Financial capital outpaces the installation of new technologies, in part because financial capital is responsible for speculating new technologies into existence. Speculation fuels capital growth, and with capital a group of people has resources to deploy towards a shared vision at scale. We saw this with railroads, electricity, automobiles, computers and the Web, and crypto has been no different. Cryptonetworks have capitalized themselves into relevance over the last ten+ years, with the space most notably reaching for the trillion dollar value mark in late 2017.
In the process of capitalizing itself into relevance, this boom of crypto capital has built a native financial system to account for its very own bootstrapping. While the other revolutionary technologies no doubt led to evolution within the existing financial system, none of them built an entirely new financial system from scratch. Instead, they remained reliant on existing financial systems, placing power in predictable hands. Blockchains can be thought of as 21st century accounting and production systems owned by “the people,” and so it follows that the space has pioneered a new financial system to displace the old.
This system is targeting a global audience, macro-and-micro resilience, cost-superiority, and services designed for the 21st century and beyond. While this will ultimately arrive at functional equivalence with incumbent financial infrastructure, it will not stop there. The base is superior, and so too will the end products be.
As a reminder, all of crypto’s financial services are built on the shared data layers we call blockchains, placing the user in control of their data and assets. Competing service providers therefore showcase the same, complete user data, leading to significant usability and convenience gains for the consumer. The analog in the existing financial system would be if Fidelity and Charles Schwab both gave their users access to the same underlying assets and ability to manage them, even though operating different interfaces. Instead, the existing financial system is siloed and laborious to change between service providers.
To delineate between this superior financial system and its predecessor, I’m going to use meatspace+digital to refer to the incumbents. I’ll use crypto- and cypher- interchangeably to refer to the blooming alternative. Cypher-systems are decentralized and open-source, while meatspace+digital systems are generally centralized and proprietary.
Global Audience
Unlike companies that seek users nation-state by nation-state, in cryptonetworks users are sought on a global basis from inception. Unlike companies that own or rent servers to provision their services, in cryptonetworks a global set of sovereign servers perform the work for the network based on economic merit. While the supply-side of cryptonetworks are currently mostly machine-based, expect an explosion of more human-based work in the future, leading to widespread wage earnings from cypher-space.
Furthermore, don’t be surprised when the unit volumes of inflecting crypto-services scale faster than anything prior. It’s already happening. For examples, look no further than the exponential rate of infrastructure buildout behind Bitcoin, or the fact that bitcoin has taken 10-years to be a serious contender to an asset that’s 1,000s of years old (gold). Or consider that in its first year, MakerDAO originated almost as much in loan volume ($200M) as LendingClub did in its first five years ($250M). The global nature and accessibility of crypto makes this breathtaking virality inevitable.
Macro-and-Micro Resilience
Resilience is important from a macro and micro perspective, as cryptonetworks already are and will continue to be, in tension with the meatspace+digital incumbents. From resilience comes sovereignty, and the inability of the meatspace+digital to kill this movement once those realms realize cypher-space is a threat to their existence.
On the macro level, crypto’s financial system needs to be resilient to attacks of all kinds. This is an ongoing game of cat and mouse, especially for the more computationally complex services built on Ethereum and other smart-contract chains. But “given enough eyeballs, all bugs are shallow,” and the open-source ethos of these softwares works to their security advantage over the long-run. While hacks are common now, it’s good that those vulnerabilities are exploited, patched, and learned-from at the toy-stage. The biggest systems will continue to get ironed out, until they are as secure as nuclear reactor code. Meanwhile, teams like Radicle and Gitcoin are pioneering resilient new funding models for the long-tail of secure open-source software and digital public-goods creation.
Moving from software security to hardware security, there has always been a fixation in crypto on ensuring the security budget of base-layer hardware is sufficient to reliably maintain and append to their ledgers at scale. Principally, we must protect against “double-spends” that could erode trust in the accounting system. I remember once calculating for ARK Invest that even if Google threw all of its compute power at Bitcoin, Google would amount to less than 0.25% of the compute that secures Bitcoin’s ledger. And that was in 2015.
