Shorting Creates Reputation Damage

Steph Smith and Ethan Brooks discuss the concerning implications of BitClout's reputation-based trading system, particularly focusing on the inevitable creation of shorting mechanisms and their negative effects on creator reputations.

• Fundamental Problems with Reputation Trading:

  • Unlike stocks that trend upward over time, individual reputations tend to decline
  • Most creators and celebrities have limited "shelf life" of a few years
  • Reputations are inherently fragile and short-lived
  • Current creators rarely maintain popularity beyond a few years

• Inevitable Market Dynamics:

  • Even if BitClout doesn't build shorting capabilities, third parties will create them
  • Statistically, betting against reputations becomes the smartest play
  • Almost inevitable for large people with large followings to eventually face cancellation
  • Smart money would likely bet against most reputations

• Platform Risk Structure:

  • Platform offloads risk onto creators who opt in
  • Creators may not fully understand what they're signing up for
  • Unclear how creators can exit once they've created a coin
  • Hard stops could leave coin holders "holding the bag"

• Economic Design Flaws:

  • Bonding curve structure limits practical utility
  • Price increases with each purchase make traditional creator-fan relationships unsustainable
  • Cannot effectively combine reputation trading with direct value exchange (like newsletters or DMs)
  • Creates perverse incentives for manipulation of reputations

• Long-term Concerns:

  • Financial instruments will emerge to bet against reputations
  • Creates monetary incentives to damage reputations
  • No clear mechanism for creators to protect themselves
  • System inherently encourages negative outcomes