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Welcoming Our New Meme Lords
Are blockchains a force for economic progress or simply lighter fluid for memes and scams?
In this essay, I consider the question, "Are blockchains better or worse for society and, assuming you associate the two in any way, economic growth?". Said another way, "Why all the hate, senpai?".
I first describe the neoclassical economic idea that markets work because they create incentives that coordinate self-interested actors to produce growth, primarily via technical innovation. I explain how blockchain-as-a-technology is often referred to as a coordination technology because it leverages markets to achieve consensus and security in peer-to-peer networks. The result is novel forms of information repositories and functionality, which can create and coordinate markets at scale.
I then posit that, due to their design, a more extensive set of buyers and sellers trade blockchain assets, who remain primarily uninformed, which increases the returns on ideas that have memetic value, i.e. Network Goods, over-and-above ideas that have pure utility. The cause? Blockchains primarily coordinate through price and therefore accelerate the spread of price information but little else.
Blockchains, therefore, favour network goods, which includes memes and Ponzis, so blockchain asset markets mainly comprise these goods. To outsiders, blockchain markets appear to reward grift above all else. However, blockchain's property as a high transmission environment also bodes well for its ability to spread high-value ideas.
I conclude that blockchains are a net positive for society in the long term, given their potential to spread high-value ideas. However, we should expect blockchains to produce a lot more low-value, high-transmission ideas, given these are much easier to create, and there are more people to buy and sell them.
As a final word, I predict that, given the transmissibility of blockchain assets, it is likely that all assets will eventually be blockchain assets and that this will happen at an alarming rate. The polarisation of opinion and the resulting hatred that blockchains command can be characterised as society's immune system resisting the spread of low-value ideas and should be actively encouraged but, likewise, tempered so as not to filter out precious innovation.
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Markets as coordination mechanisms
Markets are scalable coordination mechanisms that optimise society's allocation of resources to maximise economic returns and produce growth.
Markets resolve coordination problems primarily by constantly seeking the value of things as self-interested buyers and sellers agree on prices to exchange goods and services.
This mechanism, the production and dissemination of price information, approximates the economic value of an innovation to society which incentivises innovation. Effectively, individuals receive rewards for creating new knowledge that the market values over and above existing knowledge by higher prices, more customers, lower costs, or some combination of the above.
Suppose new knowledge can more efficiently allocate resources to deliver improved outcomes over existing knowledge and subsequently increase returns on labour and capital. In that case, society has progressed, and the market has proven itself to be a valuable mechanism for achieving growth.
That being said, the market mechanism is blind, optimising overwhelmingly for economic returns, even where wide-ranging negative externalities are the result. Hence, markets can be said to exhibit a selection pressure for knowledge with supernormal economic returns, much of which manifests as scientific and technical progress (which typically provides most "bang-for-buck").
Therefore, markets incentivise self-interested actors to coordinate in the creation and dissemination of new knowledge, which is primarily technical innovation, in the pursuit of economic growth.
Blockchains as coordination mechanisms
We generally consider blockchains a coordination technology because they embed "markets-in-everything". Blockchains do leverage markets, but in two different ways:
Markets enable blockchains to coordinate self-interested entities in the provision of digital resources, e.g. machines compete to convert cheap electricity into computation or storage.
The result is sovereign, collusion-resistant information repositories for managing state, executing logic, and persisting digital objects and their relationships. Bitcoin, Ethereum, and most Layer 1 (L1) blockchains act in this way.
It follows that any system that currently does the job of persisting information or assets and enforcing the associated logic and relationships on behalf of society, whether explicitly or implicitly, is in danger of being disrupted, especially those that create significant negative externalities in the process.
Hence, blockchains are a coordination technology because they leverage market-based coordination to commoditise the provision of digital resources such as storage and computation.