On the micro level, resilience to attack is important for the owner of any kind of property. Protecting property is critical to creation in the capitalist-geared world we live in. Only when people are assured their creations will be protected (or shared, if that’s what they prefer), will they experience the highest levels of motivation. The key is that the originator of creation is in control. This is where public-key cryptography has been huge for protecting property, and digital creations, at low cost. Remote seizure is nearly impossible. Crypto is building protection-technology, and micro-resilience, into the fabric of online culture.
Together, these macro-and-micro resiliences make it such that no army is necessary to defend a cryptonetwork. Instead, the economics and nature of the network make it such that it is resilient to all attacks, by design. In the vein of The Sovereign Individual, the lack of a military that’s needed to keep cryptonetworks resilient and operating, is key to allowing these economies to operate at lower cost over time. They require less extraction to be maintained, because they are lower cost to run and protect. The final test of resilience may be when the meatspace+digital tries to strangle all the bridges that lead to the cypher-economy (taxes on bitcoin transactions is a small-scale form of this), at which points it's likely the cypher-world will shrug and continue growing endogenously.
Cost-Superiority
To use a deep dive example of crypto’s superior unit economics, it is now possible to run an organization that is functionally equivalent to an investment firm, enterprise, or sovereign democracy for ~$16 a month on Ethereum. Ethereum alone doesn’t provide this functionality, instead a team had to build the specialized software that is stored on Ethereum’s ledger, with that software occasionally called to action by transactions submitted to Ethereum’s Virtual Machine.
In this case, that software was built by Aragon. Once the software logic is sent to Ethereum’s ledger through a transaction, it sits there dormant waiting to be called. While the software does require occasional maintenance, which does have associated costs, the “dormant but live software” on Ethereum incurs zero operational cost until it is called. When called, it is the user that pays for the operations, and the cost of these operations is set according to the complexity of the transaction for the Ethereum Virtual Machine (EVM). In other words, the costs that the consumer is charged are commodity costs, with hardly any margin added onto the service.
One thing that helps the operators of services on Ethereum is their costs are also much lower. You can think of all the applications on top of Ethereum as collectively sharing the capex and opex of the machines that run their operations, significantly lowering the burden for each individual service. Think micro-Software-as-a-Service, collectively sharing their Infrastructure-as-a-Service costs. From there, service-providers are getting creative with ways to capitalize themselves and put food on the table. In all, it’s already clear that the consumer is slated to win massively should this system of provisioning services win out.
Switching to Bitcoin, while people complain Bitcoin is expensive to run (and same for Ethereum), or bad for the environment, most of these complaints fail to grasp the full-picture. The service Bitcoin provides, which is functionally equivalent and superior to gold as a financial asset, is in all much lower cost than gold. Gold mining ravages the scarce beauty of the land that we have on Earth, not to mention all the physical world apparatuses that are needed to transport, custody, and account for it. Bitcoin is much simpler, and in time will run entirely on renewable energy, with little visible and atmospheric footprint to its operations.
Similar to Ethereum, users of Bitcoin are paying to access the commodity block-space of Bitcoin’s 21st century accounting system. There is a fee market for this access, where a global-set of ledger-appenders have competitive pressures put on them to keep margins and fees low. I expect the margins of these miners to look similar to electric utilities once BTC is fixed-supply, socially de-risked, and a massively used transactional network. This is a globally-set margin, for a globally-provided utility. Meanwhile the costs to custody, and other “carrying costs,” are near-zero for the user of BTC. The same goes for all other public cryptonetworks.
Time and again, low-cost services have taken massive share within our economies. If you believe in the gospel of low-cost, then you better believe in the promise of cypher-space provisioned services over the long-run.
Functional-Equivalence
Using services built on Ethereum, you can now access interest-bearing deposit-accounts (8% per year in USD), borrow and lend a variety of assets, create cypher-native credit, deposit into indexed asset managers, get paid by asset managers, exchange all your cryptoassets, purchase insurance, and do it all through candy-coated interfaces. And that’s just pointing out a fraction of Ethereum’s services, the lesser known cousin of Bitcoin.
The rate at which these permissionless financial services are popping up and iterating on Ethereum is mind-bending. And make no mistake, the DeFi community has functional equivalence as a north star that will be surpassed, this is clear from the breadth and depth of talent that I have seen pour into the space from Wall Street, Silicon Valley, and all parts of the globe over the last six years.
