Stare with me into the void, it’s Colton from Hedgehog, the app that helps you buy baskets of cryptocurrency and automate your digital asset exposure wherever you custody funds. Don’t forget we also now support an on-chain TBILL token for those of you who want highly liquid, Aaa-rated US government debt, and you can reply here for more details!
There’s not a lot of excitement in the world of crypto this week besides a downward correction, a few airdrops, and some stablecoin announcements, perhaps because of strong relative performance of the US dollar, so I’m just going to wax philosophical for a bit:
Endgame
What does it look like for crypto to win? Like–why are we here? In this particular industry? Building on these particular technologies? Speculating on these particular coins? What is it all supposed to be for?
In some senses, cryptocurrencies are the purest form of the attention economy. Rather than Meta or ByteDance attempting to perfectly predict (and manipulate) your scrolling habits so they can pocket those sweet sweet ad dollars, crypto speculators are doing their best to predict (and manipulate) your attention in order to pocket those even more delectable bid-ask spreads and price swings. As your attention drifts from token to token, their relative values shift with the thrumming rhythm of the body politic.
But are we really pouring billions of dollars into another entertainment medium? Or is there more there there?
I, for one, think there is more, and I think that it breaks down to a few broad themes:
Funding uncertain public goods
Open source software is a powerful force in the world, from the network technologies that give us the internet down to important firmware code that lets our computers run in the first place. There are also other public goods out there like shared green spaces that exclude other capital production, utilities infrastructure like water, power, and electromagnetic spectrum, or research that gets widely disseminated to enable the next generation of exciting technologies.
Cryptocurrencies and digital assets are really wonderful tools for issuing fungible shares in an uncertain enterprise, and creating rules for how those shares are reallocated and priced for different participants in the project. Take for example the Helium network: they issued a bunch of tokens to anyone who was willing to install a radio in their house, and created rules for how people prove they’re providing useful radio coverage around the world in order to receive future tokens. They also use these tokens as a currency that lets you consume bandwidth on other people’s radios.
This is a really beautiful setup because people who take a lot of risk buying the radios, and helping to shape the software when there’s no one who wants to use it, also have a shared upside if it turns out there’s a lot of demand for data passing through those radios. The enterprise is uncertain, but if the miners, validators, developers, and initial users all collaborate well to make something that people want to use, then everyone gets to participate in that upside in proportion to their earliness and their helpfulness.
One can easily imagine a world where this is commonplace, for everything from life extension research, to new electrical grid installations, to speculative cryptography research that enables new ways of associating and enforcing rules, trustlessly.
Standardizing social interfaces
One of the biggest challenges of human coordination is agreeing on a standard way of interacting. If you look at cultures around the world, or even just a tiny neighborhood, there are many different preferences when it comes to the ways in which you express your wants and your boundaries. In Singapore, corporal punishment is much preferrable to imprisonment for some crimes, but in the USA corporal punishment is largely frowned upon as a solution even when the alternative is potentially years of removal from society. In Japan, slurping is considered an expression of delight that is a credit to the cook, whereas in the US it is generally considered slovenly and rude.
Sometimes these differences in social interfaces result in wars or secessions, and having graceful ways to handle these disagreements is frequently literally a matter of life and death. The same is true of digital interfaces, in that many costs are borne by trying to adapt the inputs and outputs of one software provider to another, and having open accessible standards and clear transparency about how many people are using which standards helps to align people where it counts. I further think that the governance models that are being pioneered by some projects in our space are going to change the dynamics of governance in the world more broadly.
Being able to assess fines and exclude bad actors without physically harming them or imprisoning them is a game changer on its own, but throwing in the ability to play with the knobs and dials of incentives and threats adds new layers to our political and capital systems that can change perceptions of fairness and justice. Thinking carefully about the ways in which we merge and fork interfaces, and the ways in which we provide graceful entries and exits to our systems has meaningful implications for participants as they are born into these networks and age out of them.
Rewards and penalties for attestations
In this vein, a key social interface in any society is simply the court system. If someone doesn’t keep their word or hold up their end of the bargain, how do we resolve the dispute? How do we learn the truth? How do we force a defector to comply if they don’t agree with the decision of the truth-finding body?
