Stonks are What You Can Get Away With: NFTs and Financial Nihilism

 

Eric Jang, "Ten Apes", Jun 19 2021. NFT "drop" coming soon.

Andy Warhol once said, “Art is what you can get away with.” I interpret the quote as a nihilistic take on “beauty is in the eye of the beholder” — a urinal you found in the junkyard can be considered art, so long as you convince someone to buy it, or showcase it in a museum. All that matters is what other people see in it and what buyers are willing to pay.

The 2020’s equivalent of Warhol paintings are Non-Fungible-Tokens (NFTs). In this essay I’ll explain what NFTs are by motivating them with some interesting real-world problems. Then I’ll discuss why the NFT craze for digital art generates so much ideologically contentious debate. Finally, I’ll discuss some parallels between artistic and financial nihilism, and how this might serve as a framework for thinking about wildly speculative markets.

Explaining NFTs using Counterfeit Goods

Suppose you want to buy a Birkin bag or some other luxury brand item. An unauthorized seller — perhaps someone who needs some emergency cash — is willing to sell you a Birkin bag. They offer you a good discount, relative to the price the authorized retailer would charge you. But how can you be sure they aren’t selling you a fake? Counterfeits for these items are very high quality, and the average Birkin customer probably can’t tell the difference between a real and a fake.

One way to avoid counterfeits is to only purchase items from an authorized retailer, e.g. a trusted Hermès store. But this is not practical because it prevents people from selling or giving away their bags. If you leave your bag to someone in your will, then its authenticity is no longer guaranteed.

So we have the market need: how does a seller pass on or sell a luxury item? How does a buyer ensure that they are buying an authentic item?

One possible answer is for Hermès to print out a list of secret serial numbers, perhaps sewn inside the bag, that declare whether a bag is legit or not. Owners receive a serial number when they buy the bag. But this is not a strong deterrent. A counterfeiter could just buy a real bag and then copy its serial number into many fake bags.

What if Hermès maintains a public website of who owns which bag? Any time a bag changes ownership, this ledger needs to be updated. By recording a unique owner for each unique serial number, this solves the problem of counterfeiters simply duplicating serial numbers. The process shifts from verifying properties to verifying transactions and owners.

These approaches would work, but also have a centralized point of failure: If the Hermès website goes down, nobody can trade bags anymore. Hermès is a big company and has the resources to protect their website against DDOS attacks and other cybersecurity threat vectors, but smaller luxury brands might not have a state-of-the-art security department. If they are not careful, their security could be breached by hackers or an unscrupulous sysadmin. Also, if Hermès stops operating as a company in 25 years, who will maintain the ledger of ownership? If it is a third party company, can we trust them not to abuse that power? Even in the unlikely event that the central point of failure never makes a mistake, it’s still mildly annoying to require Hermès to get involved every time a bag changes hands.

What if you could verify transactions and owners, without a centralized party? This is where Non-Fungible Tokens, or NFTs, come in. In 2009, someone published a landmark paper on how to build a decentralized ledger of who owns what. This ledger is called a "blockchain". A blockchain is a record of the consensus state of the world, following some agreed-upon protocol that is known to everyone. The remarkable thing about blockchains is that they are decentralized (no central point of failure), and resilient to malicious actors in the network. Distributed consensus is reached by each individual contributing some resource like money, hash rate, or computer storage. So long as a large fraction of resources in the network are controlled by well-behaved actors, the integrity of the blockchain remains secure. The fraction required typically varies from one-thirds to just over a half.

There are many blockchains out there. The details of how their consensus protocols are implemented are fascinating but beyond the scope of this essay. The important thing to know is that the base technology underlying NFTs and cryptocurrencies is a formal protocol that allows people to come to an agreement on who owns what without having to involve a trusted third party (e.g. Hermès, an escrow agent, your bank, or your government). Theoretically speaking, blockchains allow shared consensus in a trustless society.

NFTs are like a paper deed of ownership, but instead of paper the certificate is digital. And unlike a paper deed an NFT cannot be forged. NFTs contain a unique “serial number” that is publicly viewable, but only one person can be said to “possess” that serial number on the blockchain, much like how home addresses are public but registered to a single owner by the recording office. To see how NFTs solve the Birkin bag counterfeit problem, let’s suppose Hermès publicly declares the following for all to hear:

“Owners of True Birkin bags will be issued a digital certificate of authenticity represented by an NFT”

As a buyer, you can be quite confident that the bag is authentic if the seller also owns the NFT, and you can verify that the NFT was indeed originally created by Hermès by looking up its public transaction history. During a transaction, the seller simply gives the buyer the bag and tells the blockchain to re-assign ownership of the NFT to the buyer’s digital identifier. If the payment is done in cryptocurrency, the escrow can even be performed using a smart contract without a centralized party (the seller publishes contract “If a specific buyer’s wallet address sends me X USDC in 24 hours, send the NFT is sent to them and send the cash to me.”)

