Detailing On-Chain Capitalism: The Ideal State and Potential of Cryptocurrency

Written by Packy McCormick

Compiled by: Luffy, Foresight News

Any technology that is valuable enough in an ideal world will eventually reach this state.

The ideal state mentioned here refers to the ultimate goal or highest potential that technology can achieve if all problems are solved and the technology is widely adopted.

Understanding the ideal state is probably the most important thing a technology can do early in its life, because if the ideal state represents the values of enough people, then the problem will be solved and the technology will become widespread.

The boom and bust cycles of these technologies are useful noise. Booms attract resources, busts are useful for regrouping, problem solving, and charting a course for the next phase.

In any market cycle, the expectation of an ideal state acts as a magnet for new researchers, entrepreneurs, and investors to come forward and improve the work of those who fail to achieve it. If you believe that your ideal state is achievable, you will attribute previous failures to poor timing or planning and continue to try new approaches.

Three technologies—artificial intelligence, autonomous driving, and augmented reality/virtual reality—have languished for decades, consuming billions of dollars, and now they seem to be exploding. That's capitalism: if the opportunity is big enough and feasible, ambitious people will keep trying to figure out how to make it work. Even if thousands of dreamers die on the road, these dreams will not die.

Recently, there have been new voices calling cryptocurrencies dead. Prices are down, activity is down, and people are leaving the industry. I know, it's cruel and boring. But I am convinced that cryptocurrency is one of those dreams that will never die.

Half a month ago I wrote an article "I, Exponential", which is an ode to capitalism. Cryptocurrencies ideally make capitalism more efficient.

That’s a grand claim, but one that’s potentially too grand. Cryptocurrencies don’t lack for grand claims, and I’m going to describe my thoughts as specifically as possible in two parts:

• Capitalism is good and it will evolve.
• Cryptocurrencies make capitalism more efficient.

Capitalism is good, it is constantly evolving

Capitalism works by incentivizing people to act in their own self-interest and making it as easy as possible for people to do so. The way capitalism works is by letting anyone come up with the best solution to any problem they see in the market. Many will fail, but some will succeed.

This is a core tenet of capitalism: incentivizing entrepreneurship and increasing the variance of inputs leads to better outcomes.

If you are to believe my argument that making capitalism more efficient will make cryptocurrencies valuable enough, we need to agree on two premises: capitalism is good, and capitalism evolves.

**Capitalism is good. **

The invisible hand creates modern miracles by invisibly coordinating the actions of billions of "self-interested" people. As can be seen from world GDP (gross domestic product per capita) over the past two centuries, the living standards and quality of life of billions of people around the world have improved (capitalism really began in the 18th century).

As Robert Zubrin points out, GDP per capita not only increased but also "increased in direct proportion to the cube of the size of the population." Malthus's mistake was that under capitalism, more people are not consumers of resources. More people who can contribute their best efforts or ideas are resources.

Capitalism is good, but it's not perfect. Fortunately, capitalism is growing.

**Capitalism continues to develop. **

It’s easy to think of capitalism as a static system that not only allows the goods and services that humans enjoy to evolve, but also itself to evolve.

Think of the Industrial Revolution, productivity improvements had wonderful results, just look at the GDP chart! But there is a cruel side, with children as young as five and six working twelve to sixteen hours a day, often seven days a week, in unsafe working conditions.

Child labor during the industrial revolution

Today, it is still better to own the means of production than to operate them, but working conditions for workers have improved dramatically thanks to the combined efforts of unions, journalists, regulators, and even progressive businesses. For example, Henry Ford instituted a five-day, 40-hour workweek in 1926 not out of kindness but to test his theory that reducing working hours would increase worker morale and productivity.

Consider again how ambitious technology companies are financed. Before the 1950s, in order to develop and scale a new technology, you either needed to be wealthy enough to fund it yourself, convince a bank to give you a loan, or build it within an existing company. Technology entrepreneurship is a natural barrier for ordinary people. When Sherman Fairchild wrote a check for $1.4 million to the "Traitor Eight" to form Fairchild Semiconductor, a new financing model was born.

Venture capital or liberation capital, now called venture capital, ignited the technology industry as we know it today. As Sebastian Mallaby writes in his book The Power Law, “By freeing up talent to turn ideas into products and aligning unconventional experimentation with business goals, this The unique form of finance fosters the business culture that makes Silicon Valley so rich."

I don’t believe we have reached the end of history or the end of capitalism. I think cryptocurrencies can make capitalism more efficient.

