An Important Truth Few People Agree With

Crypto provides the rails for an internet of value revolution that will reshape the world more dramatically than the original internet itself

Background

The FTX meltdown is shining light on the crypto industry, and it’s not surprising that many people I talk to today are skeptical, uninterested, or outspoken critics of crypto. I don’t blame them, between the superbowl ads, sports stadium naming and other gratuitous spending, press that highlights nothing but scams, environmental concerns, folks losing their life savings or getting rich overnight, and now the FTX fraud, what’s left to like? A recent CNBC poll suggests only 8% of Americans have a positive view of cryptocurrencies.

Unfortunately, the onslaught of bad optics is masking technology that I believe will be a massive force for good in the decades to come. Let’s dig in…

Thesis

“What important truth do very few people agree with you on?” My answer today:

The internet is one of humanity’s greatest technological achievements, and I believe blockchain technology provides the rails for an internet of value revolution that will eventually disrupt and reshape the world more dramatically than the original internet itself. The fundamental value proposition of blockchains is internet native scarcity. It’s difficult to fully conceptualize and articulate the scope of what this unlocks, but it often keeps me up at night, and may well eventually reorder the entire world financial and banking system, nation state governance, taxation, social services and social coordination, financial coordination (corporations), commerce, sports, and entertainment, and on and on. That reordering will be inherently more transparent and fair than the systems we live with today.

Ok, I sound like a tinfoil hat mad man? Why do I believe this to be true?

• Blockchains introduce protocols for an internet and democratization of value in the same way TCP/IP protocols democratized information and underpin the open internet today. They are a fundamentally new kind of computer, because they make lasting commitments and provide credibly neutral scarcity in the digital world for the first time. They don’t solve any computer science problems, which is why a lot of CSE types roll their eyes, instead they solve a human coordination problem that requires people to zoom out and look at a variety of disciplines from first principles.
• Prior to blockchains, all digital records of anything of value, from your fortnite skin, to your amazon shopping history, your friend list on instagram, the deed to your home, the money in your retirement account, your facebook profile, and your ticket to the Packers game, are stored on silo’d corporate or government databases. None of these datasets are interconnected, other than centrally tractable and proprietary APIs and front-ends. As a result, there is no digitally native value, value on these ledgers is instead ascribed by trusted third parties (corporations are custodians of the data)
• Over the next few decades, we will live through the only time in human history where this silo’d information living in unlinked and disjointed corporate databases will begin migration to databases that are a public goods owned and controlled by everyone. Plenty of issues around security and privacy still need to be addressed, but this is the promise of cryptography, and the path forward for the betterment of humanity. It won’t happen overnight, and may take much longer than I expect, but I do believe it is an inevitable evolutionary step forward.
• Why should anyone care about this change? Aren’t you just unnecessarily applying the natural laws of scarcity in the physical world to a digital world of abundance that doesn’t have the same inherent limitations? Won’t scarcity let unfettered capitalism into the digital world unnecessarily, causing further inequality and suffering? These are great questions, but I would argue that our universe is meaningless without scarcity. Why am I moved by the Beatles classic Two of Us when Paul Sings “You and I have memories longer than the road that stretches out ahead.” Imagine everyone living forever with infinite resources in an endless world, experiencing everything with everyone always. That world is utterly pointless. The scarcity of time is what gives time its meaning. If we all have infinite time, even the most valuable thing in the universe becomes meaningless to us. Of course this isn’t to suggest when you apply scarcity that anything will be as valuable as time, it just means that with endless abundance, no person, experience, or action, will be special, unique, or worth remembering. This is the reality of most digital things today. People hear “scarcity” and they think of food shortages or limited access to healthcare, but those things aren’t relevant in the digital world. I wish they would instead associate digital scarcity with what makes things special, authentic, unique, or meaningful.
• A digital world with meaning isn’t an escape from reality, it is more reality. Expanding reality means new green fields of economic opportunity, opportunities that exist beyond the credentialism, gatekeeping, privilege, and geographic limitations of the physical world. There is a huge opportunity gap between haves have-nots that gets significantly reduced when building meaningful experiences and commerce in the digital world. Talk to any digital artist that can now for the first time make a living wage and support their family selling their art through the scarcity of NFTs. There is already a not insignificant number of such artists. Parts of this bright future are already here, it’s just very early and in primitive forms. Money is just one app built on the protocol of meaning enabled by blockchains. It gets the most attention because it is the the most developed and the easiest app to build, but there is a whole universe of other rabbit holes blockchains unlock (and more interesting IMO).
• I like the phrase “optimists shall inherit the earth”. In other words, while critics and skeptics are occupied with highlighting problems, the optimists are out there taking risks and building because they believe the future is bright, so the future will belong to them. Future generations won’t be subject to a global reserve currency controlled by a black box of unelected elites from a geographically defined nation-state empire. Money will be a global, permissionless, digital currency, because it is more fair, open, trustworthy, and free system for the global population. This will be a hard fought battle. Strategically, the US dollar is the Country’s most important export for maintaining global power, and it isn’t backed by anything other than guns and strategic alliances. Skeptics have told me the concept of a global digital currency is too idealistic, counter-culture computer geeks don’t control the men with guns, but as optimist, I believe game theory just needs time to play out. In the end, the truth wins.
• So before you buy into Jamie Dimon’s lazy “ponzi/scam” argument, consider that most things in life only have value because society collectively agrees there is value. Whether it’s US dollars, the Mona Lisa, football, the Nobel Prize, or the deed to your home, it’s value isn’t backed by anything other than social structures. The “ponzi” critique is high school debate level logic and fairly easily debunked for anyone with a moderately open mind and willingness to think about it for a minute.
• Bernie Madoff was a scammer, just like Enron executives, and now the founder of the crypto exchange FTX, which was just another bank that defrauded customers and happened to be stealing their crypto. Con artists scamming people is a tale as old as time. These instances only illustrate why we need real crypto, the decentralized, permissionless, fair, the publicly auditable kind now more than ever. The purpose of money crypto is to remove the gatekeepers and middlemen from the financial system so they can’t perpetrate fraud.