NFTs provide the means to implement digital scarcity, but there still needs to be a way to pair it with a real-world item in the “analog” world. A seller could still bypass the security of NFTs by selling you an NFT with a fake Birkin bag. However, for every fake bag you want to sell, you need to purchase a real NFT and the real bag that comes with it. After you sell the NFT with the fake bag, you are left with a real bag with no NFT! Subsequently, the market value of the real bag drops because buyers will be highly suspicious of a seller who says "this is a real bag, I don't have the NFT because I just sold it with a fake bag." While NFTs are not sure proof of a physical Birkin bag's authenticity, they all but ruin the economic incentives of counterfeiting.

What about luxury consumable goods? You could buy NFT-certified Wagyu beef, sell the NFT with some cheaper steak, and then eat the real Wagyu beef - it doesn’t matter what other people think you're eating. However, NFT transactions are public, so a grocery shopper would be quite suspicious of a food NFT that has changed hands outside of the typical supply chain addresses. For NFTs paired with physical goods, each “unusual” transaction significantly adds to counterfeit risk, which diminishes the economic incentives to counterfeiters. This is especially true for consumable, perishable goods.

Authenticity is useful, even outside of Veblen goods. You can imagine using NFTs to implement anonymous digital identity verification (a 30B market by 2024), or ship it with food products like meat where the customer cares a lot about the provenance of the product. In Taiwan, there is a current ongoing scandal where a bunch of US-imported pork has been passed off as “domestic pork” and nobody can trust their butchers anymore.

In the most general case, NFTs can be used to implement provenance tracking of both physical and digital assets - an increasingly important need in our modern age of disinformation. Where did this photo of a politician come from? Who originally produced this audio clip?

The Riddle of Intangible Value

NFTs make a lot of sense for protecting the authenticity of luxury goods or implementing single sign-on or tracking the provenance of meat products, but that’s not what they’re primarily used for today. Rather, most people sell NFTs for digital art. Here are some early examples of art NFTs, called “Cryptopunks”. Each punk is a 24x24 RGB image.

One of these recently sold for 17M USD in an auction. At first glance, this is perplexing. The underlying digital content - some pixels stored in a file - are freely accessible to anyone. Why would anyone pay so much for a certificate of authenticity on something that anyone can enjoy for free? Is the buyer the one that gets punked?

It’s easy to dismiss this behavior as poor taste colliding with the arbitrarily large disposable income of rich people, in particular crypto millionaires that swap crypto assets with other crypto millionaires. While this may be true, I think it’s far more interesting to ask “what worldview would cause a rational person to bet $17M on a certificate for a 24x24x3 set of pixel values”?

Historically, the lion’s share of rewards for digital content has been owned by distribution technology like Spotify or content aggregators like Facebook, and then split with the management company. The creatives themselves are paid pittances, and do not share in the financialization of their labor. The optimist case for NFT art is as follows: NFTs are decentralized, which means any artist with an internet connection can draw up financial contracts for their art on their own terms. If NFTs revolutionize the business model of digital art, and if the future of art is mostly digital, then the first art NFTs to ever be issued might accrue significant cultural relevance, and that’s why they command such high speculative prices.

Valuing art based on cultural relevance might be a bit absurd, but why is the Mona Lisa “The Mona Lisa”? da Vinci arguably made “better” paintings from a technical standpoint. It's because of intangible value. The Mona Lisa is valuable because of its cultural proximity to important events and people in history, and the mimetic desire of other humans. In fact, it was a relatively obscure painting until 1911, when it was stolen from the Louvre and became a source of national shame overnight.

All art, from your child’s first finger painting, to an antique heirloom passed down generations, to a “masterpiece” like the Mona Lisa, are valued this way. They are valuable simply because others deem it valuable.

NFTs are the digital equivalent of buying a banana duck-taped to a wall; you are betting that in the future, that statement of ownership on some blockchain will be historically significant, which you can presumably trade in for cash or clout or both. But buyer beware: things get philosophically tricky when applying the theory of “intangible value” to digital information and artwork where the cost of replication goes to zero.

