How to Save the Blockchain
Friends, Romans, Countrymen, lend me your ears. Vinay Gupta the coordinator of the 2015 Ethereum public launch has some thoughts on the state of the industry today.
Once again, crypto winter is upon us. Depending on how you count this is my fifth or eighth. Back in the 1990s there was ITAR and the crypto wars, where the US Federal Government basically killed the industry in America, back when crypto was a thing you did to emails not a shorthand for privately issued anonymous digital cash. The early days of bitcoin, when it hit thirty-something dollars then crashed to four and stayed there. The 2016 DAO crisis. I’ve seen it all.
I want to talk about how we wound up where we are today, and how we get off this nightmare ride of boom-and-bust cycles which are psychologically trashing our industry and making it so hard to build enduring value. We can stop the bleeding, but we have to be smart.
First of all though, here’s a bunch of stuff that might help with the deep background to all this if you want to orient yourself before plunging in; you don’t need to go through it to understand what follows, but a lot of the context is here:
The psychology of the boom-bust innovation cycle.
Here’s the piece I wrote in 2017 about the 2018 crypto winter. Some of you may remember it. It lays out the same basic case I’m going to make here: crypto wins by solving problems that nobody else can solve, profitably. It has to win at three levels to survive:
- Ordinary people have to use it
- It has to generate actual value, not just move value around
- Governments have to tolerate it or use it themselves — either one will do
If we can’t hit all three of those criteria WANGMI. We’re building a technology that needs a billion regular users to survive. The constants are huge: big engineering teams, big marketing budgets, complex legal and regulatory work. It all costs money and the only thing that can sustain the industry is real economic growth.
It is still Warren Buffet’s world — literally, he owns it. His way of analysing the world is to look at the fundamental valuation and profitability of assets. He’s so good at it, his company has roughly the same market cap as Ethereum had a couple of years ago. But Buffet’s company doesn’t 10x up and 4x down every couple of years: it’s plodded along fairly reliably for decades, incrementally growing value.
Now, you’ve gotta ask yourself, “why can’t Warren Buffet see crypto?” And it’s not because he’s old or doesn’t get tech. No, it’s because he’s smart about financial fundamentals.
That’s all that boring stuff like:
- How much food will come out of the ground?
- What’s the global market for machine tools going to look like next year?
- How fast are people moving to the cities?
Thinking about this stuff really carefully is how you figure out when a real-world asset is under-valued.
Buying things which are under-valued is how Warren Buffet makes money.
But Warren Buffet won’t buy bitcoin at any price. So we have to think about that. What do we know that Warren Buffet doesn’t?
Now let me introduce another big thinker about finance: Carlotta Perez. Perez is good at valuing bubbles. Specifically, she’s good at thinking about how bubbles create value in the long run even though they all pass through horrible periods like this.
What Perez says, roughly, is that bubbles build infrastructure. There’s a massive surge of irrational enthusiasm during which water flows uphill, capital flows into the most improbable things, and the future seems so close you can touch it. Warren Buffet hates this stuff because it involves guessing about the future. During that initial lift, during the innovation burn period, the G-force is like sitting in a plane at take-off. It hits you right in the base of your spine. Here we go!
Then a little later nearly everyone goes bankrupt.
Then a bunch of grown-ups who know how to run business move in, buy up all the assets cheap, and turn all of this technological potential into profitable businesses.
It’s a fundamental change in the nature of the people that run the industry: it goes from innovators to operators. Risk tolerance goes way down because the technology already works but it needs people who can operate it profitably.
My company, Mattereum is in the middle of that process of transformation right now as our business team takes more and more responsibility for running the business, and the original innovators are now more integrated into product development and sales. Usually companies don’t make that transition under their own power — somebody has to come in and fire the CEO — but in our case we knew enough about how businesses really run to make those changes under our own power (without anyone firing me).
I’ll introduce a few members of our new senior leadership team in another Medium post shortly.
So we’ve been through basically six rounds of the Perez cycle in crypto in the past 15 years. These things come on each-other thick and fast. An enormous amount of underlying technological, financial and even social innovation has happened.
- Bitcoin
- Altcoins
- Ethereum
- ICOs
- Defi
- NFTs
And at the end of that we’re left with a rough copy of about a third of the global financial system. You could just about put together a mortgage loan and buy a house as an NFT if you really put your mind to it. It would take work and connections, but you could just about buy real estate as an NFT today, with financing. Mattereum is of course going to make that a lot easier real soon, but let’s deal with things as they are rather than as they’re going to be.