As we all know by now, Bitcoin allows for value storage and transfer at scale. It can be accessed at any time, from anywhere. Billion-dollar transactions have been processed through Bitcoin for less than a dollar. Off of Bitcoin’s backbone, a wide range of services have been built by independent companies to tie into the meatspace+digital economy. Due to its age and size, Bitcoin is much more integrated into the existing world than any other cryptonetwork, making it crypto’s primary bloodline of liquidity and capital onboarding mechanism. Ethereum is hot on its tail.
The combination of a capital pipeline and immaculate accounting system, alongside a rapidly iterating and evolving suite of financial services, points to the fact that crypto is well on its way to functional-equivalence with what can be found in the meatspace+digital. Some will claim that because these systems are not yet functionally equivalent, they are a toy that will never get there, and should thus be disregarded. That would be a grave mistake, as it confuses an instance in time with the longer-term trend. We already know that the next big thing starts off looking like a toy.
21st Century Services
One of the key value propositions of BTC -- an absolutely fixed supply -- is novel in the credibility with which the Bitcoin network is able to enforce it. Things that are supposed to be scarce have historically been subject to centralized control, which can make them prone to whimsical decisions that change the trajectory of the supply curve (e.g., equities, fiat currencies); or then there’s the typical commodities with a decentralized set of suppliers that are guided by the invisible hand to grow an asset’s flows and stocks over time.
BTC’s commitment to fixed supply can be thought of as allowing it to preserve value through time. Its digital-native transportability and accessibility allows it to also preserve value through space. A person can now fit near-unlimited wealth in their pocket, and access it from anywhere with an internet connection. Simple but powerful, and the combination of the two allows for the preservation of value through space and time; a sorely needed service for society’s 3rd millennium (Bitcoin on Mars, Elon?).
Meanwhile, within Ethereum there are also many financial services that exist that have no meatspace+digital equivalent. First off, and so obvious that it might be forgotten, all asset types (equities, bonds, cryptoassets, real-estate, virtual land, etc) on Ethereum speak the same language and so there is fluid exchange between every asset-type. This stands in stark contrast to the meatspace+digital economies, where each asset class has its own exchanges, custodians and fiefdoms, all of which inject capital and time costs into the transfer between fiefdoms. For a retail user, sending equities from one custodian to another in the meatspace+digital is at least a multi-day or multi-week affair, whereas on Ethereum that transfer would settle in less than ten minutes.
A unified and global language for assets is what causes some to speak of Ethereum as a future global-settlement layer. The nation-state domiciled financial economies of the meatspace+digital are Frankenstein systems, bolted onto each other over time, that try to ensure this type of consistent settlement; Ethereum does it seamlessly with a single blockchain.
Perhaps more obvious in their novelty, the Ethereum community is inventing new services on a monthly basis. With composable innovation, this rate of innovation is accelerating. Things like flash loans, constant-function market-makers, or asset managers that pay you for your assets, all stand out as new services, with no meatspace+digital equivalent.
Conclusion
While both Bitcoin and Ethereum are decentralized and open-source, and part of the same movement, they are providing different components of the financial services that the cypher-space needs. Bitcoin does fewer, but major things, like store, account, and funnel in value from the meatspace+digital. It is currently the largest time, attention, and capital API to the meastpace+digital that crypto has. Meanwhile, Ethereum is largely contained within cypher-space, powering robust on-chain economies. While the two are clear leaders, a variety of winners will arrive over time by following the same principles, and there is always a chance one or both are replaced.
Regardless of what happens with individual networks, financial services will be followed by a more nuanced build of various socio-economic institutions, all of which will rely upon this shared financial infrastructure. Socio-economic institutions will choose to use this infrastructure for its global accessibility, resilience, cost-superiority, eventual functional-equivalence, and novel services. Consumers will consume services from these networks, and their embedded institutions, for the same reasons.
If you can see the track that these cypher-economies are on, then you will also see there’s going to be a long-term war for economic-share between cypher-economies and the meatspace+digital economies of today. There is only so much time and attention that the eight billion Homo sapiens on Earth have, and within that time and attention, only so much capital that can be dreamt up and justified.
Anyone who knows both financial systems will admit to the superior foundation that blockchains represent. Otherwise, why would every major financial institution, consulting firm, and tech-giant have their own blockchain research and implementation arms? The transition just takes time, but the flow of talent and adoption is only going in one direction.