In a world that thrives on innovation, blockchain and cryptocurrencies have emerged as revolutionary technologies with the potential to reshape the finance landscape and how we interact with money. At their core, these technologies offer a decentralized, permissionless, and transparent approach to finance, allowing peer-to-peer transactions without intermediaries and free from the shackles of central authorities. It's a vision that has captured the imagination of tech enthusiasts, libertarians, and innovators alike.

However, in this seemingly utopian vision lies a fundamental conundrum - a clash between the ethos of blockchain and the traditional stronghold of the state over money.

Defining the Conundrum

Since the Peace of Westphalia in 1648, which ended the Thirty Years' War, modern nation-states have been claiming the inviolability of borders and non-interference in their domestic affairs, grounding their sovereignty over their population on some fundamental pillars:

1. Monopoly over the Use of Force: Modern nation-states have maintained a monopoly over the legitimate use of violence and force within their defined territorial boundaries. This involves having a standing military, police force, and legal framework to enforce laws, maintain internal security, and protect citizens.

2. Monopoly over Taxation and Revenue Generation: Nation-states possess the exclusive authority to levy taxes on their residents and entities within their territory. This revenue generation through taxation allows the state to fund public services, infrastructure, and essential functions, including the military.

3. Monopoly over Currency: Nation-states have the exclusive authority to issue and regulate their own currency, enabling them to control monetary policy, manage inflation, set interest rates, and facilitate economic transactions within their borders and with other States.

By promising an alternative and independent financial layer, inclusive of digital decentralized currencies (cryptocurrencies and other tokens) and independent monetary policies (tokenomics), crypto fundamentally threatens the States’ monopoly over Currency. If citizens were allowed to transact with an independent currency without the State’s involvement, the State would struggle to collect tax, which in turn would undermine its ability to pay for public services. Most importantly, the State would struggle to pay for the military.

We can see then that these three monopolies of the nation-states are closely intertwined, and challenging one would inherently question the others. This holds true unless we undergo a profound reevaluation of the fundamental concepts that underpin the modern State and society.

The conundrum faced by blockchain, then, becomes evident:

Can we establish a truly decentralized and permissionless financial layer without unraveling the traditional fabric of governance and society, where States maintain a monopoly over money?

In essence, can we go bankless without going stateless? The answer holds profound implications for the blockchain industry and the future of finance, the state, and how we navigate this digital revolution.

Exploring Different Perspectives

Eric Vorhees, a devoted libertarian and a fervent advocate of crypto's founding principles, calls for establishing a permissionless and decentralized financial layer as part of a clear separation between money and the State, akin to the Enlightenment philosophers' call to detach religion from politics. In line with the libertarian ideology, this represents just the first step toward a world with minimal or no state intervention, and where the free market would self-regulate and adjust to achieve the maximum utility.

While blockchain's potential for financial liberation is tantalizing, we cannot overlook the critical role played by governments. Governments are the bedrock for social stability, security, and essential infrastructure, including critical aspects such as energy, which is vital for developing technology like blockchain. Although some resources are now being facilitated by private entities, exemplified by Starlink--Elon Musk's private satellite network providing internet access--certain functions such as maintaining security through military and police should not be outsourced to private entities.

It's crucial to recognize that modern states and the democracy we currently practice have operated for merely a fraction of human history and are not set in stone. Recently, these fundamental institutions seem to face persistent challenges, dramatically evident in the declining levels of voter turnout at all major elections. In the economic sphere, concerns persist regarding the stability and resilience of the global financial and banking systems, along with challenges central banks encounter concerning money issuance, public debt, and uncontrolled inflation. Clearly, institutions must adapt to the evolving historical context to remain relevant, requiring a collective effort to explore alternative approaches.

While blockchain undeniably holds great potential in facilitating collective action and capital mobilization (for example via Decentralized Autonomous Organizations, or DAOs), potentially enabling individuals to self-organize for providing essential public goods, they have yet to demonstrate their maturity. Replacing the State with all its core functionalities remains a considerable distance away.

The Future of Crypto: What Lies Ahead

As blockchain gains traction, established institutions are beginning to embrace this disruptive technology. However, their approach often entails selectively extracting components that suit specific needs--such as fast finality and settling for international transactions and automated processes for continuous asset trading--diluting the revolutionary nature of blockchain. Private blockchains (launched by Citibank, JPMorgan, and Goldman Sachs), central bank digital currencies (CBDCs), and institution-driven crypto adoption (Fidelity, Citadel, and Blackrock pushing for RWA trading and crypto ETFs) raise concerns about the loss of blockchain's decentralized, permissionless, and transparent nature.

The central issue here is whether blockchain will be embraced but distorted by institutions, serve as a true instrument of empowerment for individuals in a challenge to the traditional financial monopolies, or perhaps something in between. Vitalik Butherin recently co-authored a paper called ‘Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium’, which describes a system allowing users “to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction graph”. Zero-knowledge technology, which generally allows a prover to demonstrate to a verifier that a claim is true without giving out any information about that claim, may indeed hold the key to reconciling the seemingly inextricable conflict between the core principles of blockchain and the regulatory compliance necessary for a harmonious coexistence with traditional institutions.

Embracing the Debate for a Prosperous Future

The clash between blockchain's revolutionary potential and the traditional role of the state in macroeconomics and finance is a defining issue for crypto. It's a narrative that extends beyond the realm of finance, touching upon the essence of societal governance and individual empowerment. It is also at the heart of the actions of regulatory bodies like the SEC and the pushback against crypto projects. The debate about securities, or the rejection of Bitcoin spot ETFs, is a natural expression of this central struggle: the attempt to integrate a decentralized, permissionless financial layer within the established framework while questioning the power and authority of the government and the State.

In considering the trajectory of blockchain and crypto, two plausible scenarios take shape. The first is where crypto gets widely adopted yet at the cost of losing its key revolutionary elements to fit into the traditional frameworks. The second envisions crypto preserving its core features, but remaining confined to a small segment of users, without ever fully realizing its revolutionary potential. There is a third, less probable, yet worth pursuing, outcome, one that could be fulfilled by zero-knowledge technology: crypto achieving widespread adoption, fortifying the foundation of future institutions, all while preserving its essential components, and coexisting harmoniously with traditional government and state institutions. These potential paths underscore the critical juncture at which blockchain technology currently stands, presenting a pivotal choice that will shape the future of finance and governance.