Not Boring Detailed Chain Capitalism: The Ideal State and Potential of Cryptocurrency

Written by: Packy McCormick

Compiled by: Luffy, Foresight News

Any technology that has sufficient value in an ideal state will eventually reach that state.

The ideal state referred to here means the ultimate goal or highest potential that technology can achieve, provided that all issues are resolved and the technology is widely adopted.

Understanding the ideal state may be the most important thing for technology to do in its early life, because if the ideal state represents the value of enough people, then problems will be solved, and the technology will be popularized.

The boom and bust cycles of these technologies are useful noise. Booms can attract resources, while busts are useful for restructuring, solving problems, and charting the next phase.

In any market cycle, the expectation of the ideal state acts like a magnet, attracting new researchers, entrepreneurs, and investors to improve upon the work of those who have failed to achieve it. If you believe the ideal state is attainable, you will attribute past failures to timing or improper schemes and continue to try new approaches.

Artificial intelligence, autonomous driving, and augmented reality/virtual reality have all languished for decades, consuming billions of dollars, and now they seem to be on the verge of a breakthrough. This is capitalism: if the opportunity is big enough and feasible, ambitious people will continue to try to figure out how to make it work. Even if thousands of dreamers die along the way, those dreams do not perish.

Recently, there have been new voices claiming that cryptocurrency is dead. Prices are down, activity is dwindling, and people are leaving the industry. I know this is harsh and boring. But I am confident that cryptocurrency is one of those dreams that will not be extinguished.

A fortnight ago, I wrote an article titled "I, Exponential," which is a celebration of capitalism. The ideal state of cryptocurrency is to make capitalism more efficient.

This is a grand claim, but it may also be too grand. Cryptocurrency is not lacking in grand claims, and I will describe my thoughts as specifically as possible in two parts:

• Capitalism is good, and it will continue to evolve.
• Cryptocurrency makes capitalism more efficient.

Capitalism is good, and it is evolving

The way capitalism works is by incentivizing people to act in their own interests and making it as easy as possible for them to do so. Capitalism operates by allowing anyone to propose the best solutions to any problems they see in the market. Many will fail, but there will always be those who succeed.

This is the core principle of capitalism: the variance in incentives for entrepreneurship and increased input leads to better outcomes.

If we are to believe my argument that making capitalism more efficient will make cryptocurrency valuable enough, we need to agree on two premises: capitalism is good, and capitalism is evolving.

Capitalism is good.

The invisible hand creates modern miracles by coordinating the actions of billions of "selfish" people invisibly. The world GDP (per capita gross domestic product) over the past two centuries shows that the living standards and quality of life for billions of people around the world have improved (capitalism truly began in the 18th century).

As Robert Zubrin points out, not only has per capita GDP increased, but it has "grown in proportion to the cube of population size." Malthus was wrong in that, under capitalism, more people are not consumers of resources. More people, able to contribute their best efforts or ideas, are resources.

Capitalism is good, but it is not perfect. Fortunately, capitalism is evolving.

Capitalism is evolving.

It is easy for people to view capitalism as a static system; it not only allows for the continuous evolution of goods and services enjoyed by humanity, but it is also evolving itself.

Think of the Industrial Revolution, where productivity gains brought about wonderful results, as seen in GDP charts! But there was also a cruel side, with children as young as five or six working twelve to sixteen hours a day, often seven days a week, in unsafe working conditions.

Child labor during the Industrial Revolution

Today, owning the means of production is still better than running the means of production, but thanks to the joint efforts of unions, journalists, regulators, and even progressive companies, working conditions for laborers have improved tremendously. For example, Henry Ford implemented a five-day, 40-hour workweek in 1926, not out of benevolence, but to test his theory that reducing working hours could improve worker morale and productivity.

Consider how ambitious tech companies are financed. Before the 1950s, to develop and scale a new technology, you either needed to be wealthy enough to fund it yourself, convince a bank to lend you money, or build it within an existing company. Tech entrepreneurship was a chasm for ordinary people. When Sherman Fairchild wrote a check for $1.4 million to form Fairchild Semiconductor for the "Traitorous Eight," a new financing model was born.

Venture capital, or liberated capital, now known as venture funding, ignited the tech industry as we know it today. As Sebastian Mallaby wrote in his book "The Power Law," "by liberating talent to turn ideas into products and combining unconventional experimentation with commercial goals, this unique form of finance cultivated a business culture that made Silicon Valley so prosperous."