As a result of the above, blockchains can enable us to coordinate in entirely new ways across an unconstrained digital landscape by:
instantiating embedded markets in the provision of other undifferentiated services (e.g. liquidity provision, credit markets) or
leveraging the reduced cost of managing state to deliver goods and services in novel ways by recasting assets (typically legal, or government-provisioned) as blockchain assets
As an example, consider our global financial system. The cost of building, operating, and maintaining a global financial system to society is impossible to calculate. Coordination is likely a significant contributor, given financial markets are primarily concerned with managing the relationships between individuals and their assets.
Blockchains were designed to persist assets and relationships and enforce our relationships to these assets. They do this and many other things, all for the price of running the entire network.
Hence, blockchains are a coordination technology because they lower the cost of coordination by using markets to commoditise services or recast assets as blockchain assets.
Blockchains & Coordination Failure
The budding economist might observe the startup equity market and characterise it as a study in coordination failure. More often than not, the market optimises for innovations that achieve high prices in public markets and create exit liquidity (Snap?), but rarely end up solving society's most pressing or valuable problems and, if so, only as a by-product of wealth creation.
With this in mind, it is worth considering whether blockchains are error-correcting relative to traditional startup equity markets or an extension of the existing paradigm.
First, it is clear that blockchains have had a notable impact on startup-driven innovation and growth as VCs restructure to invest in blockchain assets with blockchain startup valuations "141% higher than the rest of the venture capital space in Q4 ".
Blockchains, by managing the assets created by these startups, the relationships they have with buyers, and the logic that imbues them with functionality at low costs and, often, outside existing regulatory frameworks, serve an expanded set of buyers and sellers for the assets they provision. This does not only apply to speculators. Developers must hold LINK in order to make requests to Chainlink Oracles, for instance. Likewise, Bitcoin miners must sell BTC in order to cover their hardware, electricity, and facilities costs. In doing so, blockchains accelerate the dissemination of price information for blockchain assets, as markets do, but little to all other information.
As a result, increasing numbers of market participants in blockchain asset markets remain uninformed, significantly more so than professional investors in startup equity. Given their proximity to the problem a blockchain asset purports to solve, it is exceedingly difficult to determine whether that problem is a valuable problem to solve, whether it is valuable relative to other problems, whether it is tractable, or whether blockchains genuinely provide a solution.
You could suggest that blockchain assets, by their nature (code, technical, financial), inadvertently occlude information about their underlying behaviour for most buyers (and often even sellers).
Blockchain asset prices can be said to represent the value that the market places on a particular idea, a particular innovation, or solving a particular problem independently of its solution’s utility but, due to the expanded set of uninformed participants, price is even less correlated with reality than in traditional equity markets.
"Markets are a voting machine in the short run but a weighing machine in the long run" - Ben Graham.
As an aside, we see a similar phenomenon in academia, where the earliest scientific papers were written for a general audience. Still, as the problems at the frontier have become more nuanced, papers have become increasingly incomprehensible to the general reader. As a result, modern society is full of people who act in the name of scientific ideas with limited understanding but haven't taken the time to read or understand the literature. (As I'm likely doing with this essay and its treatment of concepts from economics, biology, and computer science).
However, by writing papers for a very specialised, experienced audience, the tradeoff includes faster, higher quality communication within a smaller group of specialised experts, which allows for more rapid progress and increases the probability of success. Curiously, this also seems to be happening in the blockchain space with more complex problems and solutions drawing little price action from uninformed buyers and many teams opting to "stay private" for longer instead of issuing blockchain assets early in their life, e.g. Optimism, Arbitrum, Protocol Labs, ZkSync, etc.
Therefore, if traditional markets exhibit a selection pressure for knowledge that produces economic returns above all else, then blockchain markets exhibit a selection pressure for knowledge that produces ideas with high transmissibility (i.e. memes) above all else and these ideas dominate the rest.
Ponzis all the way down
Plainly speaking, the blockchain market rewards highly transmissible, highly visible, and easily digestible ideas. There are many more buyers for the underlying blockchain assets of ideas that double as successful memes, e.g. "Digital Gold", "Label DAO", "Decentralised VC", "Public Goods". Harnessing memetics almost guarantees rewards for those that create them or purchase early as new buyers do the same. The result resembles a Ponzi-like dynamic, a common accusation made of blockchain projects, especially those in the NFT space where assets are typically a lot simpler to grok.
