Yogi Berra famously said, “It’s tough to make predictions, especially about the future.” Unlike some macroeconomists, Berra understood that the world is a complex system and not reducible to neat, algebraic models.
The global economy is one of the most complex systems we know of, defined simultaneously by its growing interconnectedness (thanks to global trade) and increasing fragmentation (the number of countries has grown consistently since the last World War, from 74 → 195).
When looking forward into an uncertain future, particularly with a new technology, it is sometimes helpful to look back.
The early days of the California Gold Rush (which peaked in 1849) were chaotic. The population of San Francisco grew from 200 to 36,000 in a matter of years. There were initially few established rules regarding prospecting rights, and while billions of dollars in gold were recovered, the majority of miners ended up no richer than when they started.
There may be many parallels between the current cryptocurrency boom and previous ‘gold rush’ phenomena. For this post, the most relevant is that the San Francisco of today has very little connection to its origin story as a Gold Rush Town. You could not have predicted Facebook, Google or the other behemoths of Silicon Valley by observing the town’s initial inhabitants and investors.
Most public discussion at any given point in time focuses on the observable. Cryptocurrencies dominate the conversation about Web 3.0. Bitcoin dominates the conversation about cryptocurrencies, and the price of BTC dominates conversations about Bitcoin. It’s entirely possible that the long-term impact of crypto will have little to do with what is currently observable and more to do with what is inferable, which we will attempt to work towards in this post.
Bitcoin was not originally conceived as an asset class, a hedge against inflation, or a middle finger to the man, but a next-generation payment system that uses elliptic curves (code) as an alternative to men with guns (the government).
Almost everyone acknowledges the benefits of blockchain-based payment systems: large transactions are faster, cheaper, and also offer the potential for greater privacy.
Crucially, cryptocurrencies are decentralized, or beyond the control of governments by design. They are a fundamentally borderless means of paying for goods and services.
The most obvious impact from a global economic perspective is on countries with high immigrant / emigrant populations with capital controls and / or expensive routes in or out via remittance channels.
Facilitating remittances should in theory make the global labor market more efficient, and cryptocoins can also provide a stable alternative for saving in high-inflation economies. Increasingly, we are seeing this potential confirmed by usage data.
Chainalysis reported an 881% increase in cryptocurrency use across various emerging markets, with Vietnam, India and Pakistan at the head of the league table. The Chainalysis report observed that crypto is being used to facilitate international trade, citing Nigeria as an example of a country with a highly-developed crypto-based import and export economy.
To take another famous Yogi Berra quotation: “In theory, there is no difference between theory and practice. In practice, there is.”
The spanner in the works of otherwise logical and rational systems usually turns out to be the human element. Communism worked a lot better in manifesto form than it did when applied in post-imperial Russia (or anywhere else).
In the course of realizing the potential of crypto to solve the world’s problems, the ‘human element’ is already making itself felt on two fronts.
At the base-level it is manifesting in the form of bad actors (rug pullers, extortion artists). Over time, the crypto-universe will develop defenses for this, and as a natural consequence of Darwinism, the most robust systems will win widest adoption.
The second and more problematic barrier is likely to come from the top-down: that is, from global governments and their institutions, or the ‘men with guns’. A gun placed to the head of a cryptographer has much the same effect as it does against any other citizen. And when the trigger is pulled, the effects are identical.
The Chinese government knows this. As mentioned above, Nigeria has developed the beginnings of a vibrant crypto-powered sub-economy for international trade, and a sizable portion of this trade was conducted with China until the latter’s government cracked down on crypto-trading in the September of this year.
The other major government in the mix, the US, is pursuing a far more muted form of central government resistance, with a general hand-wringing process underway that may or may not culminate in restrictive measures that make life difficult for Web 3.0 innovators.
In December last year, the investor and technologist Balaji Srinivasan speculated about an upcoming war between three axes, with crypto as the third option for those not wishing to take sides in the incipient cold war.
Already, we are seeing moves by governments to take back ownership of the digital realm via mechanisms such as Central Bank Digital Currencies (CBDC). These solutions conveniently excise the decentralized nature of crypto and many of its other benefits (including the potential for privacy), while retaining a digital sheen.
For the global economy, a successful re-centralization campaign by world governments would result in a rebranded version of the old financial system, with potentially fewer intermediaries, but the same risks.
Where do we go from here?
We could attempt to predict the actions of the US and Chinese governments, but if Berra is right, this would be ‘tough’.
For those not in government power, the most controllable element of the future is Balaji’s third axis, the Crypto Capital layer. As he observes, in the Cold War there was no means for advocates of the third way to aggregate power. But technology has moved on, and initial experiments in crypto — beginning with Satoshi — have proved beyond question that is possible to make world-changing moves without government funding or approval,
Could now be the time for the third axis to come into its own, and if so, could it reshape the global economy? Is there a way to solve the top-down problem that threatens to scupper all attempts to break the iron grip of fiat government?
