The structural power of decentralized finance

Beyond the liberal critique

This piece, longer than most Soon Parted posts, is written with the participants of Intersections of Finance and Society, 2022 in mind. I am grateful that this group of interdisciplinary scholars of finance exists and have welcomed me into their conversations, which I find to be open, creative, observant and collegial.

Any critique of crypto has an air of futility to it these days, so thoroughly dissipated is the hype of the heady days of late 2021. Not only futile, but bordering on disrespect, to spend precious time disentangling a collection of self-indulgent software projects in the midst of pandemic, war and the entirely material deprivations these circumstances are bringing about.

There are, after all, plenty of existing critiques of the libertarian and even anarcho-capitalist logic that is still at work in the crypto sphere, even if that logic is now more often put to cynical use. One can, with reason, point to the massive energy consumption of proof-of-work consensus mechanisms, to the high technical bar—a kind of elitism, really—of cryptography as a money for general use, or to the de facto centralization that has emerged from a system that aspires to the opposite.

These are all fine arguments, and I have made them myself from time to time. Still, I observe that the logic of tokenized finance has taken root deep in the financial imaginary, so much so that these problems are likely to be solved (the first two) or safely ignored (the third) as “crypto” sheds its name and is absorbed into the incumbent financial system. The process is already well underway; at its completion, crypto will have faded into the technological infrastructure, where it will be harder to pinpoint and less available for critique.

So this is our chance to finish the job. Indeed, liberal skepticism of this set of financial technologies has so far left the most important stone unturned. The technological infrastructure of crypto as we have known it is already being hollowed out to make it suitable for incorporation into the existing financial system. But the ethos, worldview and even ideologies that gave us crypto have, arguably, more political gravity than ever. I think it is therefore not too late to make a more careful critique.

Crypto’s radical pretensions

It was not so long ago that one could still hear the argument that cryptocurrencies would bring about a redistribution of power in the financial system. The problem, from this crypto-libertarian stance, is the excessive power of intermediaries; the solution is to construct disintermediating financial practices, returning the power of financial self-determination to the decentralized masses. The original Bitcoin paper captures the sentiment:

What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes. (“Bitcoin: A Peer-to-Peer Electronic Cash System” 2008, 1)

Some of the problems with this argument are by now painfully clear. Delivering cryptographic proof is far more technically demanding than the human capacity for trust. The need to constantly provide proof therefore creates an opportunity for sophisticated intermediaries, who conceal the difficult steps behind familiar metaphors, crypto “wallets” as a prime example. Similarly, fraudsters—far from giving up their schemes in the face of nominally secure protocols—have, predictably, set up shop within the crypto world. Crypto’s case did not really take account of the changes in behavior that would follow from introduction of the technology.

But this crypto-libertarian argument is also wrong for a deeper reason, one that has gone less remarked by liberals. The spontaneous regrowth of intermediation, crypto as a haven for scam artists, and even the simple fact of crypto billionaires can all be seen as symptoms of a failure to reckon with the social fact of debt itself. The power of intermediaries, I will argue, does not come from an inadequate payments technology; it comes rather from debt, from the obligation to pay.

The obligation to pay one’s debts, surprisingly, gives rise both to the power of intermediaries and to a centralized financial structure. Crypto has offered many interesting ideas, but it has not sought to weaken this obligation, and so has not succeeded at weakening the power of intermediaries.

The survival constraint as a basis for structural power

Hyman Minsky is best known for his work on financial instability (Minsky 1957; Mehrling 1999; Neilson 2019). At the core of this work is a simple idea, which Minsky dubbed the survival constraint: you have to pay your debts. In our capitalist system, that is, economic relations are conducted using financial obligations, which are honored by paying in money in the agreed amount at the agreed time. In his dissertation (2004 [1954]), where he used this name for it, Minsky was thinking about businesses, for whom “survival” means continuing to operate. But he also applied the idea (if not the phrase) when thinking about the cash constraints faced by households, where survival may not be so figurative (Minsky 1968).

It is helpful to have a name for the survival constraint, because without a name, the idea that debts must be paid can pass unnoticed, so implicit is it in a world governed by debts (Lazzarato 2011). In fact, as the late David Graeber pointed out in his Debt: the first 5,000 years (2011), the survival constraint binds rather tightly in our own time. Humanity’s experience, Graeber argued, says that the systematically unpayable debts of the periphery should be recognized and written off.