I can think of two ways to look at how one values NFTs for digital art. One perspective is that in a world full of fake Birkin bags and products sourced from ethically dubious places, the only thing of value is the certificate of authenticity. The cultural and mimetic value of content has transferred entirely to the provenance certificate, and not the pixels themselves (which can be copied for free). If art’s value is derived from the cultural relevance it represents and its proximity to important people, then the most sensible way to make high art would not be to improve one’s painting skills, but to schmooze with a lot of famous people and insert oneself into important events in history, and issue scarce status symbols for the bourgeoisie. Warhol did exactly that. 

The alternate view is that if a perfect copy can be made of some pixels, then it is not really a counterfeit at all, and therefore the NFT secures nothing of actual value. Is it meaningful to ascribe a certificate of authenticity to something that can be perfectly replicated? Is “authenticity” of a stream of 0s and 1s meaningless? There is certainly utility in verifying the source of some information, but anyone can mint an NFT for the same information.

In summary, the Pro-NFT crowd values the intangible “collector’s scarcity and cultural relevance”. The anti-NFT focuses on tangible value - how much real value does this secure? Both are reasonable frameworks to value things, and you can end up with wildly different conclusions.

Artistic and Financial Nihilism: One and The Same?

Convince enough people that a urinal is valuable, and it becomes an investment grade asset. This is no longer merely a matter of art philosophy - when you invest in an index fund, you are essentially reinforcing the market’s current belief of valuations. When people bid up the price of TSLA or GME to stratospheric valuations, the index fund must re-adjust their market-weighted holdings to reflect those prices, creating further money inflows to the asset and thus a self-fulfilling prophecy. As it turns out, the art-of-investing is much like investing-in-art. As I have suggested in the title of this essay and borrowed from Warhol (who probably borrowed it from Marshall McLuhan), stonks are what you can get away with.

We are starting to see this valuation framework being applied to the equities market today, where price movements are dominated by narratives about where the price is going and what other people are willing to pay for it, especially with meme stocks like GME and AMC. Many retail investors don’t really care about whether GME’s price is justified by their corporate earnings - they simply buy at any cost. This financial nihilism - where intrinsic value is unknowable and all that matters is what other people think - is a worldview often encountered in Gen Z retail traders and a surprising number of professional traders I know. Perhaps the midwit meme is really true.

This is definitely a cause for some concern, but at the same time, I think value investors should keep an open mind that what first seems like irrational behavior might have a method to madness. If you have an irrational force acting in the markets, like shareholders who refuse to sell or lend their stock, a discounted cash flow model for AMC or GME starts to not become very predictive of share price. By reflexivity, that will have impacts on future cash flows! In a similar fashion, using present-day frameworks for thinking about business and value do not account for the disruptive force of technology. That’s why I find NFTs so fascinating - they are an intersection of finance, art, technology, and the nihilistic framework of valuation that is so prevalent in our society today. 

What is rational behavior for an investor, anyway? Is it “standard behavior” as measured against the population average? How do you tell apart standard behavior from a collective delusion? Perhaps the luxury bag makers, Ryan Cohens, and Andy Warhol’s of the world understand it best: Convince the world to believe in your values, and you will be the sanest person on the planet. For fifteen minutes, at least.

Acknowledgements

Thanks to Cati Grasso, Sam Hoffman, Phúc Lê, Chung Kang Wang, Jerry Suh, and Ellen Jiang for comments and feedback on drafts of this post.

Sovereign Arcade: Currency as High-Margin Infrastructure

This essay is about how the powerful want to become countries, and the implications of cryptocurrencies on the sovereignty of nations. I’m not an economics expert: please leave a comment if I have made any errors.

Money allows goods, services, and everything else under the sun to be assigned a value using the same unit of measurement. Without money, society reverts to bartering, which is highly inefficient. You may need plumbing services but have nothing that the plumber wants, so your toilet remains clogged. By acting as a measure of value everyone agrees on, money facilitates frictionless economic collaboration between people.

Foreign monetary policy is surprisingly simple to understand when viewed through the lens of power and control. Nation states get nervous when other nation states get too powerful, and controlling the currency is a form of power.

To see why this is the case, let’s consider a Gaming Arcade (yes, like Chuck E. Cheese) as a miniature model of a “Nation State”. To participate inside the “arcade economy”, you are to swap your outside money (USD) for arcade tokens.

Arcades are like mini nation-states: they issue their own currency, encourage spending with state-owned enterprises, and have a one-sided currency exchange to prevent money outflows.

