Big Web companies tend to expand their platforms and monopolize information by locking users into proprietary interfaces. Cryptonetworks, on the other hand, tend to provide single services, and can’t “own” the interface because they don’t control the data. Specialization helps because the more decentralized a network, the harder it is to coordinate a complete suite of services under a single interface like Google, Facebook, or Amazon do. So instead, consumer applications in crypto are independently built on top of multiple protocols using what we could call a cryptoservices architecture (like microservices, but with sovereign components).
Read moreHow Much Does a Crypto-Vote Cost?
In cryptonetworks where a token provides some kind of voting power (e.g. a DAO or proof-of-stake), we might determine the cost of each vote by calculating how much interest it would cost to borrow that token in secondary lending markets for the duration of the vote. This idea highlights the important role of time as a variable in the governance process, because the longer the period one needs to borrow the token to vote, the more expensive it is in terms of interest paid. If this is true, we can use this insight to design stronger governance systems. Protocols can’t control second-market interest rates, but they can influence the “cost of governance” by manipulating how much time it takes to complete the voting process.
Read moreThe DeFi Déjà Vu
There are important patterns in the historical development of finance, most notably systemic crises associated with the collapse of asset prices or income flows and the recurring interplay between financial innovation and regulation. Understanding these relationships can help the architects of open and automated crypto-financial services, known as DeFi, to assess potential risks and prepare for different economic and regulatory scenarios. This article highlights some relevant historical precedents and considers the potential long-term implications of this latest wave of financial innovation.
Read moreZerion
A remarkable and underappreciated consequence of the emergence of decentralized finance or DeFi is the way it is helping clarify the difference between a world where consumers control their own data and one where that data is locked up in a centralized service or platform. A number of months ago, Joel demonstrated this to me by using Zerion’s application to take out a loan on Maker and then repaying that loan through another application interface. On the surface, this may not seem much different than using any digital bank to take out a loan or buy or sell a security, but as someone who first used digital media inside the walled garden of AOL, I understood immediately this difference was profound.
Read moreZcash's Network Upgrade 4: The Final Stretch of Decisions
Placeholder recently withdrew its governance proposal for Zcash’s Network Upgrade 4 (NU4), choosing to review and endorse other candidates based on our due diligence. For the uninitiated that may be reading this, NU4 will define the Zcash network’s allocation of block rewards to researchers, software contributors and other non-miner laborers. These policies will apply during Zcash’s second coinbase reward epoch, October 2020 to October 2024, and set a precedent for what Zcash’s stakeholders can expect from the network going forward. We think of the governance components of NU4 as a type of constitutional amendment to the Zcash protocol, and have been impressed with the rigor of ideas and debate that community members have displayed through this process.
Read moreThe Bookkeeping View of Money →
The three common ways of theorizing money — as commodity, legal construction, and credit — can be effectively reconciled by considering it as a social institution for bookkeeping. This article outlines the four perspectives, lists materials for understanding each, and considers how some recent innovations in digital record-keeping fit into the picture.
Read moreHow To Think About Value
One way to think about “value” is through the lens of costs. The basic principle is that markets allocate value along the lines of costs as they trend to equilibrium. So we can estimate the overall behavior of future value by studying its associated cost structure. To establish this logic we’ll review some fundamental principles of economics (primarily equilibrium and MB=MC) and piece apart what we mean by “costs”. Then we’ll apply this insight to reason about the nature of value capture and investment returns in crypto.
Read moreFire before Growth: The Likely Fate of Ethereum Killers
In the coming quarters, a high density of “Ethereum Killers” (EKs) plan to launch their mainnets, and in so doing, release their assets to the public crypto markets. The transition of price discovery from the private to public markets will be an important one to watch and understand, especially considering many EKs carry billion-dollar anticipated launch values.
To follow, I’ll reason through my expectations for asset prices and the prices of services offered by EKs. While maximalists may dismiss this as hopeless investigation of shitcoins, I expect the behavior of newly launched EKs to impact the development of the sideways market we’re currently in, as well as the bull market to come.
Read moreProtocols as Minimally Extractive Coordinators
A recent Flipside Crypto post alarmed me when it stated the following: “Despite labeling themselves as decentralized networks, protocols, foundations, and frameworks, cryptocurrency projects are, in fact, businesses – that will fail to succeed if they don’t start thinking of themselves that way awfully fast.” I respect Flipside and what they’re working towards with the Fundamental Crypto Asset Score (FCAS), but fear that encouraging protocols to think of themselves exclusively as businesses will defeat the promise of protocols in the first place.
Protocols provide structure for businesses, but are not businesses themselves; they are systems of logic that coordinate exchange between suppliers (businesses) and consumers of a service. As coordinators of exchange, protocols should be minimally extractive, whereas businesses are incentivized to be maximally extractive (that’s profit, and a business is valued as a multiple of its profit).
