Paths To Tens Of Trillions

There are three fundamental hypotheses that attempt to answer the question, “What path will the super mega winner(s) in crypto take?”

In this post, I’ll detail each of these hypotheses. Note that all three hypotheses achieve the same result: massive stores of value. The primary difference between these hypotheses is the path by which these protocols get there.

The Store Of Value Hypothesis

The store of value (SoV) hypothesis is the most straightforward and the one that best aligns with a historical understanding of money, economics, and scarcity. It’s the most conservative of the three hypotheses in that it assumes that old paradigms about money and scarcity should be projected into the future relatively, if not completely, unchanged.

Basically, the SoV hypothesis argues that the super mega winner(s) only need to have the following traits:

1. Self sovereign: Absent physical violence, no one can take the SoV away from its owner.
2. Censorship resistant: No one can prevent its owner from spending her SoV.
3. Scarce: A fixed, or at a minimum, highly predictable, un-gameable money supply that cannot be manipulated without broad-based social consensus.
4. Secure: People must feel confident that they will not lose their money, either due to practical reasons (e.g. lose the key) or technical ones (e.g. broken smart contract).

The most extreme version of the SoV hypothesis explicitly argues that the SoV itself doesn’t need to be very usable: that it’s OK that transaction fees are high, that transaction confirmations are slow, that transactions aren’t natively private, and that the value doesn’t need to be natively programmable or flexible.

The more extreme proponents of the SoV hypothesis argue that the four traits above shouldn’t be compromised at all, no matter how great the marginal utility of some trade off provides.

What good is a SoV if it’s not practically useful? Proponents of this thesis argue that as long as users can convert the SoV into a more practical medium of exchange (MoE), the SoV has done its job: to store value. The MoE can be used for more frequent, lower-value transactions. This is like having a savings account and a checking account: Users should store their wealth in the savings account, and every so often, transfer a portion of of their savings to the checking account, which can be more easily spent.

Many of the most ardent supporters of this hypothesis tend be economists, or at least those with an economics background. In their eyes, the “soundness” of money as an immutable, secure, censorship resistant, store of value trumps all notions of more practical, day-to-day utility.

The leading cryptoassets that fall under the SoV hypothesis are Bitcoin, Monero, and Zcash, but there are others, such as Decred. Each of these contenders is optimizing some variable but generally doesn’t posit that the underlying asset needs to be very useful beyond some minimum level of utility. For example, Bitcoin prioritizes maximum censorship resistance, Monero prioritizes full anonymity and fungibility, and Zcash prioritizes selective privacy in a way that may be more amenable to legacy institutions. Decred prioritizes governance.

Bitcoin, more than the others listed, embraces the most extreme interpretation of the SoV hypothesis. It foregoes any semblance of utility — privacy in the case of Monero and Zcash, and formal governance in the case of Decred — if that marginal utility comes at the expense of any of the four traits listed above.

The Utility Hypothesis

The utility hypothesis argues that the most useful protocol will capture the most value. However, utility is a nebulous concept, and there are many properties that different individuals and businesses value as useful. Given that many of these properties cannot be concurrently maximized, there is a massive design space in which protocols can assert value accrual at specific points in an n-dimensional trade-off space.

Some of the major categories of utility include:

1. Governance
2. Privacy
3. Transaction throughput
4. Confirmation time (latency)
5. Flexibility and programmability
6. Formal verification
7. Ability to adhere to existing regulations
8. Price stability

Proponents of the SoV hypothesis argue that these various forms of utility, if implemented at the protocol layer, introduce tradeoffs that adversely impact one of the four key SoV traits outlined above. They are generally correct: Most of the additional forms of utility, if implemented at the protocol layer, usually require some sort of trade-off.

Proponents of the utility hypothesis argue that optimizing exclusively for SoV properties at the expense of utility properties is over-engineering for SoV. In exchange for making the protocol more useful, proponents of this hypothesis believe that the additional utility will solve more problems for more people and businesses faster, and that the accelerated rate of adoption, combined with network effects, will ultimately produce the super mega winner(s).

These individuals tend not to be economists, but technologists. This is especially true in Silicon Valley, where most people assume that software will eat the world. Silicon Valley has nearly perfected the science of discovering unmet needs, building products, engineering virality, growth hacking, and building massive organizations that realize these grand visions. As such, they tend to find the SoV hypothesis not only boring, but fundamentally incompatible with their world view. Building products that don’t maximize end-user utility is practically heretical. To the utility maximalists, “soundness” of money matters far less than just getting hundreds of millions of people to voluntarily adopt, love, and use a new product or service.