So in every one of these rounds of the Perez cycle we can see the future as clearly as all the folks who went bust installing “dark fiber” optic cables in the ground. About 20 years ago companies ploughed billions into the ground to lay fiber optic cables that nobody needed or would pay for. It was THE FUTURE. Then everybody went bankrupt, grown ups bought the assets for a song, and slowly started to operate the fibre profitably. Same thing happened with airlines: again and again and again Southwest Airlines acquired bankrupt airlines for a song, with planes and routes, and operated them profitably.
In crypto we run this cycle super fast and with the same people in the room on each cycle. But the field keeps growing and changing, and all these ups and downs result in a most “interesting” phenomena: the All Time High.
During the All Time High, at crypto events, every single person in the room has made money. Everybody. You bought in yesterday, you’ve already made $5. You bought in six months ago and you look like a genius. The money just seems to take care of itself.
During a dip the “newbies” have lost money; the least socially connected 10% or 20% of the people in the room bought, then it dipped, and the old hands are buying at the current price. The newbies are a bit twitchy but the old hands are all looking greedy rather than fearful, and life goes on.
During a crash, and all-importantly after a crash, 70% of the people in the room have lost money. Some of them have lost 70% of what they invested: they took real money out of bricks-and-mortar assets and bought hype tickets, and then got rekt, to use current parlance. And in these periods the old hands aren’t buying anything; they’re sitting on their winnings and waiting for the rally somewhere on down the line.
The NFT space is now in this condition. I don’t know what NYC.NFT is going to feel like later in June 2022, but I expect the mood to be mordant. People have lost a lot of money, and they wonder if they’re ever going to make it back. Remember 2018, Ethereum people? The ICO craze had blown over because the massive promises made by those projects had failed to materialise, and people were gloomy as all hell. A long time passed until Defi Summer in 2020, and then the 2021 NFT take-off a year ago.
Most of the new folks in the space haven’t seen crypto winter before. 70% or so of the people in the room have lost money. The mood is down, down, down.
Welcome to the Perez Cycle, kids. I’m sorry to be seeing you down here in the gutter one more time, but you’ll find a lot of old friends here, survivors of previous rounds of the cycle.
We stick together.
The rebuild: real world utility, or bust (again).
Around 2017 I was looking at starting a VC fund. I didn’t know exactly how to do it: I’d worked in a fund in the 1990s but there was a lot about the business I did not understand at the time.
As part of the research, I put about 100 people through their first VR experience. I wanted to figure out if it was time to invest in VR projects. It was market research.
I came to the conclusion that we were years away from VR being a workable technology. The hardware was clearly ready: Oculus Rift was a little clunky but it was the Apple IIe of VR: the thing that tells you The Revolution is Coming. That was fine.
But the software was appalling. Back in the day they made movies by putting a camera on a tripod and doing a stage play in front of it. It took decades to make movies. A whole new art form (cinematography) had to be invented. Shocking and amazing things happened decade after decade for a century to get us to where cinema is now. Those changes were often driven by technology, but they were delivered by actors and directors portraying the human experience in new ways, creating ever-more-compelling works. VR is not ready for artistic reasons, far more than for technical ones. I could go on about this for some hours, but the lack of a “virtual cinematography” makes most VR experiences as compelling as watching CCTV footage of mall parking lots. It does not matter if I’m looking at the wheat fields of Gondor and scouting for Nazgul, if it’s not telling me a story I don’t want to know.
Also violence is overwhelmingly overpowering in VR. It’s literally just too much and reducing the violent content of our video games to the point that it doesn’t traumatize people to play (Arizona Sunshine, I’m looking at you here) is also going to take time.
So my prediction is this: the Metaverse is going to fail. At least for a while. It’s still too early. The pandemic is more-or-less over, people are back out in the world again, and everybody loves this place! The stay-at-home culture which VR is fundamentally rooted in doesn’t provide the lived experiences which people want. There is something very much like VR which people do want, but until VR has solved the artistic problems of storytelling in the virtual medium it’s just chat rooms with better graphics. I have an Meta Quest II, and it’s gathering dust: there’s just nothing to *do* in there.
Not yet.
On the other hand, we have inflation. To inflate. The state of things being inflated.
The bubble of all bubbles.
Folks don’t remember inflation.
Realistically the US inflation rate is about 12% right now, if it’s calculated using the same measures used back in the day. If that stays up for four years, each dollar in circulation loses half of its value.
The whole economy goes through what the Ethereum community has gone through in the last few weeks, over a couple of years. It is devastating. In theory wages adjust to keep up with inflation, and interest rates too. Practically speaking without strong labour unions to negotiate, workers get poorer year-on-year.
