How crypto could shape the decade ahead
This post was originally published on Coindesk. I’m republishing here with slight edits. You can also check a discussion on crypto markets, reflexivity and “The Supercycle” we had on the Uncommon Core podcast.
The Supercycle thesis is the bold but vague idea that crypto is on the verge of mass adoption, due to a series of technical and exogenous factors. For some, it's a marketing effort that mobilizes exit liquidity. Others interpret it as “up only!” though the latter has been invalidated during the events of late May 2021.
In short: 2021 is 2014 and crypto is the new FANG. Since 2014, FANG outperformed most of the tech VCs and was the “dumb investment strategy” that actually worked. There is no need to form a micro thesis if macro generates handsome returns.
At some point, when everyone is too macro, the magic ceases to work. But until then a way to frame this investment thesis would be: “Following the crowd” is “the new contrarian.” Imitation runs amok.
Crypto Superycyle is welcoming and invites everyone to ape in and compete. Anyone can become a viable competitor and make it. Anyone can get laser eyes or make their Twitter profile photo a couch and become a multi-millionaire.
Peter Thiel said that bitcoin is the new FANG, stating that the digital asset will be macro-driven (as most things) in the next few years. I would extend the thesis to crypto, as an asset class.
Just like AI, crypto is an abstraction. No one really knows what it means anymore. Hiding behind abstractions is seen as bad when you’re building products. Obscuring reality could be useful when you’re trying to get people to discuss the product.
Crypto is a powerful meme that outsiders treat as this mystical phenomenon that insiders try to sell them. It’s been reduced to trigger words and phrases such as “the future” and “number go up.”
In a way, crypto is similar to god. The less people know about it, the more forms and shapes it can take in the future. The more vague your god is, the easier it is to push it onto others. Only then you’ll start to unpack all the nuances of commandments and form a religion. And then others will disagree with nuance and branch out.
Crypto is not a monolith. In 2021, it encompasses many different ecosystems, memes, technologies and beliefs. DeFi (decentralized finance) has in recent months become one of the dominant movements within crypto with ambitions to go mainstream.
Institutional investors treat DeFi with the same suspicion it had treated FANG stocks a decade ago. While VCs were saying “it’s users that matters,” Wall Street power brokers shook their heads in disbelief over lack of revenue: “It’s nice that Facebook has users but how are you going to make money?” Such a boomer thing to say.
When the ad-generated revenue started to pile up many former critics FOMOed in. For some it was too late to attain that illusory 10x. Investors do not want to make the same mistake twice.
DeFi might, to some extent, follow the FANG pattern. TVL could become what users were during the internet’s growth phase; a metric that turned out to be a future cash flow generating machine. In fact, DeFi apps actually generate fees and revenues. Could this be a place to park billions and billions of cash?
DeFi is a perfect product-market fit (P/MF) for the economy running on infinite money. The nature of DeFi revenue is self-serving, but so it’s the nature of modern monetary policy. As long as interest rates are low, sky's the limit. Inflation forecasting could fuel a regime transition in finance: the new economy becomes an exit strategy for the old economy.
Welcome to 2021
Many have seen discussions about the supercycle as a symptom of market euphoria. But there might be more to it.
Crypto markets will likely remain cyclical. Bouts of volatility will persist in the decade ahead and possibly beyond. If a product-market fit for a particular app or crypto is on the horizon, the speculation around it will serve as a stress-testing mechanism. Especially if the product's ambition is to replace an old technology.
The bull market of 2016-2017 led to a mass startupization of crypto. The four years since has transformed nebulous whitepapers to products that we can deploy, test and use. There are users and products and product-market fit is being formed.
In 2017, we had one product; a global permissionless fundraising mechanism (also known as initial coin offerings, or, ICOs). In 2021, there are many more including permissionless trading and lending, the ability to create derivatives and more generally, an ability to deploy financial instruments and be a banker from one’s bedroom.
Both macro and micro factors play into crypto’s hands. Speculation is eating the world and the Gamestop vs Wall Street saga shows us the new dimension of democratizing finance. People want capital and they’re finding new ways of accessing it.
The old economy pushes people towards entities like universities or banks. These institutions are a way of attaining wealth via distribution. On the other side there is permissionless finance. The way forward is “to innovate in the devices of economic decentralization so that more people can have more access to more markets in more ways,” philosopher Roberto Mangabeira Unger once told Peter Thiel.
People do not hate capital. Many journalists, academics and politicians chase a false narrative of class resentment. The opposite is true - people simply want more of it. They just want tendies.
“Speculation is eating the world” translates at people searching for novel ways to attain capital.
The Next Great Unbundling
There are two ways to capture value in the market – to bundle and unbundle. Thompson’s Great Unbundling explains how the internet disrupted distribution of media content by creating a new point of integration. The internet enabled us to build a new value chain based on innovation that creates a new point of integration. Everyone aligns to a new focal point. The winner bundles and everyone unbundles around it.
The internet lowered media distribution cost to zero. The old media monopoly on distributing content and advertisements was shattered. This is an example of how innovation broke status-quo organization optimized for low transfer costs. Market forces unleashed by innovation created new bundles.
Facebook broke the “distribution-based monopoly on customer attention” by integrating consumers and advertising, building a new bundle and a new monopoly on attention.
Crypto, and DeFi in particular, have also created a new integration point. Blockchains such as Ethereum enabled consumers to participate directly in the new monetary regime. No need for a bank that enjoys exclusive access to the central bank.