How Cryptocurrencies Can Make Capitalism More Effective

What makes capitalism more effective?

As the two examples above illustrate, capitalism does not develop along a single trajectory. Improved working conditions and new financing models both make capitalism more effective.

Cryptocurrencies could potentially improve capitalism along many different directions. I asked Anthropic’s artificial intelligence, Claude, what ideal capitalism would look like, and it told me that while economists don’t agree on the answer, there are some basic principles:

• Strong title and contract enforcement.
• Free market, prices are determined by supply and demand.
• The threshold for starting a business is low.
• Healthy competition among enterprises with low concentration of power.
• Open trade and capital flows between countries.
• A democratic process that reflects the opinions and interests of the people. *Equal opportunities regardless of status or background.
• Combining business interests with long-term social welfare.
• Limited regulation focuses on correcting market failures and protecting rights.
• Governments provide adequate funding for public goods such as infrastructure, education, basic research, and social safety nets to mitigate the structural challenges of capitalism.

We can quibble about the specifics, but this result is close enough to the ideal. To my surprise, the first seven read like a list of ideal world characteristics for cryptocurrencies.

• Cryptocurrencies strengthen digital property rights and have self-executing smart contracts.
• Now I can get the current price of a HarryPotterObamaSonic10Inu or monkey jpeg based purely on supply and demand.
• Composability, open source code, and shared infrastructure make launching new applications relatively easy.
• Competition forces protocols to have minimal value extraction.
• Cryptocurrency is a 24/7 global market with users and developers all over the world.
• Decentralized protocols rely on the governance of their holders.
• The most popular new apps in crypto are built by anonymous developers.

If you read carefully, you'll see that not all of them are ideal.

HarryPotterObamaSonic10Inu is a crapcoin; who cares if you can instantly discover its price and trade it?

Governance is also problematic: voter turnout is low and votes are easily manipulated by whales.

We can debate whether friend.tech is good or bad, but the fact that it's the most popular new application to date for all the money and effort put into this area is hardly cause for celebration.

Amid all the chaos, there are signs that we are moving toward an ideal state. There are a few avenues that I find particularly compelling.

First, if you value the Internet, giving physical attributes (such as property rights) to digital assets is a big deal.

For example, I’ve written about the need for cryptocurrencies to give people control over their personal AI models, an idea that seems strange now but won’t any time soon. It's one thing to take away your @x handle, it's another thing to take away your girlfriend.

If you're building a company, computers that can make promises are even more important. Just as entrepreneurial activity in society is determined by the structure of property rights, digital entrepreneurs require commitments that cannot revoke their access or limit their distribution.

For companies building on-chain (based on L1s like Ethereum and Solana, L2s like Base, Optimism, and zkSync Era, and protocols like Farcaster), performance must improve on multiple fronts (cost, speed, security, UX). The fact that protocols can incentivize developers to build on top of them, with incentives aligned over the long term through protocol token ownership, is an idea I wrote about in "Small Apps, Growing Protocols" When Performance Tradeoffs Disappear , should accelerate this transition.

Digital property rights uniquely secured by blockchain have the potential to increase online entrepreneurial activity in the same way as offline physical property rights. Incentivizing entrepreneurship and increasing the variance of inputs leads to better outcomes. Or as Chamas said, “Some will work, some won’t, but always learn.”

Second, cryptocurrencies make it easier than any other technology or platform to date to create a global free market based on supply and demand, even for things that don’t exist.

Cryptocurrencies offer the opportunity to apply free markets to almost everything. Decentralized exchanges like Uniswap are the first to allow anyone to list any digital asset, provide initial liquidity, and create an unintermediated market.

To be sure, the vast majority of things traded in today’s cryptocurrency markets are garbage — 99% of all tokens and NFTs ever created are effectively worthless — but noise is a feature, not a bug . 99% of websites on the internet are junk. 99% of people's ideas about what companies to build, how to explain natural phenomena, or how to design the next big technology are garbage. Capitalism works because it allows less than 1% of truly great people to emerge.

Molecule is one of my favorite examples of on-chain neo-free markets. It uses so-called IP-NFTs to fund scientific research by bringing “intellectual property rights and rights to R&D data on-chain, unifying the legal rights, data access and economics of research projects into a cryptocurrency on Ethereum.” . It funds research on longevity, hair regrowth, autophagy and Alzheimer's disease.

Projects funded by Molecule

Importantly, Molecule's potential is to bring the influence of the free market down to the research level, so that scientists can study what the market deems important.