The coins are a store of value that facilitate a one-way transaction with the Nation-State: you get to play an arcade game, and in return you get some entertainment value and some tickets, which we call “wages”.

The tickets are another store of value that can facilitate another one-way transaction: converting them into prizes. Prizes can be a stuffed animal or something else of value. Typically, the cost of winning a prize at an arcade is many multiples of what it would cost to just buy the prize at an outside store. The arcade captures that price difference as their profit.

Money’s most important feature requirement is that it is a *stable* measure of value. Too much inflation, and people stop saving money. Too much deflation, and people and companies aren’t incentivized to spend money (for example, employing people). Imagine if tomorrow, an arcade coin could let you play a game for two rounds instead of one, and the day after, you could play for four rounds! Well, no one would want to play arcade games today anymore.

The arcade imposes many kinds of draconian capital controls, and in many ways resembles an extreme form of State Capitalism:

• All transactions are with state-owned enterprises (the arcade games) and must be conducted using state currencies (coins and tickets). You can’t start a business that takes people’s coins or tickets within the arcade.
• The state can hand out valuable coins at virtually zero cost without worrying about inflation - every coin they issue is backed by a round of a coin-operated game, of which they have near-infinite supply. They can’t hand out infinite tickets though, because that would either require backing it up with more prizes, or devaluing each ticket so that more tickets are needed to buy the same prize.
• You can bring outside money into the arcade, but you can’t convert coins, tickets, or prizes into money to take out.

Controlling the currency supply is indeed a very powerful business to be in, and why arcades would prefer to issue their own currency and keep money from leaving their borders.

Governments are just like arcades. They prefer their citizens and trading partners to use a currency they control, because it gives them a lever with which they can influence spending behavior. If country A uses country B’s currency instead, then country B’s currency supply shenanigans can actually influence saving and spending behavior of country A. This can pose a threat to the sovereignty of a nation (a fancy way to say “control over its people”).

After World War II, the US Dollar became the world’s reserve currency, which means that it’s the currency used for the majority of international trade. The USA wants the world to buy oil with US dollars, and we go to great lengths to enforce it with various forms of soft and hard power. The US dollar is backed by oil (petrodollar theory), and this “dollars-are-oil rule” in turn is enforced by US military might.

Governments print money all the time to pay for needed short-term needs like building bridges and COVID relief. However, too much of this can be a dangerous thing. The government gets what it wants in the short term, but more money chasing the same amount of goods will cause businesses to raise prices, causing inflation. Countries like Venezuela and Turkey who print too much of their own currency experience a runaway feedback loop where money supply and prices skyrocket, and then no one trusts the government currency as a stable source of value anymore.

The USA is not like other countries in this regard; controlling the world’s reserve currency gives the USA the ability to print money like no other country can. The US government owing 28 trillion USD of debt is like the Arcade owing you a trillion game coins. Yes, it is a lot of coins - maybe the arcade doesn’t even have a trillion coins to give you. But the arcade knows that you know that it’s in the best interest of everyone to not try and collect all those coins right away, because the arcade would go bankrupt, and then the coins you asked for would be worthless. 

Is this sketchy? Absolutely. Most other countries absolutely hate this power dynamic. Especially China. The USA calls China a currency manipulator for devaluing the yuan, but will turn around and do the exact same thing by printing dollars. China does not want to be subject to the whims of US monetary policy, so they are working very hard to establish the yuan as the currency of exchange in international trade. Everyone wants to be the arcade operator, not the arcade player.

Large Companies as Nation-States

Nation-states not only have to worry about the currencies of other nation-states, but increasingly, large global corporations as well. Any businesses that get big enough start to think about the currency game, since currency is a form of high-margin infrastructure.

AliPay is a mobile wallet made by an affiliate company of Alibaba. It’s basically backed by an SQL table saying how much money each AliPay user has. It would be very easy for AliPay to print money - all they have to do is bump up some number in a row in the SQL table. As long as users are able to redeem their AliPay balance on something of equivalent value, Alibaba’s accounts remain solvent and they can get away with this. In fact, many of their users shop on Alibaba’s e-commerce properties anyway, so Alibaba doesn’t even need to have 100% cash reserves to back up all entries in their SQL table. Users can redeem their balances by paying for Alibaba goods, which Alibaba presumably can acquire for less than the price the user pays for.