Blockchain-driven innovation, then, is a source of incredibly potent network goods, e.g. liquidity mining, dog tokens, airdrops, etc. Said differently, more apes reduce the Ape Tax, and as a result, it pays to "ape".
Bitcoin is a classic example of a network good. Given it has no other functionality, it completely internalises all of its memetic value, i.e. buying Bitcoin as a store-of-value is improved directly and overwhelmingly by others buying bitcoin as price appreciation thanks to the hard supply limit. There is little network value in pricing your goods and services in Bitcoin, i.e. pricing my goods in BTC is only marginally and indirectly improved by others pricing their goods in BTC. Therefore the BTC "means-of-exchange" meme is overwhelmed relative to BTC's “store-of-value” meme. This helps elucidate why Bitcoin will likely never achieve its goal of trustless peer-to-peer payments.
To summarise, blockchains coordinate the production of ideas, but the most memetic ideas or network goods are, at least initially, the most successful.
A helpful analogy here is Soundcloud Rap, Spotify Ambient Music, or the success of WoWGlider and other bots in World of Warcraft, where the market mechanism begins to augment production as sellers optimise away from the stated purpose, entertaining people, and respond to the primary selection pressure, satisfying algorithms. Unintended selection pressures in digital systems can be troublesome.
The selection pressure for memetic ideas goes some way to explaining why $DOGE has been such a lucrative investment for many while ideas with more utility but more complexity flounder.
Control the Memes
Now that we understand why blockchain asset markets function more like meme markets than innovation markets, what should we do?
It seems highly probable that meme-led blockchain assets will continue to attract a significant amount of buyers and dominate the market narrative, even when the expected utility is low. One could even go so far as to say that the majority of blockchain assets will be meme assets as teams become more “fit” in order to compete for buyers. It's also true that low-value ideas are easier to create and therefore more common than high-value ones, so they're more likely to be produced.
To outsiders, it would appear that the blockchain space is a grifter's oasis where fortunes are minted overnight on a whim, and little economic value is being created. On the one hand, we've established that blockchains have a propensity to select for memes and Ponzis by amplifying the effects of network goods. We must also recognise that this can also be a force for good. If we can spread ideas quickly, we can also spread and adopt high-value ideas quickly. Even better, this may help us overcome the inertia that rebuffs innovation's advance on society's most dysfunctional systems and institutions.
Returning to the initial questions, "Are blockchains better or worse for society and, assuming you associate the two, economic growth?" and "Why all the hate?", I believe that blockchains are, on net, good for society in the pursuit of economic growth. They provide a new environment where buyers and sellers are rewarded for finding high-transmission ideas, regardless of whether they are low-value or high-value. The downside is that blockchains are destined to create a deluge of low-value meme ideas, but they'll also accelerate the adoption of and amplify the returns on high-value ideas as and when they are created or discovered.
As blockchains amplify the returns on network goods, blockchain assets will be more successful, by way of price and as a function of buyers and sellers, than traditional assets and the markets for traditional assets will begin to diminish. As such, I'd predict that all assets will eventually become blockchain assets. I also predict that this will happen more quickly than anyone expects. First slowly, then all at once and alarmingly so.
Finally, I'd like to turn to my second question, "Why all the hate?". Interestingly, the prediction above renders the traditional asset under attack by the more "fit" blockchain asset. In this construct, blockchains polarise people's opinions of the validity and legitimacy of blockchain assets. Many are blockchain converts with cult-like levels of engagement, signalling, and prophesying, and others embody hatred and disdain for anything remotely related to blockchains. One could see this aversion to blockchains as society's immune system, acting to resist the spread of low-value, high transmissibility ideas, of which the blockchain space is saturated. This is, actually, relatively reassuring as it limits the potency of low-value ideas and, therefore, should be encouraged in some respects—but we should be careful not to filter so aggressively that we douse the sparks of the truly important ideas when they do appear, should they appear as memes, ponzis, or in some other insipid form.
And I, for one, have no doubt they will.