The Promise of Cryptoeconomics

Nanos Gigantum Humeris Insidentes.
If I have seen further, it is by standing on the shoulders of Giants.
- Sir Isaac Newton, 1675

They say history smiles at all attempts to force its flow into theoretical patterns or logical grooves; it plays havoc with our generalizations, breaks our rules; history is baroque (1). I agree. Historical analogies are never wholly accurate. They’re often miles wide and inches deep. Therefore, predicating a white paper on a historical analogy might seem like an exercise in futility. While the history of technology doesn't repeat itself, it often rhymes. Historical analogies grounded in the present day can bear fruit. Therefore, I proceed hesitantly.

Johannes Gutenberg invented the printing press in 1440. 50 years later, Frater Luca Pacioli invented double-entry bookkeeping. Pacioli’s invention allowed familial dynasties like the Medici and the Fuggers to ascend to heights previously impossible in such short periods of time. Pacioli couldn’t have invented nor published his treatise on accounting without the printing press. Pacioli saw further by standing on the shoulders of a giant. The printing press, along with gunpowder, eventually broke the church’s monopoly on violence, truth, knowledge, and power (2). Men like Martin Luther and Luca Pacioli pushed the boundaries of human knowledge further for the better thanks to Gutenberg’s printing press.

Satoshi Nakamoto couldn’t have invented a byzantine fault tolerant peer-to-peer cashless system without Tim Berners-Lee’s internet. In the same vein, Nakamoto’s invention has led to a Cambrian explosion. 1T USD of market cap has been created (as of writing in 2022) in less than two decades. Standing on the shoulders of Satoshi and Berners - Lee, men like Vitalik Buterin have pushed the boundaries of human knowledge further for the better. Nanos Gigantum Humeris Insidentes, indeed.

Solidity and EVM (Ethereum Virtual Machine) allow novice developers to spin up smart contracts that encapsulate, organize, and mobilize 100s of billions of dollars in a few weeks or months. These cryptoeconomic organisms, if you will, are decentralized, jurisidictionless entities that exist entirely in cyberspace maintained by a combination of cryptography, economics, algorithmic game theory, and social consensus (3). Maker, Compound, Uniswap, Curve, AAVE, and LIDO are some names that come to mind. These new economic systems are far more efficient than traditional financial products and companies. They don’t have 100s of value extracting and rent-seeking middlemen. Users and deployers of capital interact with and govern these protocols directly without intermediaries.

Some argue that cryptoassets will never be adopted as a means of exchange at scale due to their inherent volatility. First, as the TVL (total value locked) in cryptocurrencies has increased, the percentage change in price over a 24-hour period has more or less decreased steadily. Second, whether one analyzes the Ducat, the Florian, the Mark, or any other historical currency on which data exist, there has almost always been a strong negative correlation between volatility and depreciation of the currency (4). If those arguments are insufficient, then to that I say, we now have overcollateralized and algorithmic fiat-pegged stablecoins that are permissionless, trustless, and usable without intermediaries. Tether, USDC, Dai, and Frax are some names that come to mind.

Settlement times on cryptoeconomic payment rails vitiate the existence of traditional financial rails. T+1, T+2, T+30 (courtesy chargebacks and disputes)? No thanks. How about T+10 minutes? Non-fungible tokens promise a better economic model for artists and musicians.

Blockchain based digital assets have the potential of serving as value protection, safety, and security in a world where western central banks and governmental institutions have diminished in effectiveness.

References:

1. The Age of Reason Begins, Will Durant, 267
2. The Sovereign Individual: Mastering the Transition to the Information Age, James Dale Davidon, William Rees-Mogg
3. The Great Wave: Price Revolutions and the Rhythm of History, David Hackett Fischer
4. A Proof of Stake Design Philosophy, Vitalik Buterin, Medium