Some of the leading cryptoassets that fall under the utility hypothesis are Bitcoin Cash, Ethereum, EOS, Dash, Tezos, Dfinity, Cosmos, Kadena, Hedera Hashgraph, AION, ICON, and Polkadot.

Given the size of this list versus the prior list, it’s prudent to recognize that the vast majority of engineering and research efforts in crypto are predicated on the utility hypothesis.

The Stablecoin Hypothesis

This technically falls under the utility hypothesis, but is worth breaking out as its own fundamental hypothesis.

The stablecoin hypothesis posits that price stability is such a valuable form of utility that consumers, especially those in countries with unstable governments and currencies, want a price-stable asset that offers most of the general benefits of cryptoassets (reasonable guarantees of self-sovereignty, censorship resistance, security, and un-gameable money supply).

Proponents of this hypothesis argue that the vast majority of cryptoassets today are in a speculative bubble and that no one uses cryptoassets for any substantial commerce precisely because price-stability is a basic requirement for commerce.

Some have argued (here and here) that truly decentralized, open, permissionless, free-floating stablecoins are economically impossible, and that when a black swan event occurs, these systems will collapse. I won’t attempt to argue the possibility or impossibility of stablecoin economics in this essay, other than to say I believe there’s a real, non-zero probability that they could work, at least in some limited capacities.

But there are other, non-economic challenges awaiting stablecoins.

In the long run, it seems likely that most governments will issue their own cryptocurrencies, managed by their own central banks, on a blockchain. The benefits are obvious: Blockchains are the perfect vehicle for governments to implement the ultimate surveillance state.

Many governments, including the U.S., are unlikely to issue their fiat currencies on an open, permissionless blockchain like Bitcoin or Ethereum. Rather, they’re likely to create permissioned chains that they control (so they can manipulate the money supply), and which require substantial know-your-customer (KYC) compliance to access.

However, I expect that in the next five years, a government of a small but stable country will issue its own currency on a blockchain that doesn’t require any KYC compliance. When — and not if — this happens, demand for that country’s currency will skyrocket, increasing the wealth of that country immensely. It’s unclear how an open, decentralized stablecoin will fare against a government sponsored, globally accessible, highly marketed, censorship resistant, “backed” stablecoin.

Moreover, decentralized stablecoins will face competition as existing institutions issue stablecoins that are backed by the underlying fiat system. The first such systems are live today: Tether and TrueUSD. Stellar is promoting this as well through the use of anchors.

Some of the leading open, decentralized stablecoins are Maker, BitUSD, Basecoin, Fragments, Carbon, and Havven. You can learn more about stablecoins here.

Conclusion

The SoV hypothesis aligns most closely with humanity’s existing understanding of money and economics. Despite its limited utility, gold has stubbornly remained the world’s best store of value over many millennia. Bitcoin aims to be digital gold for exactly this reason. SoV hypothesis proponents don’t care that Bitcoin isn’t very useful because gold isn’t very useful, either.

The utility hypothesis aligns most closely with a the technologist’s view of the world: That the design space of software is fundamentally infinite and unbounded, and that people will devise systems that offer few if any compromises. And of the compromises that must be made, that value will accrue not to a single extreme of maximal censorship resistance, but in a more gray middle-ground in an n-dimensional trade off space of various forms of utility.

The stablecoin hypothesis posits that a price stability is such an important feature to enable commerce — and that commerce is all that really matters — that price stability should be prioritized above all else.

These hypotheses aren’t necessarily mutually exclusive. There’s a real probability that we end up with multiple chains that are collectively worth tens of trillions. For example, Bitcoin may become digital gold, and a performant smart contract platform could become the foundation on top of which humanity builds a new global financial system. Although there are some network effects in these systems, these network effects are not absolute in the same way that Facebook didn’t come to dominate all forms of social media.

The design space for competition among these systems is open-ended and almost entirely unexplored. At Multicoin Capital, we’re looking forward to learning from these massive, global experiments as they play out.

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Thanks to Matt Huang for providing feedback on this essay.

Disclosures: I am openly biased in favor of the utility hypothesis. Multicoin Capital has long positions in the store of value hypothesis and the utility hypothesis, but not the stablecoin hypothesis. We have been and continue to evaluate stablecoin investment opportunities.

For general background, I strongly recommend Nick Szabo’s seminal piece, Shelling Out: The Origins Of Money.