It is the survival constraint that gives creditors power over debtors, for example the power to take recourse through the legal system in order to collect a missed payment. Such power, surprisingly perhaps, also creates a special benefit for centrality: it means that a centralized creditor, who is well positioned to collect payment from many others, is for that reason also well positioned to issue liabilities which can serve as a means of payment, or in other words to issue money. Lending and payment show up together, that is, because of the survival constraint. It is a bank’s portfolio of loans that ensures it will be able to issue deposits; because it can create deposits that serve as money, a bank is able to lend when it wants to. The liabilities are good money because the assets are good credit.

Those interested in holding the center have discovered and re-discovered means for constructing groups of permanently indebted people. The idea is to assign the arbitrary but effective labels of systems of race, class and gender to create hierarchical groups. The lower strata of such groups can be pushed to desperation through occupation, criminalization, colonization and brutalization, ensuring that they will face a constantly binding survival constraint, which can be loosened, at a price, by those in the upper strata.

In this sense, I argue, debt plays an essential role in the construction of structural power. Arbitration of the survival constraint confers centrality; centrality confers power. A financial intermediary can make the payment constraints of others tighter or looser. The center is thus stable: when someone holds the center, they can keep it. So accumulations of wealth tend to endure and even expand.

Centralization is not an accident

The crypto case for decentralization wrongly supposes that financial technologies that make it possible to avoid intermediaries will make it common to avoid intermediaries, so taking power from them. Experience has shown the error: crypto or no, creditors still gain from their ability to intermediate. They have power, in particular the power to ease the survival constraint, or to choose not to. When big moneyed interests want to put billions into Bitcoin and DeFi, they don’t stop being big moneyed interests. The argument extends naturally to states: once a state gets hold of the financial center, it is unlikely to give it up, and it is hard to force a state to do so.

In other words, crypto never made the case for the weakening of the survival constraint. For all of its proposals of new ways to think about payment and exchange, accounting and consensus, crypto did not suggest that there were debts that should not be paid, and that a healthy monetary system should occasionally sweep them away, not one by one in bankruptcy court but all at once, in one fell swoop.

Crypto’s true believers sought to remake the financial system, but they chose not to reckon with structural power. They started from a genuine dislike of concentrations of market power and concentrations of state power, sentiments broadly shared with left critics of finance, and proposed to use new technology to build a system that could stand without such concentrations. Because these arguments never tried to weaken the survival constraint, they left structural power intact. Indeed, the obsession with cryptographic immutability has if anything strengthened the survival constraint. Even relatively radical crypto experiments, those which propose new forms of institution, organization and decision-making, still have little to say about what happens when debts are unfair, or even just unpayable.

With its foundational principle—“debts must be paid”—unchallenged, capital has been free to absorb crypto’s innovations, which are flexible, flashy and full of opportunities for profit. Once the bearded crypto riffraff has been shown the exit, or joined up, creditors, with their structural power, can look forward to a world no less centralized than the one we have now, a world no more democratic, but one in which every debt is inscribed in a shared ledger for all time, immutable and incontrovertible.

References

“Bitcoin: A Peer-to-Peer Electronic Cash System.” 2008. https://bitcoin.org/bitcoin.pdf.

Graeber, David. 2011. Debt: The First 5,000 Years. Brooklyn, NY: Melville House.

Lazzarato, Maurizio. 2011. La Fabrique de l’homme Endetté : Essai Sur La Condition néolibérale. Paris: Éditions Amsterdam.

Mehrling, Perry. 1999. “The Vision of Hyman P. Minsky.” Journal of Economic Behavior & Organization 39 (2): 129–58. http://www.sciencedirect.com/science/article/B6V8F-3WWV211-1/2/dfdaa0f0d703ccd45aa89ab7c5c0712a.

Minsky, Hyman P. 2004 [1954]. Induced Investment and Business Cycles. Edward Elgar.

———. 1957. “Monetary Systems and Accelerator Models.” The American Economic Review 47 (6): 860–83. http://www.jstor.org/stable/1810041.

———. 1968. “Adequate Aggregate Demand and the Commitment to End Poverty.” In Rural Poverty in the United States, 562–80. U.S. Government Printing Office, Washington, D.C.: President’s National Advisory Commission on Rural Poverty.

Neilson, Daniel H. 2019. Minsky. Cambridge: Polity Press. http://politybooks.com/bookdetail/?isbn=9781509528493.