Of course, outright printing money incurs the wrath of the Sovereign Arcade. Alibaba was severely punished for merely suggesting that they could do a better job than China’s banks. Facebook tried to challenge the dollar by introducing a token backed with other countries’ reserve currencies, and the idea was slapped down so hard that FB had to rename the project and start over. In contrast, the US government is happy to approve crypto tokens backed using the US dollar, because ultimately the US government controls the underlying resource.

There are clever ways to build high margin infrastructure without crossing the money-printing line. Any large institution with a monopoly over a high-margin resource can essentially mint debt for free, effectively printing currency like an arcade does with its coins. The resource can be a lot of things - coffee, cloud computing credits, energy, user data. In the case of a nation-state, the resource is simply violence and enforcement of the law.

As of 2019, Starbucks had 1.6B USD of gift cards in circulation, which puts it above the national GDP of about 20 countries. Like the arcade coins, Starbucks gift cards are only redeemable for limited things: scones and coffee. Starbucks can essentially mint Starbucks gift cards for free, and this doesn’t suffer from inflation because each gift card is backed by future coffee which Starbucks can also make at a marginal cost. You can even use Starbucks cards internationally, which makes “Star-Bucks” more convenient than current foreign currency exchange protocols.

As long as account balances are used to redeem a resource that the company can acquire cheaply (e.g. gift cards for coffee, gift cards for cloud computing, advertising credits), a large company could also practice “currency manipulation” by arbitrarily raising monetary balances in their SQL tables.

The Network State

Yet another threat to the sovereign power is decentralized rogue nations, made possible by cryptocurrency. At the heart of cryptocurrency’s rise is a social problem in our modern, globalized society: how do we trust our sovereigns to actually be good stewards of our property? Banking executives who overleveraged risky investments got bailed out in 2008 by the US government. The USA printed a lot of money in 2020 to bail out those impacted by COVID-19 economic shutdowns. Every few weeks, we hear about data breaches in the news. A lot of Americans are losing trust in their institutions to protect their bank accounts, their privacy, and their economic interests.

Even so, most Americans still take the power of the dollar for granted: 1) our spending power remains stable and 2) the number we see in our bank accounts is ours to spend. We have American soft and hard diplomacy to thank for that. But in less stable countries, capital controls can be rather extreme: a bank may simply decide one day that you can’t withdraw more than 1 USD per day. Or some government can decide that you’re a criminal and freeze your assets entirely.

Cryptocurrency offers a simple answer: You can’t trust the sovereign, or the bank, or any central authority to maintain the SQL table of who owns what. Instead, everyone cooperatively maintains the record of ownership in a decentralized, trustless way. For those of you who aren’t familiar with how this works, I recommend this 26-minute video by 3Blue1Brown.

To use the arcade analogy, cryptocurrency would be like a group of teenagers going to the arcade, and instead of converting their money into arcade coins, they pool it together to buy prizes from outside. They bring their own games (Nintendo Switches or whatever), and then swap prizes with each other based on who wins. They get the fun value of hanging out with friends and playing games and prizes, while cutting the arcade operator out.

The decentralized finance (DeFi) ecosystem has grown a lot in the last few years. In the first few years of crypto, all you could do was send Bitcoin and other Altcoins to each other. Today, you can swap currencies in decentralized exchanges, take out flash loans, buy distressed debt at a discount, provide liquidity as a market maker, perform no-limit betting on prediction markets, pay a foreigner with USD-backed stablecoins, and cryptographically certify authenticity of luxury goods.

Balaji Srinivasan predicts that as decentralized finance projects continue to grow, a large group of individuals with a shared sense of values and territory will congregate on the internet and declare themselves citizens of a “Network State”. It sounds fantastical at first, but many of us already live in Proto-Network states. We do our work on computers, talk to people over the internet, shop for goods online, and spend leisure time in online communities like Runescape and such. It makes sense for a geographically distributed economy to adopt a digital-native currency that transcends borders.

Network states will have the majority of their assets located on the internet, with a small amount of physical property distributed around the world for our worldly needs. The idea of a digital rogue nation is less far-fetched than you might think. If you walk into a Starbucks or McDonalds or a Google Office or an Apple Store anywhere in the world, there is a feeling of cultural consistency, a familiar ambience. In fact, Starbucks gets pretty close: you go there to eat and work and socialize and pay for things with Starbucks gift cards. 

A network state might have geographically distributed physical locations that have a consistent culture, with most of its assets and culture in the cloud. Pictured: Algebraist coffee, a new entrant into the luxury coffee brand space

A network state could have a national identity independent of physical location. I see no reason why a "Texan" couldn’t enjoy ranching and brisket and big cars and football anywhere in the world.