DeFi dapps can do everything a bank does. Some of these services will not be decentralized but will operate on the decentralized financial stack.
For Revoluts and Robinhoods tapping into decentralized finance is just a matter of integration. Their “backends” will be upgraded from the old economy to the DeFi stack. This is how financial institutions will adjust to the new paradigm. This is the Supercycle.
Naval Ravikant provides a succinct explanation of technological leverage:
“The most interesting and the most important form of leverage is this idea of products that have no marginal cost of replication. This is the new form of leverage.”
One is able to reach millions just with a microphone and internet connection. Most modern leverage boils down to the internet and code – at no marginal cost.
Tech startups are leverage machines because they combine “the minimum, but highest output labor that you can get, which are engineers, designers and product developers. Then you add in capital.”
This combination can yield big returns paired with extreme volatility and long tail distributions. New forms of leverage are permissionless.There are three things I would like to address in terms of modern leverage.
Leverage cuts both ways, with a huge civilizational upside comes also a downside
With the availability of leverage, the malleability increases (potentially also fragility)
Permissionless finance is the pinnacle of internet leverage because the capital becomes more liquid and widely ownable
1. Cutting Both Ways
The era of the internet is an era of infinite leverage that allows one to join three commas clubs in a matter of months. On the other hand, you easily leverage yourself to an absolute epistemic decay by subscribing to a YouTube channel that discusses edgy conspiracy theories and falling down the rabbit hole. The greater the leverage available the greater the potential inequality gap.
Malleability is a function of reflexivity. The more malleable the world becomes, the less robust it is. Reflexivity itself is fuelled by technological and financial leverage. Building our world through leverage introduces inherent fragility.
3. Permissionless Finance
Permissionless finance is an ultimate leverage because it enables almost anyone to access markets and create financial instruments at whim. This forces an upgrade upon the knowledge economy. As a result, the innovation loops might get rapidly shorter as finance becomes gamified.
We already see teenage developers actively participating in DeFi. The new bankers are basically gamers. The same way the media was dismantled by the internet, permissionless finance will disrupt finance.
This is what “unbanking” means. The illusory credential barrier between pros and amateurs will melt.
This does not necessarily lead to just good outcomes. The greater the equality of opportunity, the greater the inequality of outcome. Becoming a billionaire from your mom's basement will inherently increase relative inequality.
The Supercycle is overreaching beyond our wildest dreams. Everything will be “super;” the wins, the losses, the volatility and potentially the difference between losers and winners. The conclusion to the Supercycle is unpredictable, with either a dystopia or a utopian awaiting.
The Utopia of a New Agricultural Revolution
Crypto becoming the new FANG is a real option. The birth of a new asset class represents an opportunity to transition into a new economy. What happens today in crypto or DeFi is not totally without precedent.
The U.S. agricultural revolution in the mid to late 19th century was a prosperous era that led to the ascent of the United States. This period of prosperity started by distributing land, creating a new asset class of farmland and new stakes.
Then came the establishment of land grant colleges focusing “on the teaching of practical agriculture, science, military science, and engineering”. This enabled sharing knowledge and broadened the number of eligible participants. New legal and financial devices, like crop insurance, were invented.
This revolution was a result of technological innovation paired with institutional innovation. The question is if digital assets can provide a similar stimulus.
Digital assets are capital. Some DeFi assets could be framed as productive capital with actual revenue and yield. If the adoption of these new capital assets is paired with education, the unbundling of finance at large will follow.
Almost a Dystopian Alternative
The more things change the more they remain the same. Permissionless finance inherits flaws of the old economy. In this version of the future we will face the same old problems but with new names.
Crypto is often interpreted as a revolution where the little man thrives. It’s possible that the little man will ...well, remain little. Crypto could be a mere regime change rather than a full-blown revolution.
DeFi is permissionless on the surface, but there are skills needed to play the game – a sort of permission. People with a particular set of skills can thrive in this system – even from their parents' basement. But does it lead to more equality in outcome?
Some describe DeFi or Crypto at large as an instrument that will liberate. This perspective says it will merely enable a regime transition and formation of a new financial elite with marginal improvements for others. The insiders joined by the old financial elite will be heralding a revolution.
The Coinbase IPO is a hallmark of the new economy trying to establish itself in the old economy crowd. Crypto trying to legitimize itself could be more dangerous than operating as a subversive force on the sideline. Will crypto face a similar ideological reversal to that of Google? Remember that the world’s greatest ad company used to be against advertisements.
Conclusion to a Conclusion
Just like tech stocks in the last decade, crypto may attract a lot of financial capital. And given that the signal travels faster these days, retail participation will be significant. The liquid nature of this obscure new asset class is a beguiling call to riches that is hard to resist.
Since its inception crypto felt like a promiseland from the inside, and the club of the damned from the outside. This is slowly changing. The kinetic energy in forms of radically subversive ideas have been channeled into a potential energy in the form of cypherpunk startups building DeFi and crypto.
The new economy is bubbling underneath the old, ready to reshape the world. The Supercycle may as well be called a Hypercycle. The IT revolution will finally enable full digital age transition in the Roaring 20s, losing its subversive roots in an attempt to legitimize and establish itself.
The new economy will serve the old economy; finally providing a transition into the digital age in which value is embedded into the computer program. The same battle as the early 2000s but with an alternate ending: the new prevails as we enter the long awaited deployment phase of the digital era.
But Supercycle will require great sacrifice.