Has crypto lost the plot?
Like it or not, presidents launching memecoins is a milestone. What now?
Greetings from ETH Denver, where things have changed a lot since last year. Exciting projects still abound, to be sure. But it’s impossible to deny that the atmosphere has shifted—no longer can the crypto industry lay claim to the mantle of insurgent outsiders held down by oppressive regulators. The halls of power in the US ring with pro-crypto messaging. But is this the promised land?
As we contemplate these big questions, we also have a look into the limits of ZK proofs.
Finally, we trawl court filings and examine what the rash of memecoin chaos portends, as retail investor discontent has boiled over into class action lawsuits against pump.fun.
Crypto is in danger of losing the plot
Financial inclusion. Public goods. The decentralized web. Billions onchain.
Is it all bullshit?
If you’re familiar with this newsletter, you know I don’t think that. Still, pump-and-dump memecoin schemes endorsed by presidents have given me pause.
I don’t know how to make sense of it. But one thing seems clear. The two coins that Donald and Melania Trump launched just before Donald took his oath of office as US president, and Libra, the coin that launched on February 14 with a tweeted endorsement from Argentinian President Javier Milei, are not silly memecoins in the way that dogecoin is. They are schemes in which insiders extracted large amounts of value from unsuspecting investors—at least if Hayden Davis, one of the creators of Libra, is to be believed.
Everyone concerned about the future of crypto should probably listen to this remarkable conversation between Davis, who claims to also have been involved in the Melania coin launch, and Stephen Findeisen, a crypto scam investigator who’s better known by his YouTube handle, Coffeezilla. Davis said many eyebrow-raising and possibly incriminating things. He also painted a dark, cynical picture of insider dealing and market manipulation. “With Trump or any of these big ones, like, this is, it is an insiders game. This is an unregulated casino,” Davis said.
Blockchain analysts have indeed found evidence suggesting that insiders profited disproportionately from these three launches. A New York Times analysis that drew on work from Chainalysis and Nansen, found that the digital wallet behind an early million-dollar bet on the $TRUMP coin was created only three hours before the coin launched. This individual’s well-timed trades netted more than $100 million in profit. According to the report, 31 large early traders made a total of nearly $700 million. Similar phenomena were documented surrounding the launch of the $MELANIA coin. As for Libra? “We see very tangible onchain evidence showing a group of ‘insiders’ unilaterally profiting off of the masses who got involved,” Nansen stated in a recent report.
The Hayden Davis story gets worse. First, how did he get so close to Milei? I spoke to an Argentinian smart contract developer here in Denver who told me that when Milei tweeted a photo last month standing next to Davis, no one in his professional circles recognized him. After the launch, CoinDesk obtained text messages it reported were from Davis in which he claims he “controls” Milei. “I send $$ to his sister and (he) signs whatever I say and does what I want,” read one of the messages.
If you are a crypto enthusiast hoping this story goes away, I’ve got some bad news. There are too many compelling questions that enterprising journalists are already trying to answer. Milei has claimed no involvement, but as the New York Times put it in a story out yesterday: “Mr. Milei’s story has begun to unravel, showing how crypto and politics have increasingly blended to enrich the powerful and take from most everyone else.”
Taking a step back: How did we get here so quickly? Last year I reflected on the crypto-idealism I felt at ETH Denver. In the background was the US government’s crackdown on the industry. There was a sense of electricity and enthusiasm here, perhaps because there was reason to be unified. Then much of the industry got behind Donald Trump, who promised to end the crackdown and make the US the crypto capital of the world. That seems to be paying off: The new SEC is already moving to drop cases against Coinbase and ConsenSys and an investigation into Uniswap. Crypto is, in many ways, winning.
Still, the future of privacy, identity, and surveillance—areas in which I believe crypto software has the potential to make a big difference—remains up in the air. There is no signal that the US Department of Justice will reverse course in its prosecutions of Roman Storm and the Bitcoin Samourai Wallet developers, for instance.
It is not a foregone conclusion that crypto software developers will revolutionize how society interacts online. Far from it. First, “crypto” needs more popular support—enough to withstand the inevitable negative press that the field will get thanks to its resident scammers and criminals. Normal, non-crypto folks first have to believe the story about the future that so many passionate folks here at ETH Denver take as a given.
Right now, many—most?—regular people see presidents launching shady memecoins and wonder if this is what crypto was always really about. Maybe the “decentralized web” was just marketing. Maybe Libra and the Trump coin are the real end state. If “serious” crypto folks working on the future of the internet want to change those people’s minds, they’ll have to find new ways to reach them.
Almost everyone who goes to a typical crypto conference panel is in the crowd, nodding their heads along to someone onstage who probably knows they’re preaching to the choir. It’s time to convince a less receptive audience. Fewer nodding heads, more furrowed brows. Less talk of “anti-crypto” and “pro-crypto” points of view and more focus on the future of society beyond the crypto bubble.
Otherwise, the nonserious folks in crypto will continue to be the only ones out there telling your story. —Mike Orcutt
Poking holes in the “ZK” hype
If you are familiar with this newsletter, you already know we are somewhat obsessed with zero-knowledge cryptography. The ability to prove that something is true—like that you are over the age of 18—without revealing any other information about yourself seems poised to unlock a new class of applications in privacy, identity, and computing. We talked about this all day long at October’s DC Privacy Summit.
Let’s not get carried away, though. That’s one of the takeaways from a recent discussion between two of the field’s leading minds—Howard Wu, cofounder and CEO of Provable, and a16z research partner Justin Thaler—on a16z’s Crypto’s Web3 podcast.