New civilizations throughout recent and ancient history have typically resulted from a group of explorers or pioneers leaving an established community in which growth or development had stalled, owing to saturation or suppression by a comfortable ruling majority.
The upcoming generation famously faces a future with far fewer options than its parents. College debt, house prices, stagnant wages and a seemingly endless list of additional obstacles await them if they choose to play the game as it has traditionally been played.
Much of this talent is therefore being diverted into the crypto-realm.
Despite rapid progress in the development of blockchain-based solutions by uncoordinated groups of entrepreneurs, much of the value of Balaji’s Crypto Axis is not observable in the technology layer but inferable from the so-called Layer Zero or cultural layer — the composite of individuals, values and vision that makes up a given community.
In the field of crypto, the gear-shift came from a re-purposing of Satoshi’s initial vision for a new payments system (Bitcoin) to a more flexible protocol that has since been used to build the foundations of a complete, alternative financial ecosystem (Ethereum). The shift also implies that the future impact of cryptocurrency could go beyond even that of finance.
Balaji has for some time now been developing the possibility of the ‘network state’ — a collection of individuals who begin as a virtual community and subsequently coalesce into a state-like entity, governed and facilitated by crypto-protocols, eventually acquiring sufficient scale and financial heft to establish a physical presence in the real world.
Depending on the size of the community, this could be a seastead, an island, or even a major land mass. The difference from the traditional state would be that membership is 100% elective rather than decided by birth, and the country in question would possess none of the baggage of legacy government institutions, since everything will have been encoded afresh by the community founders.
While Balaji’s concept envisages such nations being created on the blockchain initially, it’s not impossible to imagine that existing entities (as we are already seeing in the case of El Salvador) transitioning to something akin to a network state from the legacy model.
Since cultural consensus is paramount, it is likely that network states will remain below a certain size, since history tells us that human society is naturally fragmented absent the pressure of a centralized power. It is possible that states will retain affiliations based on common values (like the Anglosphere) while retaining separate status.
We observed above that the efficiency of payments in a blockchain-based system leads naturally to greater fluidity of labor. This would also be the case in a world of network states, with a dominant universal currency (currently Bitcoin) fulfilling the role of the US dollar. What would additionally be the case is that citizenship itself would become fluid.
The example of the United States gives us a sense of what this might mean for the global economy. Currently, citizenship is ‘fluid’ between states for US residents, meaning that individual state governments must compete for individuals.
While entry into the US from those outside is difficult, for the crypto-state of the future this would be less likely, given that those applying would self-filter based on alignment with cultural values, rather than economic opportunities, which in a remote world would not be geographically-dependent.
A larger number of decentralized states, able to operate independently while interacting freely with others, could be a major booster in terms of innovation (and hence global economic growth).
As Nassim Taleb sets out in this short but incisive paper, centralization is the death knell for innovation. It could account for the general stagnation that has taken place in multiple industries in recent decades, which many claim is behind the flatlining of median male income since 1971.
The way to harvest randomness, according to Taleb, and increase chances of major breakthroughs (positive Black Swan events) is to run as large a number of small-scale experiments as possible. In global terms, this means diffusing talent away from the bureaucratized, top-down countries that favor conformity of thought, and into smaller, nimble communities based on commonality of values.
Since this world has not been realized yet, we can only point to existing analogs. The example of South Korea, which was until the 1960s considered a foreign aid ‘black hole’, but which has since risen to outclass global rivals in semiconductors, shipbuilding, advanced construction, and even nuclear fusion, shows the power of a relatively small, culturally distinct entity to create disproportionate gains for the global economy in an internet-enabled age.
In the work Thinking Fast and Slow, the psychologist Daniel Kahneman condensed an entire career’s worth of insights on the topic of systematic errors in human judgement.
Of all the flaws he identified, the one for which he reserves the greatest emphasis is the phenomenon “What You See Is All There Is”. The human brain not only overestimates the importance of the visible, but discounts what cannot be seen to the point of assuming its nonexistence. This is the reason why we interpret “absence of evidence as evidence of absence”, and is the flaw behind many of the better known behavioral biases and effects.
With this in mind, the thrust of this post is two-fold:
1) The path of cryptocurrencies in the immediate term is highly dependent on the actions of world governments, and these are hard to predict.
2) The long-term potential of cryptocurrencies is not limited to their role as currencies per se, but in their role as facilitators for the creation of new countries and a ‘third path’ out of the 20th century paradigm of centralized powers calling the shots.
The challenge, as outlined in the introduction, is that all the attention is currently being directed towards the observable and the unpredictable. In the meantime, the long-term outlook for crypto goes far beyond creating a solution for the unbanked, or making the current financial system work a little faster or cheaper.
It has the potential to power the next stage of human evolution, in ways that we cannot know but can be certain exist, if the history of human progress is anything to go by.