Not Financial Advice

I’m not calling any top or bottom of any cryptocurrency, I don’t know when to buy or sell, I’m not a trader, and I’m not interested in market speculation or short term price movements. However, I am deeply invested in crypto and web3’s fundamental value proposition, and naturally have high conviction long term bets in this space that I am willing to be wrong about. You can lose what you put in, always do your own research. With risk and uncertainty comes opportunity, but please know what you are getting into. Most tokens are worthless garbage, in my opinion there is only a small handful worth paying attention to.

Blockchain Overview

If you already understand blockchain basics please feel free to skip ahead, this is meant to an “explain it to me like I’m five” overview of how crypto works.

Decentralized Ledgers

blockchains such as bitcoin, are basically an accounting ledger, in the same way your checking account with your bank is an accounting ledger of debts and credits to the dollar value in your account. What makes this blockchain ledger different than the one with your Wells Fargo account, is a blockchain ledger is distributed across thousands of computers across the world, there is no central authority, it doesn’t require trust, and if properly decentralized, it is a digital organism that cannot lie and cannot be turned off, in the same way nobody can turn off the internet today.

Consensus

Blockchains achieves this decentralization through a distributed consensus mechanism. Distributed consensus is the core piece of innovation that blockchains provide, and while it can be technically complex, it can also be simplified.

I will focus on the proof-of-stake form of consensus used by Ethereum, since that is the environmentally friendly option today and in my opinion also the most capital efficient.