Pair that up with the global supply chain crisis, including food, and you’ve got a recipe for global disaster.
The middle class don’t just get to retreat into the virtual world. There’s nothing there that anybody wants.
No, we have to stand our ground and fight for the real world: it’s where we live.
The metaverse is not going to save us. If we re-inflate the tech-hype bubble around the metaverse, it’ll produce a brief flare of innovation, some very inflated prices for assets which are inherently extremely volatile, and another flame-out like the one that we’re in, just a couple of years down the road (at most.) I quite liked play to earn as a concept. It didn’t seem inherently bonkers to me that the age-old practice of gold farming could be modernised by crypto into something that allowed essentially independent operators to do it in a defi way. But it’s stuck in the Perez spin cycle, along with everything else, and people in developing world countries are losing their entire livelihood in this chaos.
We have to change how this works.
We have to take the hard path now: we have to start building the kind of wealth that Warren Buffet can understand, the rebuilding that outfits like Southwest Airlines specialised in.
We have to learn how to make money.
Shovels and gold mines
During a Perez Cycle there is one very predictable way to make money: be the exchange. This is one form of the old saw about “during a gold rush, sell shovels.”
In the recent loops, that’s:
- Coinbase in its Bitcoin, altcoins, Ethereum, and ICOs phases
- Uniswap (and all the rest) during the Defi phase
- OpenSea during the NFT phase
OpenSea got 2.5% of everything. Pushing $400,000,000 a month in fees at one point.
That’s no joke. That’s real money. But it’s essentially a toll road, and if the cars go somewhere else you don’t get a cut. Coinbase is doing NFTs but it’s going to have a hard time catching OpenSea. Maybe this deal with Mastercard will help.
But, really, this is just a tax on bubbles. You want to get into the bubble, you pay the gatekeepers. It’s generating real wealth by skimming a little on other people’s speculative activities. In a casino, this is called the vig. In roulette, it’s the green “00” where the house wins and takes all the money on the table.
In crypto it’s the commissions going to the people selling access to the speculative market. This is not a bad business to be in for the winners. It’s real revenue.
But it’s not actually wealth generating.
So how does crypto actually generate wealth?
Here’s the first argument: crypto is monetary policy as a service. Crypto makes money by literally making money. Bitcoin miners pull the stuff out of thin air, with enormous energy costs, and sell it. Money is a product. Now this argument was always solid, but the counter-argument was “but Bitcoin is worse money than the US dollar.”
And here we get into a thicket.
Bitcoin was a worse, more expensive, more volatile version of the US dollar for a long time. But the price, on average, kept going up. Bitcoiners would talk about scarce supply and historical inevitability, and the good and right-thinking people of the world would roll their eyes and say “but it isn’t really money” and move on, while the bitcoiners continued to be wrong and get rich.
The thing that kept the Bond Villains in the loop on bitcoin was the underlying fear that the US dollar was inevitably going to start inflating eventually. The 2008 bust had left the economy in a fickle, precarious position and the vultures knew it was only a matter of time.
Well, that time is now. 12% inflation is one hell of a thing. It was a global crisis that last time inflation was that high. It’s a global crisis now.
And the bitcoiners are clearly and visibly right about Bitcoin being “monetary policy as a service” while, at the same time, losing money hand-over-fist right now as the current Perez Cycle bubble they are in bursts (again… for like the 5th time). They were making money when they were wrong. Now they’re losing money when they are right.
There’s no justice. But there is inflation.
For our younger readers: inflation means there’s too much money chasing not enough stuff. The price of the stuff starts to rise, and year-on-year everything gets more expensive. If wages rise at the same price as stuff, the people who lose are people with money in the bank. If wages don’t rise at the same price as stuff, the working class gets poorer and poorer, and the landlords get all the money. This was last a thing in the 1970s, and it led to the 1980s. What a disaster. And as for keeping wages rising through an inflationary period, who’s in a union these days?
So “monetary policy as a service” in bitcoin means this: by restricting the supply of money to below the availability of goods and services, the amount of goods and services a given amount of money can buy will keep going up. This is known as “deflation” — prices go down every year instead of up. Well, sure enough, with 12% inflation and worse on the way probably (stagflation! secular stagnation! contagion!) for the dollar economy, the bitcoin (and soon, Ethereum) “hard money claim” begins to look pretty good. There’s no doubt it’s a plausible model of the future: in-between the massive Perez cycle crashes, there is a massive on-going infrastructure built out and fundamental economic wealth creation from making and selling hard money during an age when all the governments will sell you is increasingly-soft money.
