Back in the 18th century, people called bankers, insurers, and landlords, "the sterile class." I think we should bring the term back, and include speculators, traders, and almost anyone we might call a "financier."
They're "sterile" because they don't produce anything. At best, they help move money around, and at worst they just sit on resources and charge for access. But even in the best case, where they provide some function, the more of them there are, there aren't just diminishing returns, there are dangers.
Think of it this way. In a village of a hundred people, where one person does the banking and the other ninety nine do labor that provides goods and services, the people living there will probably thrive. And to be completely fair, this village might do better than a village with zero members of the sterile class. Some amount of financial services can help facilitate growth and opportunity through loans and investment.
But, reverse that, where ninety nine people are members of the sterile class, and only one person actually makes anything, then that village will almost certainly collapse. When that one laborer dies from over work, the remaining financiers are going to struggle to feed themselves with derivatives and securities.
The amount of financial services needed for a proper functioning society is somewhere in between those two extremes, though almost certainly as few as possible is best. Exactly where the line is drawn is a matter of concern. There is a case to be made that the current over financialization of the overall global economy is a higher risk to stability than most other concerns, like AI and mechanization.
The problem of over financialization is that less profit is being used for reinvestment into development and creation, and instead is simply rewarding investors. Money goes out of companies, away from research labs, optimization of production, labor, and into the pockets of shareholders who buy another Tesla. And forty years after Reagan and Thatcher, what was obvious then is irrefutable now, that nothing trickles down, it just goes off shore.
What this has to do with Bitcoin Cash is that I see a similar process at work. Though it's not exclusive to Bitcoin Cash by any means. The whole crypto space has been largely co-opted by speculators who are only interested in seeing advancements that meet their one need of deriving profits for profit's sake. They don't care if any one development on any blockchain is qualitatively better than before, they only care if the number in their portfolio is quantitatively higher than before.
They're thrilled to see all sorts of creative financial instruments that move money around in complicated ways so that they can make ever more sophisticated bets on the random ups and downs of price tickers.
Recently, there's been a lot of excitement over SmartBCH, a side chain that enables smart contracts and decentralized finance, or "defi." People are excited about it, because defi is where the heat is.
But, heat for who?
One of the reasons SmartBCH is seen as a big move for Bitcoin Cash is because many BCH supporters watched as Ethereum moved into the number two spot in terms of market capitalization on the strength of its defi features.
Market capitalization is a big deal for investors, as it gives them a sense of where to invest. Does market capitalization actually represent anything about utility, though? Does it reflect sentiment or drive it? I think the latter, and I think everyone who has pulled off a pump and dump scheme knows this is the case.
What does defi really bring to the table? Just like a village can benefit from one member of the sterile class, I'm sure defi can create opportunities. I think SmartBCH is a good thing. But like all powerful tools, there are as many risks as benefits. Returns not only diminish with more financial instruments, they may actually suffocate the market.
Decentralized finance, at its core, is an outgrowth from "smart contracts." Smart contracts are basically a way to set terms of an agreement to be carried out by neutral computers. You can, in theory, set any kind of agreement between two parties to make something happen based on a specific condition measured at a specific time.
An example I've seen over and over on web sites when trying to explain how smart contracts work is to set the weather as the condition for a payout of some kind. You might, for example, have an out door concert planned, and maybe only if the weather is good by a certain time do you actually take payment and issue tickets. That would be kind of neat.
However, I think that situation is often recited more because of its friendly accessibility than for any kind of market demand. The number of show producers who would want to set up a system like that is pretty small.
The far more likely use case for smart contracts is setting a price on a stock or token, and if that price is met, an order is executed to buy or sell. Traders can already do this kind of thing on exchanges, but defi would bring down fees and possibly make it more accessible, something maybe you could do straight from your phone's wallet app. More buy and sell orders by more retail investors, buying and selling money, to make money.
Looking at a list of possible use cases for defi that I found, most of them are geared towards financial instruments. Gaming and analytics seem like harmless use cases. Tokenization and "Decentralized Autonomous Organizations," or DAOs, could go either way. But asset management, lending and borrowing, insurance, decentralized exchanges, margin trading, and staking are all of more interest to the sterile class than anyone else.
The majority of defi functions, by category and very likely by volume of use, service various ways speculators can think of to buy and sell money in order to make money, generating nothing, putting the village at risk. Risk, because all speculators want to use any of this for is moving some fiat into the ecosystem and pull more fiat out.
Just like rewarding shareholders takes money out of a company's research labs, extracting fiat out of crypto strangles adoption. The trading and price speculation is the root of volatility. The more volatility there is, the harder it is to achieve utility. Without utility, there is no adoption. A person shouldn't have to think about buying a coffee in terms of financial markets and whether or not the price will be more or less worth it tomorrow. Nobody wants to have to think about currency when they buy a coffee. They want to think about the coffee.
Bitcoin Cash is one of the few cryptocurrencies where people in the community will tell speculators that speculation is not the point. In r/btc on Reddit, you will often see a post asking about investment met with comments saying BCH is meant to be used, not held. This, in my opinion, is good.
But perhaps this attitude doesn't go far enough. If the Bitcoin Cash community, on the whole, admonishes people for speculating, but then at the same time offers a buffet of financial instruments via defi on SmartBCH or the main chain, isn't the net result a kind of hypocrisy? Or at least, mixed signals? "We don't want you to invest, but if you're going to, we have so many great ways for you to do it!"
Of course, BCH is a large community with various motivations and opinions. It's as meaningless for me to evaluate the community as a whole as it would be to advocate for a unified stance on any topic. Communities just don't work like that.
But I can point out that we'll all have to lie in the bed we collectively make. Defi is not just a technology, it's also an unintentional declaration of intent. If you build the tools to make financial instruments, everyone is going to assume that's what you want made. More financial instruments will attract more of the sterile class, who will want to engage in more speculation, manipulation, and gambling. And volatility. Which will suppress utility. And suffocate adoption.
In my ideal fantasy world, the sterile class would be met with outright hostility. Which sounds extreme, but, it doesn't actually matter if it's extreme or not. You can't get rid of the sterile class no matter what you do anyway. Capitalism isn't about friendship, it's about money, and if there's money to be made, they don't care what you say.
But maybe more diplomatically, I'd hope to see more SmartBCH projects, and projects related to Bitcoin Cash in general, justified in terms of how they drive real world utility, not financial opportunity.
The more the community actively rejects the idea of catering to the sterile class, the better off it will be. Ironically, even for the sterile class.
And that is precisely where the problem lies today. The sterile class has created sterile products that make much more money than the production of goods and real services. I had no contact with DeFi until SmartBCH, but now I know that DeFi is nothing but a sterile product without sterile class. The sterile products are basically meaningless, they don't create value, they are just there to have more pay in the account or more tokens in a wallet. I hope that reasonable and good smart contracts will emerge in SmartBCH. At the moment they do not exist.
At some point it will turn out that all the numbers in the account and inflated cryptos in the wallet are worth nothing. Only the things that are really needed, like food, petrol, electricity, houses, will always have value.
A very good article.