Imagine a group of people sitting around a table, each with 10 poker chips. At the beginning of a block, or round, if a person wants to help validate the transactions at the table, they push 3 chip into the center, and are called a “validator”. All these validators then watch as all folks around the table engage in commerce, trading their chips for goods and services, etc… after a set number of trades, they reach the end of the block, or round, and all of the validators that have been watching the commerce write their observations on a piece of paper and push them to the center of the table. Jane sent Bob 2 chips, Bob sent Maurice 1 chip etc… As a group, the validators review the recorded observations together. If a validator reports transactions that are consistent with more than half the other validators, they earn an extra chip as payment for their services of validating the transactions. if their report of the transactions conflicts with most of the validators, they lose the 3 chips they put in.

Basically, the validators are all financially incentivized to tell the truth, they are rewarded for being honest, and punished for being dishonest.

In this group at a table analogy, it is easy to imagine collusion, where a few folks get together and and lie about the transactions for their mutual benefit. This is called a 51% attack, where a single group or individual owns and controls 51% of the validators and cooks the books. But at scale, in a properly decentralized system with thousands of validators across the globe, where each validator needs substantial capital to participate, and where flows of capital are publicly traceable, it becomes technically possible but practically unlikely for this to occur. There is also social coordination level defense against this type of attack that we don’t need to get into here.

Trust Minimzed Credible Neutrality

Assuming a blockchain is sufficiently decentralized through this consensus mechanism, it can be considered trustless, credibly neutral, and censorship resistant.

In other words, people across the world can agree on very little, but nobody will argue with the amount of ether in a Ethereum wallet. It doesn’t matter if you are Greta Thunberg, Kim Jong-un, or Kim Dot Com, there are no differences of opinion, because the blockchain doesn’t take sides and isn’t susceptible to manipulation and corruption in the same way centralized authority is.

Ownership in General

Capitalism and its shortcomings

A quick aside on human nature, if you don’t see how even the most selfless humanitarians (Mother Theresa, Nelson Mandela, Mahatma Gandhi, etc…) operated in their own self interest, the book Awareness by the Indian Jesuit priest and quasi buddhist, Anthony de Mello, provides some explanation. He argues there are three types of selfishness (quoted):

1. First, when I do something, or rather, when I give myself the pleasure of pleasing myself; quite unrefined.
2. Second, when I give myself the pleasure of pleasing others. Don’t take pride in that. Don’t think you’re a great person. You’re a very ordinary person, but you’ve got refined tastes. When you were a child, you liked Coca-Cola; now you’ve grown older and you appreciate cold beer on a hot day. You’ve got better tastes. But you’re getting your pleasure all the same, except now it’s in the pleasure of pleasing others.
3. Then you’ve got the third type, which is the worst: when you do something good to avoid the guilt of not doing it. The good deed doesn’t give you a good feeling, you hate it. You’re making loving sacrifices but you’re grumbling. How little you truly know yourself if you think you don’t do things this way as well.

Humans are the most refined animals. We’ve gotten to type 2 and 3 of selfishness, whereas all other animals are stuck with the first type.

Because of the inherent self-interested nature of all living things, fundamentally an evolutionary drive to survive and thrive, while flawed, I believe capitalism is aligned with motivations of the natural world. However, capitalism today is broken and needs reform.

Looking at history, Ray Dalio notes in his essay on the needed reform of capitalism:

The communist philosophy of “from each according to his ability, to each according to his needs” turned out to be naïve because people were not motivated to work hard if they didn’t get commensurately rewarded, so prosperity suffered. Capitalism, which connects pay to productivity and creates efficient capital markets that facilitate savings and the availability of buying power to fuel people’s productivity, worked much better.

But today, capitalism is broken, and it’s not the result of evil rich people or lazy poor people. Dalio argues:

All good things taken to an extreme become self-destructive and everything must evolve or die, and that these principles now apply to capitalism. While the pursuit of profit is usually an effective motivator and resource allocator for creating productivity and for providing those who are productive with buying power, it is now producing a self-reinforcing feedback loop that widens the income/wealth/opportunity gap to the point that **capitalism and the American Dream are in jeopardy. That is because capitalism is now working in a way in which people and companies find it profitable to have policies and make technologies that lessen their people costs, which lessens a large percentage of the population’s share of society’s resources.