In the modern world, when these agreements fail and local dispute resolution cannot rise to the challenge, the burden falls to lawyers, judges, police officers, and a jury of your peers to prevent a greater escalation of violence. If you don’t comply, they physically restrain you, deport you, or execute you. And there isn’t exactly a perfect record of finding the ‘truth.’
In the world of web3, as long as the result can be proven with cryptography, then rewards and punishments can be triggered seamlessly. But that “as long as” is doing a lot of heavy lifting in that sentence. How do you prove with cryptography that an artist created a satisfactory rendering that met the criteria of your commission? Or how do you prove that Amazon delivered the item you ordered?
For some of these things you can get creative with double-confirmation, location-aware protocols, and insurance contracts that pay out to one of the parties that failed the double-confirm. But sometimes you really do just have to find a mediator who is going to consider the evidence and decide in someone’s favor. Can decentralized networks rely on AI for this task? Perhaps, but I won’t expect the humans in the loop to like it. Or maybe there really is a way to prove things like taste and style with elliptic curves and finite spaces.
Reduced opportunity costs
This is primarily the way that digital assets improve lives today, via decreased transaction costs, increased leverage via atomic swaps and flash loans, and rehypothecation of assets in complex financial products used by people who need liquidity for their staked funds.
One of my favorite examples of this is the app Superfluid, which turns payments into streams; for example, you could stream an employee paycheck every block instead of twice a month, and you would still have access to all the liquidity until the block in which the stream is paid out. You could also attach cash flows and indentures to any NFT, allowing the owner to immediately benefit from the streams as soon as the trade is processed. These are worthy innovations that unlock billions in opportunity costs and transaction frictions.
Increased data and service redundancy
Nowadays people think of redundancy as a bad thing, but as certain supply chain failures showed during COVID, it’s an absolutely necessary aspect of a well-functioning society. Decentralization broadly incentivizes redundancy: making sure that every validator has a local copy of all the most relevant transactions, and that there is a backup in case certain validators can’t be reached.
Filecoin’s proof of storage is an amazing example to follow, where clients can actually choose for and pay for their redundancy requirements. In the case of Bitcoin, as long as there is one miner broadcasting a valid ledger, the transactions will always exist. Imagine if we had these kinds of guarantees for all the edifice of science and government.
Portable identities
At its bottom, cryptocurrency encourages the use of private keys, which are really just portable identities: for people, for items, even for processes. Anyone who is willing to recognize your unique number as a unique number, can attach many other unique numbers to that identity, and that makes your data and your belongings portable. You can take those unique numbers anywhere with you, to any platform or protocol that acknowledges the way those unique numbers were assigned.
That’s powerful! If for some reason my favorite service shuts down, I can pick back up with another service that uses the same identities. If I don’t like the policies being adopted because new leadership took over, I can take my identities with me to a more palatable establishment. Having this option is an unvarnished good and an unequivocal improvement over the web2 way of doing things.
Weekly feature
This week we’re featuring LUNA, the coin that blew up in 2022 after market participants managed to depeg the UST algorithmic stablecoin which destroyed billions in value for average consumers on the chain. Mostly I want to feature this because of the new currency on everyone’s lips, Ethena.
Ethena thinks they’ve reinvented the algorithmic stablecoin with a mixture of perpetual swaps and the deflationary dynamics of Ethereum’s EIP-1559. In not so many words, their pitch amounts to ‘number can only go up’ so I’d be wary of pitches with that basic premise. Remember that even the Bank of Scotland was cornered by George Soros, and that was in the much more mature and well-traded silver markets. Algorithmic crypto stables don’t stand a chance.
LUNA is still kicking though, alongside LUNC (Luna Classic), and they are joined by a varied cast of characters on Cosmos IBC: BLD, DYDX, AXL, and beyond. Just make sure that the chain volume and dapps don’t rely somewhere on one of these algorithmic stablecoins.
What are you most excited about for the web3 and crypto industry? It’s okay if your answer is gambling, but I disagree with you.
Keep hedging,
— Colton