Read moreEthereum and The Seven Dwarfs
People in the 1960s computer industry would say the market was IBM “and the seven dwarfs” in reference to the other popular computer makers: Burroughs, Control Data, Digital Equipment, RCA, Univac, Honeywell and GE. They all poured fortunes into developing newer and better technologies than IBM, yet none could compete with its massive distribution advantage. Ethereum is the IBM of the smart contract blockchains: it may not be the “best” technology, but it works well enough and has amassed a distribution advantage that will be hard to overcome by its competitors.
Read moreWeb vs. Crypto Service Models
We compare web vs. crypto service models across two dimensions: the production model (from centralized to decentralized) and the data model (from custodial to non-custodial). The more decentralized and non-custodial a service, the more distributed its cost structure. This is important because markets tend to allocate value along the line of costs. So the more we decentralize the cost structure of a service, the more broadly we distribute its value.
Read moreCryptonetworks and Governments →
Public cryptonetworks have some unique features that put them in an ambiguous position vis-à-vis existing legal and administrative systems, especially governments. What should governments make of these emerging systems, and how might their societal role evolve in a cryptonetworked world? On the one hand, crypto represents an important and effective tool against authoritarianism, and certain aspects of it can arguably be framed as competitive with the State. On the other hand, it is also possible to envision a more symbiotic relationship in which well-intentioned governments are both active participants in and direct beneficiaries of public cryptonetworks.
Read moreSovereign Cryptonetworks
A state is sovereign when it has supreme authority to govern its territory without interference from a foreign power. Similarly, a cryptonetwork is sovereign when it runs in a way that resists outside influence. But instead of managing the rules and politics of a geography, cryptonetworks use blockchain protocols to govern the production and exchange of information services over digital space. Achieving sovereignty is necessary to fulfill crypto’s ultimate promise of independent online networks that distribute value more broadly across its participants, instead of concentrating it in a particular company or jurisdiction.
Read moreResources, Governance, and Legitimacy in Zcash's 2020 Network Upgrade
In October 2020 the Zcash network will undergo its first halving, slicing the annual rate of ZEC inflation in half. Halvings are important moments in any cryptomoney’s maturation as they double the marginal cost of producing each incremental unit (at constant hash rate), moving the asset further along the scarcity curve. Concurrent with this halving, Zcash will undergo its fourth network upgrade (NU4), in which key decisions (especially re: the Founders Reward) need to be made that will shape the next four years of Zcash’s life.
As ZEC coin holders, Placeholder recognizes that NU4 will be a critical upgrade for the Zcash network, and therefore have chosen to submit our thoughts about its contents.
Read more here.
Risk Management in MakerDAO
A core function of the financial system is to transfer risk to the parties most willing to bear it. It should therefore be no surprise that two of the most successful products in DeFi, stablecoins and DEXs, address the key risks of using and holding cryptoassets. But these systems face uncertainties of their own. While limited counter-party risk and full transaction auditability have been rallying cries for DeFi, history reminds us that risk isn’t eliminated, but transposed. In fact, increasing complexity of products and complacency of market participants can magnify rather than reduce systemic risks.
Read more3Box Thesis
In the technology market, a shift in the development paradigm has always shuffled the deck and created opportunity for new entrants and new tools. We are thrilled to announce today that Placeholder led a $2.5mm investment in 3Box, a company based in New York and Berlin dedicated to the proposition that users should have an interest in their data.
Read moreThe Full Circle Hypothesis →
One thing more difficult than critical analysis is predicting the future. But here’s one possible scenario. While blockchain networks will continue to reinvent organizations that administer information and facilitate transactions connected to that information, on a societal level, the end result will look disturbingly familiar. I call this the full circle hypothesis.
Blockchains are Bureaucracies par Excellence
In an earlier post, I likened decentralized networks to fields - social arenas of symbolic and material production within which interested actors compete and cooperate over network-specific resources.
The promise of blockchain and related technologies is that these arenas can be set up in ways that minimize trust requirements, reduce concentration of control over data, and enable free, censorship-resistant transactions in an increasingly global and automated setting.
In this post, I propose this development represents an important step in the evolution of bureaucracy. That may sound counterintuitive given this term’s common association with inefficiency and excessive paper-shuffling. But once we understand the essence of bureaucratic organization, it will become clear that blockchain networks are actually bureaucracies par excellence.
Value Capture and Quantification: Cryptocapital vs Cryptocommodities
The majority of cryptoassets are shaping up to be capital assets in nature, whereas many early examples like bitcoin are better characterized as commodities, with a subset poised to become commodity monies. Within the burgeoning capital asset field of crypto, some closely resemble equity, others more closely resemble debt, and others have a bizarre enough mix of capabilities and value streams to be unrecognizable from prior renditions of capital assets. As part of explaining why governance assets have value, Joel has done an excellent job of laying out foundational principles behind capital, which is a piece that should be read before continuing here.
Read moreDeFi Liquidity Models
As the potential of open financial protocols becomes clearer, some applications are gaining adoption faster than others. Maker dominates in terms of value locked and volume transacted. Compound and Uniswap trail, but are well ahead of 0x, Dharma, Augur, and dydx when it comes to liquidity. The rest have yet to show up on the radar. Looking at the three dominant protocols reveals a design advantage with respect to liquidity: none of them require users to find a specific peer to take the opposite side of a trade.
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