I do not believe we have reached the end of history or the end of capitalism. I believe cryptocurrency can make capitalism more efficient.

How Cryptocurrency Makes Capitalism More Efficient

What makes capitalism more efficient?

As the two examples above illustrate, capitalism does not evolve along a single trajectory. Improvements in working conditions and new financing models both make capitalism more efficient.

Cryptocurrency may improve capitalism in many different directions. I asked Claude, the AI from Anthropic, what ideal capitalism would look like, and it told me that while economists do not agree on the answer, there are some basic principles:

• Strong property rights and contract enforcement.
• Free markets where prices are determined by supply and demand.
• Low barriers to entrepreneurship.
• Healthy competition among firms with low levels of power concentration.
• Open trade and capital flows between nations.
• Democratic processes that reflect the opinions and interests of the populace.
• Equal opportunities regardless of identity or background.
• Alignment of business interests with long-term social welfare.
• Limited regulation focused on correcting market failures and protecting rights.
• Sufficient funding from the government for public goods like infrastructure, education, basic research, and social safety nets to mitigate the structural challenges of capitalism.

We can disagree on specific details, but this outcome is close enough to the ideal state. What surprises me is that the first seven read like a list of characteristics of an ideal world for cryptocurrency.

• Cryptocurrency strengthens digital property rights and has self-executing smart contracts.
• Now, I can get the current price of HarryPotterObamaSonic10 Inu or monkey jpeg purely based on supply and demand.
• Composability, open-source code, and shared infrastructure make it relatively easy to launch new applications.
• Competition forces protocols to have a minimum level of value extraction.
• Cryptocurrency is a 24/7 global market with users and developers spread across the world.
• Decentralized protocols rely on governance by their holders.
• The most popular new applications in the crypto space are built by anonymous developers.

If you read closely, you will find that not all of these have reached the ideal state.

HarryPotterObamaSonic10 Inu is a meme coin; who cares if you can immediately discover its price and trade it?

Governance is also problematic: low voter turnout and ballots are easily manipulated by whales.

We can argue whether friend.tech is good or bad, but it is the most popular new application showcased by all the money and effort invested in the space so far, which is not something to celebrate.

Amid all the chaos, there are signs that we are moving toward the ideal state. I find there are some particularly compelling pathways.

First, if you value the internet, then endowing digital assets with physical attributes (such as property rights) is a big deal.

For example, I have written about the necessity of cryptocurrency, which enables people to control their personal AI models. This idea may seem strange now, but it won't be for long. Taking away your @x handle is one thing; taking away your girlfriend is another.

If you are going to create a company, the ability to make commitments with computers becomes even more important. Just as entrepreneurial activity in society is determined by property rights structures, digital entrepreneurs need commitments that cannot be revoked or restricted in their distribution.

Companies built on-chain (based on L1s like Ethereum and Solana, L2s like Base, Optimism, and zkSync Era, and protocols like Farcaster) must improve performance in multiple areas (cost, speed, security, UX). In fact, protocols can incentivize developers to build on top of them and align incentives long-term through protocol token ownership, which is an idea I wrote about in "Small Apps, Growing Protocols." When performance trade-offs disappear, this shift should accelerate.

The unique guarantees of digital property rights provided by blockchain have the potential to increase on-chain entrepreneurial activity just like offline physical property rights. The variance in incentives for entrepreneurship and increased input leads to better outcomes. Or as Chamath said, "Some will work, some won't, but you always learn."

Second, compared to any other technology or platform so far, cryptocurrency can create globally free markets based on supply and demand more easily, even for things that do not exist.

Cryptocurrency provides the opportunity to apply free markets to almost everything. Decentralized exchanges like Uniswap were the first products that allowed anyone to list any digital asset, provide initial liquidity, and create a market without intermediaries.

It is certain that the vast majority of things traded in today's cryptocurrency market are garbage—99% of all tokens and NFTs ever created are actually worthless—but noise is a feature, not a bug. 99% of websites on the internet are garbage. 99% of people's ideas about what companies to build, how to explain natural phenomena, or how to design the next big technology are garbage. Capitalism is effective because it allows less than 1% of truly great people to emerge.

Molecule is one of my favorite examples of a new on-chain free market. It uses so-called IP-NFTs to fund scientific research by "bringing the rights to intellectual property and R&D data on-chain, unifying the legal rights, data access, and economics of research projects into cryptocurrency on Ethereum." It has funded research on longevity, hair regeneration, autophagy, and Alzheimer's disease.