Balaji is broadly optimistic that existing sovereigns will be tolerant or even facilitate network states, by offering them economic development zones and tax incentives to establish their physical embodiments within their borders, in exchange for the innovation and capital they attract.

I am not quite so optimistic - the fact that US persons can now pseudonymously perform economic activities with anyone in the world (including sanctioned countries) without the US government knowing, using a currency that the US government cannot control - is a terrifying prospect to the sovereign. The world’s governments highly underestimate the degree to which future decentralized economies will upset the world order and power structures of the world. Any one government can make life difficult for cryptocurrency businesses to get big, but as long as some countries are permissive towards it, it’s hard to put that genie back into the bottle and prevent the emergence of a new digital economy.

Crypto Whales

I think the biggest threat to the emergence of a network state is not existing sovereigns, but rather the power imbalance of early stakeholders versus new adopters.

At the time of writing, there are nearly 100 Bitcoin billionaires and 7062 Bitcoin wallets that own more than 10M each. This isn’t even counting the other cryptocurrencies or DeFi wealth locked in Ethereum - the other day, someone up bought nearly a billion dollars of the meme currency DOGE. We mostly have no idea who these people are - they walk amongst us, and are referred to as “whales”.

A billionaire’s taxes substantially alter state budget planning in smaller states, so politicians actually go out of their way to appease billionaires (e.g. Illinois with Ken Griffin). If crypto billionaires colluded, they could institute quite a lot of political change at local and maybe even national levels.

China has absolutely zero chill when it comes to any challenge to their sovereignty, so it was not surprising at all that they recently cracked down on domestic use of cryptocurrency. However, by shutting their miners down, I believe China is losing a strategic advantage in their quest to unseat America as the world superpower. A lot of crypto billionaires reside in China, having operated large mining pools and developing the world’s mining hardware early on. I think the smart move for China would have been to allow their miners to operate, but force them to sell their crypto holdings for digital yuan. This would peg crypto to the yuan, and also allow China to stockpile crypto reserves in case the world starts to use it more as a reserve currency.

There’s a chance that crypto might even overtake the Yuan as the challenger to reserve currency, because it’s easier to acquire in countries with strict capital controls (e.g. Venezuela, Argentina, Zimbabwe). If I were China, I’d hedge against both possibilities and try to control both.

Controlling miners has power implications far beyond stockpiling of crypto wealth. Miners play an important role in the market microstructure of cryptocurrency - they have the ability to see all potential transactions before they get permanently appended to blockchain. The assets minted by miners are virtually untraceable. One way a Network State could be compromised is if China smuggled several crypto whales into these fledgling nations that are starting to adopt Bitcoin, and then used their influence over Bitcoin reserves, tax revenues, and market microstructure to punish those who spoke out against China.

The more serious issue than China’s hypothetical influence over Bitcoin monetary policy is the staggering inequality of crypto wealth distribution. Presently, 2% of wallets control over 95% of Bitcoin. Many people are already uncomfortable with the majority of Bitcoins being owned by a handful of mining operators and Silicon Valley bros and other agents of tech inequality. Institutions fail violently when inequality is high - people will drop the existing ledger of balances and install a new one (such as Bitcoin). If people decide to form a new network state, why should they adopt a currency that would make these tech bros the richest members of their society? Would you want your richest citizen to be someone who bet their life savings on DOGE? Would you trust this person’s judgement or capacity for risk management?

Like any currency, Bitcoin and Ethereum face adoption risk if the majority of assets are held by people who lack the leadership to deploy capital effectively on behalf of society. Unless crypto billionaires vow to not spend the majority of their wealth (like Satoshi has seemingly done), or demonstrate a remarkable level of leadership and altruism towards growing the crypto economy (like Vitalik Buterin has done), the inequality aspect will remain a large barrier to the formation of stable network states.

Summary

1. A gaming arcade is a miniature model of a nation-state. Controlling the supply and right to issue currency is lucrative.
2. Large businesses with high-margin infrastructure can essentially mint debt, much like printing money.
3. Cryptocurrencies will create “Network States” that challenge existing nation-states. But they will not prosper if they set up their richest citizens as ones who won the “early adopter” lottery.

Further reading and Acknowledgements

I highly recommend Lyn Alden’s essay on the history of the US dollar, the fraying petrodollar system, and the future of reserve currency.

Thanks to Austin Chen and Melody Cao for providing feedback on earlier drafts.