Certain identity-related applications are ready today. Some national passports, for instance, have NFC chips that store all the card’s data in encrypted form. This makes it possible to extract data from the chip using an NFC reader and then use zero-knowledge proof to attest confidentially, say, that the holder is older than 18. Several startups have developed applications that do this. Wu, who helped invent the private Layer 1 blockchain Aleo, said he recently saw a demo in which an iPhone with an NFC reader scanned a Ukrainian passport and generated a proof on the phone and verified it in a matter of minutes. It would also be possible to pull this off with a driver’s license to grant access to age-restricted websites mandated by a number of state laws.
The problem, of course, is that it’s relatively easy to get a hold of someone else’s passport or driver’s license. There’s nothing cryptography can do about that. “The problem isn’t whether this ID is forged or not,” Wu said. “It’s actually more of a question of: if mommy and daddy aren’t home but they left their wallet at home, can I get access to it and use it to access these adult websites?”
During the conversation, Thaler came up with a potential fix: “You could imagine that there’s a trusted entity—the government or something—that will attest once that the picture on the passport actually looks like you and then send a credential to your wallet,” he said. “So you are bringing in a trusted entity but once that entity attests, they’re out of the picture and no one has to go ask them any questions. You get to just prove in zero knowledge that they’ve sent that attestation to your wallet or something like that.”
More complicated applications raise more complicated questions. For example, consider a decentralized exchange. It is “very simple” to make the sender and receiver in a transaction confidential, Wu said. But tallying the amounts swapped is very tricky without relying on an offchain entity that can see the transactions. “Right now there’s a lot of folks who are building privacy preserving DEXs that are primarily to provide account privacy rather than the actual amount privacy,” he said.
This is where other kinds of advanced cryptography could eventually come in handy. For example, Wu explained that it could be possible to use a technique called fully homomorphic encryption (FHE), which makes it possible to perform computation on encrypted data without decrypting it, alongside zero-knowledge proofs. With FHE, a system could tally the amounts and update the blockchain “completely blinded,” Wu said. “So there are ways to do that mathematically but I would say those are much further out than where we are today.”
Bottom line: zero-knowledge proof-based private applications are here, but there are important limits to what exactly they can keep private. This helps explain why additional forms of advanced cryptography, like FHE, seem to be on a fast-track to achieve the buzzword status that “ZK” already has. —Mike Orcutt
Have memecoins jumped the shark?
Over the last year or so, since the debut of the Solana-based memecoin launcher pump.fun, memecoin mania has reached a fever pitch, luring in buyers eager to get a piece of the action and, presumably, make a quick profit in crypto. But that euphoria has increasingly given way to discontent as a procession of pump-and-dump schemes have left consumers with mounting losses.
Now that discontent is coming home to roost in the form of multiple class action lawsuits targeting pump.fun—a site whose operators have previously boasted of letting users launch a joke cryptocurrency in less than a minute.
The suits beg the question: Did pump.fun break the law?
People who bought coins based on Peanut the viral squirrel, brief online celebrity Hawk Tuah girl, and a cartoon frog known as fwog certainly think so.
On November 4, 2024, a token with the ticker $PNUT was launched, the price of which rocketed to a high of $2.47 per token and has tanked ever since, according to data from CoinMarketCap. Buying PNUT today would cost you about $0.25.
The lead plaintiff in one lawsuit, Kendall Carnahan, alleges $PNUT was “at all relevant times” an unregistered security. The filing says pump.fun sold it and other coins, while its executives raked in almost $500 million in fees.
“Pump.Fun’s core function is to work alongside influencers to co-issue and market unregistered securities,” the filing states. “Inherent to its operations are a novel evolution in Ponzi and pump and dump schemes.”
While the Securities and Exchange Commission reiterated on Thursday that it still doesn’t think memecoins are securities, Carnahan’s complaint attempts to address other uncomfortable issues about how business is conducted on the platform.
Among a litany of accusations, it argues the platform omits know your customer procedures, anti-money laundering protocols, and risk disclosures. The complaint also says pump.fun facilitates market manipulation and fraudulent practices.
The PNUT filing goes into detail about other tokens too—featuring reprehensible content created by pump.fun users. An appendix lists memecoins associated with racial hatred, threats of school shootings, references to kidnapping and torture, and antisemitic conspiracy theories, as well as sexual exploitation.
Now that it’s unlikely that a securities complaint will be taken seriously, if any of these other legal blows are to land, what will become of the wild world of memecoins? How will leaders, such as President Donald Trump, justify launching their own tokens? Many crypto professionals have expressed embarrassment and concern about the timbre of pump.fun’s influence and questioned whether memecoins should still hold a place in crypto.
Long-time crypto evangelist Nic Carter, for example, tweeted on February 19 that “memecoins are unquestionably over.”
“The entire premise of memecoins was that they were ‘fair launch’ opportunities where John Q Retail had just as good a shot at making money as the funds and VCs,” he said. “This was the entire substance of the claim made by the memecoin boosters.”
Earlier in February, Espresso’s chief strategy officer Jill Gunter also described pump.fun as a “real dregs-of-society business” which “brings out the worst of human nature.”
If the lawsuits are successful, and launching memecoins on pump.fun is found to be illegal, the action may ingrain the widespread belief of crypto outsiders that the industry is a bin-fire with few redeemable features. It may even slow the adoption of novel, useful technologies, or lead the US Congress to drag its feet over meaningful legislation for fear of boosting scams.
Or, if the lawyers lose, and this round of complaints fizzle, pump.fun will continue pumping. The dark corners of the internet will continue to be dark. And consumers will have to try to sidestep yet more blockchain-based misadventures around the globe. —Lucy Harley-McKeown
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