Currency in the 4th Industrial Revolution.
ICO’s are an outgrowth of electricity displacing oil, as the fluid that drives the world’s economic productivity.
What is currency? One way to look at currency is that it is a chunk of of stored economic activity. Currency can be used to store that activity, create that activity, transact that activity. The US dollar, in less than a century, has become a frame of reference for all of the above. But how did that happen, and what might happen as we move forward into the 4th Industrial Revolution?
Electricity has replaced oil as the life blood of productivity. As such, crypto currencies are an expression of ‘tokenized electricity’, just as the ‘petro dollar’ is the expression of ‘tokenized oil’ underlying and facilitating the world’s economic activity and the creation, storage or transaction of value.
It’s instructive to understand how we got to where we are. Today’s dominance of the US dollar relative to other currencies is an anomaly. For more than 99% of human history, cultures, languages, and the economies that linked them, were heterogeneous — in other words, economies were numerous, fragmented across many groups, and decentralized. We are going through a mean reversion of multiple interconnected economies, built around communities of interest, with electricity at the root and software as the enabler.
The US dollar has been dominant for roughly 74 (28 years backed by gold plus 46 years backed by oil) years; literally a blip in time representing 0.0012% of the 6 million years of human history. How did that happen? In 1944, at the tail end of the carnage of WW2, the major productive economies of the world were largely destroyed.
Nations gathered at Bretton Woods to ‘restart the world economy’. Part of that effort included the creation of a new set of interlocked currencies, with the US dollar as the reference point, and the trust behind the USD reference currency, created by setting $35 USD against 1 ounce of gold. Gold was something easy to trust (as is Bitcoin is today as a frame of reference in crypto) — a durable, scarce commodity. Any individual could swap their USD for gold at a Federal Reserve teller window at that fixed price, if one wanted to physically hold something they could trust. This model lasted for a good 27 years until 1971.
As modern economies developed post WW2, the productivity model accelerated what may turn out to be a temporary shift toward centralization — driven by the “oil based industrial revolution”. Centralized capital, supporting ‘new’ work methods centered around the assembly line and specialization of labor, produced maximum economic returns for those that controlled ‘centralized’ capital and capital assets. Humans became commoditized at scale and for much of this past 74 years became locked into the productivity machine like hamsters in cages running on wheels.
Over a those decades, the explosion of economic activity broke the ‘gold standard’ as a viable currency model. As economies grew, total stored wealth on paper “in dollars” far exceeded the gold available to back it. Should there come a day when everyone with ‘stored productivity in dollars’ wish to redeem it at a fixed price of $35 per ounce of gold, there would not have been enough to go around — so a new system was needed; one that reflected the new economic model where productivity and storage of value was based on oil.
As the root of economic productivity shifted to oil, along with the forced use of the dollar by western powers as the exchange mechanism, ‘petro dollars’ displaced the ‘gold backed dollar’ and became the proxy for economic security. Economic security of people, companies and nation states could be had by storing ‘tokens’ — a proxy for oil in the form of US dollars. At a country level, US dollars accumulated in a nation’s ‘foreign reserve’ were a call option on economic security as they represented barrels of oil — fuel for economies. One could argue that the creation of the ‘petro dollar’ was the ‘tokenization’ of oil, in the form of a rolling, unbacked (by a hard reserve of gold) ICO of the USD.
So where are we headed? I’ll posit here that Bitcoin, arguably a proxy for gold in an age of electricity, has become a frame of reference, and that ICO’s are a proxy for currency in the 4th industrial revolution.
At first, ICO’s seemed crazy to me. While a chip designer by training, I’ve been funding startups as an ‘equity biased venture capitalist’ , purchasing equity in companies for over 2 decades. ICO’s seemed absurd. Initially, I thought to myself “this feels like walking into a casino and buying a poker chip, expecting someone to pay more for that chip than I did, later”. But they kept happening, and I had to test my assumptions.
What I have concluded, is that the economic productivity model for the world, has ALREADY changed and that ICOs are a reflection of that. Currency, defined as ‘unit value exchange’ is now encapsulating an already existing new reality. One where electricity is more important that oil for productivity at the margin, and where the structure of work, human communities, and humanity itself is reforming and in some ways reverting to a norm that has existed for millions of years.
The shift to the petro dollar, and it’s 44 year (thus far, with likely a few decades to run) reign as a world dominating currency, is a reflection of a transient era where oil became more important then gold as a unit of value exchange. That blip, driven by the ‘2nd industrial revolution’, may have been the exception and not a permanent step change to a world of economic ‘centralization’. We are already in a new era, one where electrons enhance what has been historically ‘decentralized’ human communities and economic behavior for 99.9988% of 6M years of human existence. ICO’s represent a baby step toward the world’s systems catching up to that reality.
We are already at the point that, individually, if I were given a choice to have a ‘hard cutoff’ of either oil or electricity in my daily life, the choice would be simple. I’d give up the oil, as the root of my productivity is based mostly on electricity. The shift has actually already happened for the “growth economy” and is reflected in the massive market capitalization of game changing companies like the FAANG (FB AAPL AMZN NFLX GOOG) stocks as an example, which are all businesses largely predicated on electricity.
Value exchange in the digital era has been redefined. Interestngly, metrics for equity share valuation and governance are evolving as well, particularly in this type of company — companies driven by electrons flowing in interconnected networks, with a ‘community’ element.
In the 1980’s valuation metrics for publicly listed shares centered around P/E ratios. As high growth tech companies emerged as a force, metrics changed to P/E adjusted for growth rate ; aka “PEG ratios”. Then forward discounting allowed companies to list equity, without earnings at all and metrics shifted to ‘Price to Sales’ or other metrics like users and engagement. Simultaneously, the notion of governance evolved to allow companies with communities or network effects to issue ‘class B, non voting shares’. So.. what is an ‘equity share’, representing a community and usage, such as those of Snapchat, with NO earnings and NO vote? (hmmm .. sounds a lot like a token, eh?)
ICOs and /or tokens are simply the expression of economic alignment across a community of interest— whatever those interests might be. Thousands of them have emerged in this ‘new era’ where software and the Internet combine to create a P2P fabric where ‘individual molecules of interest’ can spring off the world’s digital fabric and connect virtually. We are ‘going back to the future’, with blockchain unlocking the tribalism (and with it, simultaneous heterogeneous methods for value exchange across communities) that humans have expressed across the entirety of history in a decentralized world.
More here :
Milken Institute MENA Summit. “ What’s more important electricity or petroleum? After World War II oil was paid for by US dollar so in essence oil had an ICO; oil become tokenized with money; oil became a security “
This post is a work in progress. What is happening now is an amazing, simultaneous redefinition of societal structure, the nature of work, the evolution of communities enhanced and enabled by digital tools, and the value exchange inherent within them. What is happening has broad implications for what we have all grown up with — the concept of the modern ‘nation state’ and the purpose it serves. Some of these thoughts were also encapsulated in a closing keynote talk at Polycon18, which I think was captured on video that i will link to once I find it.