unveiling of the aforementioned Midjourney, which is free to anyone via its Discord bot. An even bigger surprise was the release of Stable Diffusion, which is not only free, but also open source — and the resultant models can be run on your own computer…

What is important to note, though, is the direction of each project’s path, not where they are in the journey. To the extent that large language models (and I should note that while I’m focusing on image generation, there are a whole host of companies working on text output as well) are dependent not on carefully curated data, but rather on the Internet itself, is the extent to which AI will be democratized, for better or worse.

Just as the theory of crypto was decentralization but the product manifestation tended towards centralization, the theory of AI was centralization but a huge amount of the product excitement over the last few months has been decentralized and open source. This does, in retrospect, make sense: the malleability of software, combined with the free corpus of data that is the Internet, is much more accessible and flexible than blockchains that require network effects to be valuable, and where a single coding error results in the loss of money.

The relevance to this Article and introspection, though, is that this realization about AI is rooted in a product-based narrative, not theory. To that end, the third piece of news that happened last week was the release of Midjourney V4; the jump in quality and coherence is remarkable, even if the Midjourney aesthetic that was a hallmark of V3 is less distinct. Here is the image I used in The AI Unbundling, and a new version made with V4:

One of the things I found striking about my interview with MidJourney founder and CEO David Holz was how Midjourney came out of a process of exploration and uncertainty:

I had this goal, which was we needed to somehow create a more imaginative world. I mean, one of the biggest risks in the world I think is a collapse in belief, a belief in ourselves, a belief in the future. And part of that I think comes from a lack of imagination, a lack of imagination of what we can be, lack of imagination of what the future can be. And so this imagination thing I think is an important pillar of something that we need in the world. And I was thinking about this and I saw this, I’m like, “I can turn this into a force that can expand the imagination of the human species.” It was what we put on our company thing now. And that felt realistic. So that was really exciting.

Well, your prompt is, “/Imagine”, which is perfect.

So that was kind of the vision. But I mean, there is a lot of stuff we didn’t know. We didn’t know, how do people interact with this? What do they actually want out of it? What is the social thing? What is that? And there’s a lot of things. What are the mechanisms? What are the interfaces? What are the components that you build this experiences through? And so we kind of just have to go into that without too many opinions and just try things. And I kind of used a lot of lessons from Leap here, which was that instead of trying to go in and design a whole experience out of nothing, presupposing that you can somehow see 10 steps into the future, just make a bunch of things and see what’s cool and what people like. And then take a few of those and put them together.

It’s amazing how you try 10 things and you find the three coolest pieces, and you put them together, it feels like a lot more than three things. It kind of multiplies out in complexity and detail and it feels like it has depth, even though it doesn’t seem like a lot. And so yeah, there’s something magic about finding three cool things and then starting to build a product out of that.

In the end, the best way of knowing is starting by consciously not-knowing. Narratives are tempting but too often they are wrong, a diversion, or based on theory without any tether to reality. Narratives that are right, on the other hand, follow from products, which means that if you want to control the narrative in the long run, you have to build the product first, whether that be a software product, a publication, or a company.

That does leave open the question of Musk, and the way he seemed to meme Tesla into existence, while building a rocket ship on the side. I suspect the distinction is that both companies are rooted in the physical world: physics has a wonderful grounding effect on the most fantastical of narratives. Digital services like Twitter, though, built as they are on infinitely malleable software, are ultimately about people and how they interact with each other. The paradox is that this makes narratives that much more alluring, even — especially! — if they are wrong.

1. I gave a 15 minute overview of the FTX blow-up on Friday’s Dithering. ↩

2. Beyond the conspiracy theories that he was actually some sort of secret agent sent to destroy crypto, a close cousin of the conspiracy theory that Musk’s goal is to actually destroy Twitter; I mean, you can make a case for both! ↩

3. Past performance is no guarantee of future results! ↩

4. Given Bitcoin’s performance in a high inflationary environment the argument that it is a legitimate store of value looks quite poor ↩

5. TBD ↩