On-chain, free markets can even be created for less obvious assets such as ideas. I liked Jacob Horne's prediction market concept and tried my own entrepreneurial oracle idea. You could imagine letting people stake their ETH on an outcome they want to see, providing a price signal before the entrepreneur decides to take action. John Palmer of PartyDAO is building this toy model with Idea Guy Summer: buy NFT, join DAO, propose an idea, holders vote on it, execution with enough votes, all ETH must be released on the last day of summer (September 23) Spent before. Currently, people are proposing to buy NFTs and exchange ETH for USDC, but as more economic activity moves on-chain, these ideas may become more substantial.

Allowing arbitrary digital assets to find a free market based on supply and demand may work in unpredictable ways, but putting existing assets on-chain is predictably useful and is already starting to happen.

Third, real-world assets are being put on the chain, which can reduce the capital costs of enterprises and projects, increase liquidity through access to the 24/7 global market, and lower the threshold for entrepreneurship.

The potential is huge, and I think this is the most obvious way how cryptocurrencies can make capitalism more efficient. Capitalism is more efficient when capital can more easily find the right opportunities, is frictionless, and has low transaction costs. When money flows freely to the most promising businesses, products, or ideas, productivity and progress are maximized. The frictionless flow of capital allows it to be quickly redeployed as new opportunities arise, meaning there are fewer deadweight losses when capital is weak. Lower transaction fees mean more capital is available for value creation activities rather than being extracted by middlemen.

In the Not Boring guest post "Everything is Broken," Blocktower's Kevin Miao explains his expectations for moving securitization onto the chain. Real World Assets ("RWA") DeFi protocol Centrifuge converts the 9 steps of traditional capital flow into securitization and streamlines it into four steps through code management: This process involves 14 party participants...

Parties involved in securitization transactions, source: PwC

Source: Kevin Miao, Everything is Broken

Kevin Miao pointed out that streamlining the process not only reduces the basis point of the cost of capital - "At the scale of our $14 trillion securitization market, even a 25 basis point increase in efficiency would save $35 billion per year in borrowers' pockets." "——The trustworthy, neutral, public and open blockchain means that developers can provide value-added services on top of Centrifuge.

Despite the bear market, Centrifuge's cumulative funding more than doubled in 2023 to $436 million. This is not worth mentioning in terms of the total securitization market, but fortunately it is growing rapidly.

RWA DeFi could have a greater impact on markets that have traditionally lacked liquidity and accessibility.

Goldfinch and Jia provide loans to small businesses around the world. My sister works in SME lending in Africa, so I've heard horror stories about the high interest rates businesses have to pay to access capital - sometimes as much as 12% per month. Both Goldfinch and Jia allow these small businesses to access global liquidity and cheaper capital on-chain, using off-chain assets and revenue as collateral. As they make their payments on time, small businesses build an on-chain credit score and receive lower interest rates.

Jia just launched its first loan pools in Kenya and the Philippines this summer and is already seeing strong early results. Goldfinch, which began lending in December 2020 with $100 million in outstanding loans, has recovered $27.6 million in loans after suffering its first loss this summer, with a loss ratio of 1.66%.

Another program that caught my attention is Plural Energy, which allows people to invest in solar farms, wind farms and battery storage projects for as little as $10, compared to the usual minimum investment of $50,000. Plural focuses on small and medium-sized projects that lack liquidity (too small for traditional infrastructure investors) and have lengthy and complex underwriting processes.

By filing with the SEC (under Reg A+), Plural can tokenize equity in the project and use that equity as a wedge for DeFi. Over time, because developers will hold equity in their projects on-chain in the form of tokens, they will be able to lend against that equity on-chain at a lower cost of capital than off-chain.

These are just a few examples of RWA DeFi projects that are being built on-chain to remove friction, increase liquidity, and reduce funding costs. They are early signs that help global capital find the right opportunities and drive capitalism forward.

As time goes by, we will see more types of projects and assets come on-chain. In an ideal world, capital could circulate at the speed of the Internet, making capitalism more efficient.

However, regulation remains a big bottleneck. Bringing assets representing things like company shares on-chain is complex, especially in the United States. Ultimately, opportunity will force regulators to establish sound regulation. Major companies such as Visa and JPMorgan Chase have announced on-chain settlement products in the past week, and companies such as BlackRock have filed for Bitcoin and Ethereum ETFs. As large institutions continue to see opportunities to reduce costs and increase liquidity, I expect they will lobby the government.

