The Philosophy of Digital Assets
This is the first post in a series on the philosophy of digital assets.
An alien species has jacked into the capitalist mainframe via a rogue modem and it is causing convulsions the world over. That alien species is cryptocurrencies, or more generally, digital assets. Likesome monster from a horror movie, it is growing at an exponential rate and sucking in assets as its tentacles creep further into the capitalist machinery.
There have been many threats to capitalism before, and they have either gone the way of the eight-track or have been subsumed into the capitalist apparatus. Those threats were incremental, well understood, and easily folded into the existing infrastructure.
This is different.
Cryptocurrencies are truly alien. So alien that their appearance marks a paradigm shift that will transform economic, social, and political relations. These structures have been relatively fixed since the last paradigm shift, when feudalism gave way to capitalism.
The Paradigm Shift
The previous paradigm shift started in the 10th century and extended into the 17th century. The current one will be measured in years.
Surely this all sounds like hyperbole from some kind of crypto-truther. However, a sober examination of the traits of cryptocurrencies reveals the extent of just how radical an innovation they are and how they will change virtually all aspects of modern life.
Some of these cryptocurrency traits include:
- Simultaneously being an investment, a medium of exchange, a store of value, a unit of account, an app, and a platform;
- Having no ostensible goal, leadership, or “business model” beyond its own adoption;
- Allowing anyone to unilaterally decide to work on the platform, without needing authorization or approval, and then getting paid for that work automatically;
- Having open intellectual property that can be adopted by anyone for their own purposes without permission;
- Having emergent properties where products and services built on the platform are unknown in advance; and,
- Paying users for their use of the cryptocurrency, for the use of their data, or for revealing their preferences.
The speed of these things is much faster than anything previous because of the well-developed internet that it is built upon. Internet adoption was incredibly fast, but web page downloads were incredibly slow. This meant that email was the only killer app to emerge from the internet for many years.
Today, high-speed internet access is ubiquitous (and 5G is well on the way), computing power has advanced exponentially and is available in the cloud for little cost, and machine learning/AI has gone from science fiction to science fact.
This is the infrastructure that digital assets will be built upon. Whereas the internet was built on dial-up phone modems. This difference means the adoption and advancement of digital assets will be violent in comparison.
Changing Capitalism as we Know it
This is going to change capitalism, not the other way around. Because of that, digital assets also have the very high likelihood of changing the economic structure of society.
Critically, cryptocurrencies undermine the traditional battleground of capital versus labor, by introducing a third option, the individual as a user of products and services, owning and profiting from the use of those products and services.
We can call this “own-by-use”. The own-by-use structure is built into many cryptocurrencies.
Let us define the various types of “users”, which include:
- Individuals or entities that use the cryptocurrency for whatever use case they need it for;
- Developers who build apps upon the cryptocurrency protocol; and,
- “Miners” of the cryptocurrency that validate transactions on its blockchain.
Here I want to focus on the first type of user, which is the most intuitive.
Under the own-by-use paradigm, capital is created by users and (at least some) value is captured by users. Everyone is a user of products and services and costs to be a user are generally nil. (I'm thinking of the cost to be a user, such as a membership fee, not the cost of the goods or service consumed.)
This means individuals can influence the success of their own investments just by being a user and, if they choose, a promoter encouraging friends and family to also become a user of that cryptocurrency. Think about Bitcoin, the sum total of the bitcoin advertising budget is zero. It has grown by word of mouth and being promoted by its users.
Users are making an "investment" in the product or service just by using it, and the earlier the user adopts the product or service the more value will accrue to them.
If the Google search engine had been started as a cryptocurrency browser, it would pay its users for their data in Google's own currency, which could be used to purchase other Google products and services, exchanged for fiat, or held as an investment.
Alphabet (the parent company of Google) has a market capitalization of $1.61 trillion. If Google had been started as a cryptocurrency, some of that value would have accrued to Google search engine users.
This model has existed for a long time in the form of mutuals, where a company’s customers are its owners. The most well-known of these have been insurance companies that paid out a portion of their profits to policyholders each year as “dividends”. However, there has been another mutual that has changed virtually every part of the investment industry: Vanguard.
Vanguard revolutionized investing by “paying” clients who purchased its funds in the form of lower fees. Excess profits are used to reduce fund management fees. This is the single most successful business model in the history of Wall Street.
It is also the business model of many digital assets.
While all this is exciting for the possibilities of digital assets, these assets are, and will continue to be, extremely volatile, with 80 percent drawdowns not uncommon. Investors who have adopted an investment strategy of religious fervor towards digital assets, will likely get wiped out.
Indeed, I think it is possible that Bitcoin itself ends up being a minimum viable product that gets left behind by Ethereum and other cryptocurrencies that have an infinite amount of use cases and no real existential risks (compared to Bitcoin’s one use case and many existential risks).
I’ll have more on this in future posts in this series.
 Source: Bloomberg.
NOTHING IN THIS BLOG POST SHOULD BE CONSIDERED INDIVIDUAL INVESTMENT ADVICE.