Projects funded by Molecule

Importantly, Molecule's potential is to bring the influence of free markets down to the research level, so scientists can study what the market deems important.

On-chain, even less obvious assets like ideas can create free markets. I love Jacob Horne's concept of prediction markets and have tried my own entrepreneurial prophecy idea. You can imagine allowing people to stake their ETH on the outcomes they want to see, providing price signals before entrepreneurs decide to take action. John Palmer from Party DAO is building this toy model with Idea Guy Summer: buy an NFT to join the DAO, propose ideas, holders vote on them, and those with enough votes execute, with all ETH needing to be spent by the last day of summer (September 23). Currently, people are proposing to buy NFTs and swap ETH for USDC, but as more economic activity shifts on-chain, these ideas may become more substantive.

Allowing any digital asset to find a supply-and-demand-based free market may play out in unpredictable ways, but it is foreseeable that bringing existing assets on-chain is useful and is already happening.

Third, real-world assets are coming on-chain, which can lower the capital costs for businesses and projects, increase liquidity by entering a 24/7 global market, and lower the barriers to entrepreneurship.

The potential is enormous, and I believe this is the most obvious way cryptocurrency can make capitalism more efficient. When capital can more easily find the right opportunities with low friction and low transaction costs, capitalism becomes more efficient. When funds flow freely to the most promising businesses, products, or ideas, productivity and progress are maximized. The frictionless flow of capital allows it to be rapidly redeployed when new opportunities arise, meaning less wasteful loss when capital is soft. Lower transaction costs mean more capital is available for value-creating activities rather than being extracted by intermediaries.

In a guest post on "Not Boring," Blocktower's Kevin Miao explained his expectations for moving securitization on-chain. The real-world asset ("RWA") DeFi protocol Centrifuge has streamlined the traditional nine-step securitization process into four steps through code: this process involves 14 parties…

Parties involved in securitization transactions, source: PwC

Source: Kevin Miao, Everything is Broken

Kevin Miao points out that streamlining the process not only reduces the basis points of capital costs—"given the scale of our $14 trillion securitization market, even a 25 basis point efficiency improvement could save borrowers $35 billion a year"—but a credible, neutral, public, and open blockchain means developers can provide value-added services on top of Centrifuge.

Despite being in a bear market, Centrifuge's cumulative funding has still more than doubled in 2023, reaching $436 million. This is insignificant compared to the total volume of the securitization market, but it is good to see rapid growth.

RWA DeFi could have a greater impact on traditionally illiquid and inaccessible markets.

Goldfinch and Jia provide loans to small businesses around the world. My sister works in SME lending in Africa, so I have heard horror stories of businesses having to pay high-interest rates to obtain capital—sometimes as high as 12% monthly. Both Goldfinch and Jia allow these small businesses to access global liquidity and cheaper capital on-chain, using off-chain assets and income as collateral. As they repay on time, small businesses build on-chain credit scores and receive lower interest rates.

Jia just launched its first loan pool in Kenya and the Philippines this summer and has already seen strong early results. Goldfinch began lending in December 2020, with outstanding loans of $100 million, and after experiencing its first loss this summer, it has a loss rate of 1.66% and has recovered $27.6 million in loans.

Another project that caught my attention is Plural Energy, which allows people to invest in solar power plants, wind farms, and battery storage projects for as little as $10, whereas the usual minimum investment is $50,000. Plural focuses on small to medium-sized projects that lack liquidity (too small for traditional infrastructure investors) and the lengthy and complex underwriting processes.

By filing with the SEC (under Reg A+), Plural can tokenize equity in projects and use that equity as a wedge for DeFi. Over time, as developers hold equity in their projects in token form on-chain, they will be able to borrow against that equity on-chain at lower capital costs than off-chain.

These are just a few examples of RWA DeFi projects being built on-chain to eliminate friction, increase liquidity, and lower capital costs. They are early signs of helping global capital find the right opportunities and drive the evolution of capitalism.

Over time, we will see more types of projects and assets come on-chain. Ideally, capital can flow at internet speed, making capitalism more efficient.

However, regulation remains a significant bottleneck. Bringing assets like company stock on-chain is complex, especially in the U.S. Ultimately, opportunities will force regulators to establish reasonable regulations. Major companies like Visa and JPMorgan have announced on-chain settlement products in the past week, and firms like BlackRock have applied for Bitcoin and Ethereum ETFs. As large institutions continue to see opportunities to lower costs and increase liquidity, I expect they will lobby the government.