Back when the market cap of Bitcoin was around $500m USD people used to say to me “why is Bitcoin worth anything at all?” and I’d say “given the state of the world, does a $500m hedge against the dollar going horribly wrong seem unreasonable to you?” and usually they’d go “Ah. Hm. Alright then, sure.” It made a difference to their understanding of the situation.
So the argument here is that, even though Bitcoiners are losing money on the current Perez Cycle, they’re also right about inflation. Selling wealth preservation as a service is inherently profitable (if you’re any good at it) — just ask any professional wealth manager.
The long term trajectory here is WAGMI: Satoshi’s analysis of the inability of governments to control inflation in the long run was accurate, and the apocalypse that they predicted is here.
But Bitcoin prices are still going down because the market can stay irrational longer than you can remain solvent, as they say in finance. It’s a hard life.
So that’s one half of “during a gold rush, sell shovels.” Bitcoin is the selling the gold part. I won’t say that’s going well, but it’s going as expected. There are huge issues, as always with bitcoin, but the nation state’s money isn’t all roses either: defense spending vs. bitcoin mining, you know? It is the same sort of spending: protecting value.
Here’s the other half.
Protecting wealth from inflation is only one kind of protection we need.
The other kind of protection we need is environmental protection.
Now here you say “but Bitcoin has horrible environmental externalities” and I’m not saying you’re wrong. It does. There is a paradox here, at no mistake, and we all have to live with it regardless of what position we take relative to Bitcoin. I’m very pro Proof of Stake systems including Avalanche and whatever we’re calling ETH2 these days, and have been for years.
Environmental protection is a big deal. The existing economic architecture of the world makes it essentially impossible to protect nature. I could go on for some time about how the key function of colonialism is to convince rich people that it isn’t unceasing violence that maintains their wealth but, at the end of the day, you either know how this world works or you don’t. I used to get into trouble for saying “what is the point of Free Software running on hardware manufactured by slaves” at open source conferences. You know me.
A system of sound money, no matter how outlandish or mainstream, is not going to save us alone. There is nothing about bitcoin that will stop us destroying ourselves with CO2 emissions, indeed many would argue (and I’m among them) that Bitcoin has done immense damage in this way.
We need a comprehensive overhaul of how things are done while the global system is in shock: there is a window of opportunity to start a reorganisation of trade the likes of which hasn’t been seen in about five hundred years. We need hard asset accounting to deal with fraud and asset bubbles, and we need to start counting environmental and social externalities on the same kind of basis that we account for payments. And it has to be the same system. (to read more about what an integrated blockchain-based environmental economics backbone would look like, see this Medium piece)
But back to the hard asset economics. Here’s the core issue in a nutshell.
Nobody trusts anybody else’s money.
If you’re in China and signing a deal for 12 months in the future, what do you think the dollar is going to be worth?
So being able to see exactly what is going on with your counterparties is an increasingly good idea. If I’m being made promises about a supply chain, I want to be able to inspect it. Are you really going to be able to deliver me 1200 PC laptops at 200 a month, or is your vendor going to crap out? If you do fail me, can I get my money back
Uncertainty is high. All time high. Trust is low. All time low. The global system is stressed.
We restore trust by making the system transparent: visibility into our counterparties’ supply chains enables us to make a better guess about whether or not they’re going to be able to deliver. This kind of trust problem on trading and delivery is breaking out all over the place, in previously-unprecedented ways.
The answer, inevitably, is to use less volatile things to pay for less volatile things.
Absolute certainty about hard assets and their value is a precondition for being able to do trade. But you also need certainty about the value of money, and the risks of the goods not being delivered because of supply chain problems. No system can solve all of this, but strategically deployed cryptographic assets can. If I have a crypto token which translates to four ounces of gold in the form of a gold bar, and you have every reason to trust that token, I can use it to pay for two laptops priced in gold. If you prefer SDRs to gold, and you want to bake in some terms for inflation to index-link the price of the contract, no reason that can’t be done too.
Turning the corner
The crypto industry has two fundamental ways of making money: “scarcity as a service” to protect wealth from governments printing currency. That mode of wealth production should be strongly reinforced by 12% per year US inflation and similar rates in other wealthy countries. But 50% drops that apparently come out of nowhere make it hard unnecessarily hard to make that case.
The other, complimentary, approach is to get stuck in to the hard work of getting physical asset trade on chain. There are a huge range of benefits to tokenizing physical assets as NFTs or representing them as ERC20s.