Early signs of cryptocurrency’s ideal state—making capitalism more efficient—are already here. Cryptocurrencies can provide developers with property rights, encourage more people to start businesses, and increase the input variance that is the lifeblood of capitalism. It can create a free market for anything. It begins to bring real-world assets onto the chain, allowing capital to flow more freely to the right places and lowering the threshold for starting a business.

Even if overshadowed by the bear market, the signs are real.

We are still in the early days

Let’s be honest: Cryptocurrencies in reality have yet to live up to the promise on paper. There are bright spots, but they are often drowned out by bad actors, scams, pumps and pumps.

I've spent a lot of time trying to explain what cryptocurrencies have been built to date, but the more I think about it, the less I understand it. For now, this is important.

In the gaming space, the lack of widespread utility of cryptocurrencies is to be expected. "We're too early!" This is often quoted, but I think it's the truth.

Ethereum is less than ten years old and it is the latest major technology platform we have. Artificial intelligence has been developed for nearly 70 years, and the origins of VR can be traced back to Headsight and Sensorama in the 1960s. Something like Bitcoin first appeared as electronic cash in Bruce Sterling's 1994's "Bad Weather." Smart contracts did not really appear until Charles Stross's Accelerando in 2005 and Daniel Suarez's Daemon in 2006.

Cryptocurrency hasn't had a lot of time to prove itself, and the time it has has been spent in the vortex of the Internet, which is both a very good thing and a very bad thing as money is poured into it.

Very few science fiction works mention cryptocurrencies, which could mean:

For science fiction writers, the technology isn't valuable enough to even bother imagining.

This is a truly rare new idea.

I think it's the latter. If this is the case, then we are still in the sci-fi ideation stage of cryptocurrencies. In this stage, people dream about potential use cases and ideal states that could arise if the technology works perfectly and people just happen to build with it.

HG Wells conceived the "network world" in 1899, which was a very early idea for the Internet. Before the Internet boom, we spent a century thinking about the impact of the Internet, and finally we came to this conclusion:

Amazon, Apple, Disney, Coca-Cola, Webvan and other bad websites from the 90s

Despite the Internet's awkward beginnings and the billions of dollars made by any company with a ".com" name, the Internet's ideal state - connecting everyone in the world to communicate and transact - is clearly extremely valuable So much so that researchers, entrepreneurs, and investors persevered through the crisis and built the internet we know and love today.

At this stage, the most important thing is to understand the ideal state. With an ideal state valuable enough, everything else is implementation.

The ideal state of cryptocurrency is that it will make capitalism more efficient and accelerate progress across industries. This has enough value in civilization that people will pursue it through booms and busts.

This is indeed happening. It’s already a cliché to talk about infrastructure investment at this stage of the cycle, but on-chain infrastructure has made huge strides over the past year.

L2s such as Optimism, Base, Arbitrum, zkSync and Starknet are making block space cheaper. Innovations like account abstraction, Supersends, embedded wallets, and multi-party computation give developers the tools to create a smoother user experience while retaining the benefits of cryptocurrency. Stablecoins are becoming infrastructure, as Visa highlighted when it announced the use of USDC on Solana to accelerate merchant settlements. Researchers at Stanford University have even proposed the ERC-xR standard, which would make certain transactions reversible. I've spoken with a ton of teams working to correct cryptocurrencies' shortcomings.

Despite falling prices and lackluster activity, infrastructure progress shows that smart people still believe in the ideal state of cryptocurrency and dedicate their careers to it. It also acknowledges that the average user won't want to make the trade-off: they'll want the benefits of Web3 and the convenience of Web2. While I don't think mass adoption is important yet, at some point it will be crucial if cryptocurrencies are to reach their ideal state. Entrepreneurs need to gain unique value from on-chain construction. Businesses will need to turn to cryptocurrencies to finance their projects, and lenders will need to pursue funding opportunities there.

I believe that the next decade will see faster progress and more economic opportunity than any previous decade. The wheels are turning and this will happen with or without cryptocurrencies. However, my hope is that by bringing more capitalist engines onto the chain, we will speed up the process and allow even crazier ideas to flourish.

As everything becomes decentralized, cryptocurrencies can push capitalism further to the edge, reducing the cost of market transactions, thereby benefiting individuals and entrepreneurs.

Capitalism is good and capitalism continues to develop. I think cryptocurrencies have a role to play in this evolution. With a sufficiently valuable ideal state, this will be inevitable.