Early signs of the ideal state of cryptocurrency—making capitalism more efficient—are already present. Cryptocurrency can provide developers with property rights, encourage more people to become entrepreneurs, and increase the variance of inputs that are the lifeblood of capitalism. It can create free markets for anything. It is beginning to bring real-world assets on-chain, allowing capital to flow more freely to the right places and lowering the barriers to entrepreneurship.

Even if obscured by the bear market, these signs are tangible.

We are still in the early stages

To be honest: cryptocurrency in the real world has yet to live up to its written promises. There are highlights, but they are often drowned out by bad actors, scams, and boom-and-bust cycles.

I have spent a lot of time trying to explain what cryptocurrency has built so far, but the more I think about it, the less I understand it. For now, that is important.

In the gaming space, the lack of widespread utility for cryptocurrency is to be expected. "We came too early!" is a phrase often quoted, but I believe it is the truth.

Ethereum has been around for less than ten years; it is the latest major technology platform we have. Artificial intelligence has been developing for nearly 70 years, and the roots of VR can be traced back to Headsight and Sensorama in the 1960s. Things like Bitcoin first appeared in the form of electronic cash in Bruce Sterling's 1994 "Heavy Weather." Smart contracts did not truly emerge until Charles Stross's "Accelerando" in 2005 and Daniel Suarez's "Daemon" in 2006.

Cryptocurrency has not had much time to prove itself, and all the time it has had has been spent in the whirlpool of the internet, with money pouring in, which is both a very good thing and a very bad thing.

Few works of science fiction mention cryptocurrency, which could mean:

The technology's value is not yet sufficient for sci-fi writers to bother imagining it.

It is a truly rare new idea.

I believe it is the latter. If so, then we are still in the sci-fi conception stage of cryptocurrency. In this stage, people dream of the potential use cases and ideal states that might emerge when the technology runs perfectly, and they just happen to be building through it.

HG Wells conceived of the "World Wide Web" in 1899, a very early idea of the internet. Before the internet boom, we spent a century thinking about the implications of the internet, and we ultimately concluded:

Bad websites from the 90s like Amazon, Apple, Disney, Coca-Cola, Webvan

Despite the awkward start of the internet, and any company named ".com" making billions, the ideal state of the internet—connecting everyone in the world for communication and trade—was clearly so valuable that researchers, entrepreneurs, and investors persisted through the crisis and built the internet we know and love today.

At this stage, the most important thing is to grasp the ideal state. With an ideal state that is valuable enough, everything else is implementation.

The ideal state of cryptocurrency is that it will make capitalism more efficient and accelerate progress across industries. This has enough value for civilization that people will chase it through booms and busts.

This is indeed happening. It is a cliché to talk about infrastructure investment at this stage of the cycle, but on-chain infrastructure has made tremendous progress over the past year.

L2s like Optimism, Base, Arbitrum, zkSync, and Starknet are making block space cheaper. Innovations like account abstraction, supersends, embedded wallets, and multiparty computation provide developers with tools to create smoother user experiences while retaining the advantages of cryptocurrency. As Visa announced its use of USDC on Solana to accelerate merchant settlements, stablecoins are becoming infrastructure. Researchers at Stanford University have even proposed the ERC-xR standard, which would make certain transactions reversible. I have spoken with many teams dedicated to correcting the flaws of cryptocurrency.

Despite falling prices and poor activity, the progress in infrastructure indicates that smart people still have confidence in the ideal state of cryptocurrency and are dedicating their careers to it. This also acknowledges that ordinary users will not want to make trade-offs: they will want the benefits of Web3 with the convenience of Web2. While I believe mass adoption is not yet important, if cryptocurrency is to reach its ideal state, it will be crucial at some point. Entrepreneurs will need to derive unique value from building on-chain. Companies will need to turn to cryptocurrency to finance their projects, and lenders will need to seek funding opportunities there.

I believe the next decade will see faster progress and more economic opportunities than any previous decade. The wheels are turning, and this will happen whether or not cryptocurrency is involved. However, my hope is that by bringing more engines of capitalism on-chain, we will accelerate this process and allow crazier ideas to flourish.

As everything becomes decentralized, cryptocurrency can push capitalism further to the edge, reducing the costs of market transactions, benefiting individuals and entrepreneurs.

Capitalism is good, and capitalism is evolving. I believe cryptocurrency can play a role in this evolution. With an ideal state that is valuable enough, this will be inevitable.