- support for environmental economics
- lowered fraud rates
- guarantees there’s no slave labour in your stuff
- circular economy benefits to reduce raw material usage
- easier sales because people trust the stuff they are buying
All this together turns the blockchain itself into the marketplace for the entire world. That’s how we win: we get the real estate, the gold, the land, the wine, the cars, the clothes and furniture and everything else flowing over the magnificent complex infrastructure that has been built up by the last 6 rounds of the Perez Cycle in the blockchain space.
We have world-changing infrastructure. Now we have to use it to change the world.
My company, Mattereum, derisks physical assets as they are turned into tokens. We make Mattereum Asset Passports (MAP) which enable people to vouch (with their money) for the condition of physical goods, ranging from fine artwork to real estate. We combine cutting edge legal developments with blockchain technology so we can partner with merchants to add a MAP to every transaction — the MAP is a digital smart contract that legally binds the identity of an item being sold to its detailed specifications and value. Within the asset passport, each specification is backed by a warranty that is legally enforceable in more than 160 jurisdictions. This means it is no longer necessary to have to just rely on trusting the seller to tell the truth about an item, solving the problem of the lack of a trusted third party in sales on the blockchain. For the first time it enables purchasers to fully trust in the value, integrity and authenticity of on-chain merchant sales, which is of critical importance for the growth of metaverse and NFT transactions that will dematerialise and financialise the world’s physical assets, and allows an avenue for recompense if your on-chain asset is stolen. In addition, through engaging as a warrantor, brands and manufacturers can participate in recurring revenue streams from secondary market transactions.
Using MAPs we’ve helped our customers sell everything from gold bullion to a world-famous DJ’s trumpet. We are hard core economic realists: Vinay Gupta (CEO) spent years as a consultant on failed states; Anton Shelupanov (Managing Director) saw the economic troubles in former Soviet countries in the 1990s and early 2000s from an extremely difficult position: working alongside justice systems he witnessed the outcomes of economic collapse, which included uncontrolled hyperincarceration, leading to an amplification of the TB and HIV pandemics and the resultant harm to societies. It took respective governments and international organisations years and in some cases decades to put in place strategies to begin to recover from that harm.
We’re building the technologies, teams, and know-how to run the global economy in an era of unprecedented pressure. We have a circular economy service to make the physical goods we have work harder. We’re working on a large-scale scale play to take gold bullion from around the world and decentralize gold custody. We’re working on real estate, both so you can use real estate as collateral more easily, but also to make it possible to transfer real estate faster and with more certainty which minimises exposure to fluctuating purchasing power and interest rates. We’re getting stuff digitally tagged so you know exactly what you are buying. Soon, all kinds of machineries like futures and options on physical assets: the full Defi toolkit applied to the real world. And because we really believe in and understand ecological economics, because the assets we help sell have estimates of their environmental impact and integrated CO2 offsets, this is all Refi: “Regenerative Finance.” Documenting real things, including the environmental externalities, is critical to our model of the world. You can’t know the real value of a thing unless you fully understand and know its environmental externalities. And knowing real value is what we are all about.
I want to encourage all of you to join us. The real asset revolution is how crypto really generates wealth.
How, you say? Right now the global economy offers us no reliable global way to buy and sell things of substantial value around the world, with strong legal protections for both buyers and sellers, and excellent risk management to make sure people get paid if something goes wrong. We don’t gather and collect the information necessary for environmental economics and right-pricing of assets, discounted by any environmental damage they are causing. We know only the cost of everything, but the value of nothing, and it’s really harming us.
TradFi destroyed the world through systemic fraud of the kind that led to the 2008 financial collapse. It’s working on destroying the future through funding climate change. Defi built the tools for doing some amazing things, but underpriced risk to a scary degree. Refi is both “regenerative finance” but also, critically, Re-al Finance. Finance fully grounded in the real world, including all that messy environmental, social and governance stuff that TradFi and Defi conveniently left out of the picture.
Everything that we can do to make transactions faster, more certain, more trustworthy, higher in information content, more international — all of that — generates real wealth by moving transactions from inefficient and data-losing rails (have you tried buying a house recently?) on to dramatically more functional infrastructure for the future of world trade.
And this is how we make the blockchain space valuable in an operational way, rather than a speculative way. This is how we move from a series of bubbles to enduring, stable wealth. We get into the real world, and we solve the transparency, accountability and trust problems which dominate real world trade and financial markets. This is the way forward.
Mattereum is up and running and open for business, creating MAPs for an ever-growing variety of assets. If you would like to onboard your physical assets (including real estate) to Mattereum’s system so you can sell them on the blockchain you can contact us at sales@mattereum.com
