What is Cryptoeconomy: A Macroview
By Dick Bryan
Investing in crypto is both a short position and a long position.
THE SHORT POSITION
The short position is a bet that currently-known assets are entering a period of uncertain prices and potentially general decline. As economic assets they are passé.
1) In a crisis, almost all conventional assets are correlated. Where do you find non-correlated assets that are not just ‘gambling’?
2) There is something new happening. Financial crises are not new, but their impact is now faster and more pervasive in an era of financialized capitalism. The current period revealed something about capital markets that is not experienced in the last 40 years.
Right now, governments and central banks are spending many billions of dollars/euros a month to maintain liquidity in asset markets: QE by central banks; fiscal deficits that keep businesses profitable. Asset market liquidity is now directly dependent on state funding: liquidity is now a ‘public good’.
But is it sustainable?
Can central banks ever sell the trillions of dollars of private assets they now hold?
Will governments ever pay down the fiscal deficits they have accumulated?
Are there limits to the market/public acceptance of state money printing that underlies these state fiscal and monetary positions? And what happens when that limit approaches?
So, as a short position, crypto offers: 1) non-correlated assets that can have ‘real’ economic underliers and 2) an economic domain not contingent on being denominated in fiat (state) currencies and not reliant on state underwriting of liquidity. Investing in crypto is a bet against riding the volatility of the existing capitalist economy. It may still appear volatile, but a different volatility. The short position trades the spread of volatilities.
THE LONG POSITION
This involves seeing a cryptoeconomy not just as an alternative asset class within a capitalist economy, but as a different notion of an asset itself.
This certainly isn’t true of all cryptotokens, but here we focus on those with real underliers: those tokens that link to processes of creation of something useful and/or valuable, be it related to an anchoring role in measurement, art-related, co-ordination related or related to the production of block space or outputs that embed new notions of ‘value’. Going long in these domains is a bet that the assets purchased will grow in value not just because standard capital markets will see value directly, but because participants in a cryptoeconomy will see value in their terms.
The long position is therefore about going outside what will standardly be recognised as value-creating, and see there are new notions of what is meant by value. NFTs have really opened the game to this direction: people are, for a reason, excited about their newly discovered capacity to express better what they consider valuable. If a critical mass of investors embraces these new notions, a unique process of accumulation has started. It is a question of re-evaluating value itself. The long position trades the spread of ways of calculating value. (If that doesn’t make sense, please read on; hopefully it will!)
STABILITY IN CRYPTOINVESTING
Is volatility a problem? All markets need some volatility or they stagnate, but what is ‘reasonable’ or even ‘welcome’ volatility?
It depends on how you measure.
1) The short position is intentionally volatile with respect to the mainstream capital market — that’s part of being an ‘alternative’ asset.
2) In the long position some assets are designed to be innately stable, when defined by mainstream capital market norms. ‘Stablecoins’ (a.k.a ‘cryptodollars’ and ‘cryptoeuros’) are designed precisely to deliver this outcome (they embed incentives to buy when the price falls, and to sell when the price rises, so they can be made stable with respect to any nominated asset — the dollar, the euro, the S&P500, etc.). They don’t do anything in themselves, but they are a valuable bridge between two worlds.
3) Different notions of ‘value creation’ can offer their own stability with respect to their specified underliers. Stability here is that cryptotokens’ prices hold a direct and predictable relation to the underliers of value creation.
The key here is measuring in a crypto unit of account: a unit that ‘describes’ the cryptoeconomy. Token stability, when measured in terms of its own unit, verifies the direct connection to the underlying value-creating performance.
Current fiat currency links directly to a system based on profit — so system liquidity means keeping stock prices high, banks profitable and firms profitable (this is where, and why, we see monetary and fiscal policy directed). Liquidity doesn’t link to the environment, scientific research or social welfare, or to a viable art community — indeed, with a fiat unit of account, these must be sacrificed, at least in the short term, to secure fiat liquidity.
But what if you design a money linked to other values? — where liquidity would be defined by the creation of alternative values, let’s say environmental value, and not ‘profit’ value? *
The design issue in these cryptoeconomies is how to secure popular buy-in on an alternative unit of account, or mode of measurement, an alternative mode of calculation and accounting. We are born into a money system that values profit, but we must make a money system that values social and environmental goals.
Now we have the sense of crypto as not just offering an alternative asset class that cycles differently from the stock market, but an alternative notion of what an asset can be. This cryptoeconomy alternative mode of calculus then is a bet not on whether cryptoassets can look like mainstream assets, but that the spread between the two is not just a price spread denominated in fiat, but a mode-of-calculation spread as well.
The long position is a bet that this mode-of-calculation spread will grow. And that more and more people will value the latter when they realize it is actually possible. When that happens, on which side of the spread do you want to be?
NOTES
(*) This discussion is only starting in crypto — even if it is perhaps the most important one. The key here is that, in their money role, cryptotokens can provide an alternative unit of account, not just a means of exchange: they can invoke a new measure of value, not just facilitate new processes of trade. Just like Stani Kulechov from Aave recently tweeted:
Or last autumn Rune Christensen from MakerDAO was pointing out that stablecoins are what they eat — and that there is power in the ability to define what is accounted and accepted as collateral and how that is denominated:
In summa: stability with respect to a fiat currency (or a basket of fiat currencies) is one take on stability, but it embeds the primacy of fiat over crypto, and leaves the stability of fiat currencies unquestioned. Stablecoins are considered as the acceptable face of crypto because they are a crypto version of fiat: the US dollars you hold when you don’t hold US dollars. But where do you go when you want to dissent from fiat, when you want to take a stand against fiat by betting against it (shorting it) and finding new stability from a different set of economic and social relations. We think the latter is the real social potential of cryptoeconomy. It provides an opportunity to re-think the social role of money, and the social incentives that are embedded in fiat currency — money as protocols of social relations. And if and when fiat currencies face their next future crisis, we want to be talking already about what new stabilities — new social relations, processes and values we believe should be constant; new metrics of stability — we are advocating. This is the issue we should pose of every aspiring token: what is its own notion of inter-temporal stability that it claims to secure?
For more, prepare for the forthcoming ECSA economic paper Economic Space Agency: Towards Protocols for Post-Capitalist Economic Expression.
Dick Bryan is a Prof. (emer.) of Political Economy (University of Sydney) and Chief Economist at Economic Space Agency. He is one of the key theorists of the derivative value form, and the author of Risking Together and Capitalism with Derivatives (together with Mike Rafferty).
Akseli Virtanen is a political economist and a co-founder at ECSA. More of his research background here.
More ECSA Cryptoeconomics
What is Stability? The Time of Alternative Money
Crypto-Political Economy. Transcending Hayek and His Digital Disciples
Economics back into Cryptoeconomics
What is a Cryptoeconomy? And Why Now?
Valuation Crisis and Cryptoeconomy
Towards Post-Capitalism: A Language for New Economic Expression
Economic Media: Crypto as a New Medium for Economic Expression
Rethinking Money and Credit in a Cryptoeconomy: On Protocols for Securing Liquidity in a Distributed Economy
