I am uncertain if humans understand the consequences of the complete application of blockchain technology. For if we manage to realize the complete application of blockchain, the human cost will be extraordinary.
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In the period leading up to the 1990s, sound business models were predicated upon deploying capital to produce assets which in turn generated more capital; in essence, to generate a dividend. Homeowners who rent their properties out have deployed capital for accumulating a return on this investment via rent payments. Consequently, tangible (and productive) assets played a key role in driving economic output in the pre-1990s world.
The utility of capital has undergone drastic changes since the rise of the modern Internet in the 1990s. In the modern world, capital alone is not a significant driver of economic progress. Rather, capital is deployed to fund individuals who perform R&D to solve existing problems (Biotech) or to scale software companies so that they may address larger markets. In each of these cases, the talent the entrepreneurs’ capital underwrites is the main driver of the economic machine, and the initial investment required to realize outlandish returns is minimal since these assets exist in abstract space; they are not rooted in physical reality.
Software companies can maintain massive margins for precisely this reason – these businesses are not capital intensive. The analog of physical capital in the digital world is superior design and/or a widely adopted network. If certain software is superior in addressing a problem, and the methodology the application leverages is challenging to replicate, users are more likely to choose that software over its competitors since competitors will be incapable of imitation. As a result of this initial adoption, it becomes more convenient for new users to choose that software as well since the technology’s initial adopters have likely established an ecosystem. Thus, software leverages network effects: a self-reinforcing feedback loop whereby “adding a new participant to the network increases the value of the network to all existing participants. Network effects thus create a winner-take-all dynamic. The leading network tends towards becoming the only network.” 
It is no surprise that venture capital firms seek to identify software companies that can capitalize upon network effects accordingly. Since these investments are not capital intensive, the risk-reward ratio of establishing a dominant software network is extraordinary. Software that becomes the dominant network in its space monopolizes a vertical of the digital economy, enabling companies to theoretically generate profit ad infinitum. In this context, the P/E multiples of growing software companies are not so unreasonable given an environment of low-interest rates, minimal amortization of assets, wider gross margins since costs scale with users, and the non-zero probability of developing a dominant network.
Once a software establishes itself as a dominant network, it continues to generate economic value by deploying humans to advance the network’s objective. Facebook employs software engineers to drive user engagement, providing advertisers the ability to target specific consumer segments seamlessly and at low cost; Google hires engineers to enhance our ability to obtain useful information from all corners of the internet; Spotify recommends new music to listeners and generates unique playlists based on historical listening patterns. These networks are owned by companies that compensate engineers in dollars (or other fiat currency) for the sake of advancing the goal of their respective networks. The better the network is at performing its function, the more economic value it has, and the more profitable these software companies become. The stock market then reflects this increase in value through higher share prices.
The 2020s have brought with them a new variant of network through the mainstream adoption of cryptocurrency, sparking debate everywhere over the price appreciation of tokens such as bitcoin and ether. Skeptics of cryptocurrencies argue that these tokens are valueless and that the price appreciation we are witnessing is a result of rampant speculation. But these individuals fail to realize the value generated by the blockchains that these tokens belong to. To assert that tokens are valueless is to assert that blockchains are valueless, and to understand why blockchains are not valueless, we must first understand what they are.
Blockchains are a new technology that seeks to disrupt the physical economy via cost reduction (and, when I refer to blockchains in this piece, I will mean public blockchains. There are indeed private blockchains, but the assumptions below would not hold for private blockchains so this distinction is important). They are software networks that provide users with some functionality and are not dissimilar to other software networks we leverage today (Facebook, Google, etc.). Where they differ, however, is in their composition::
- Blockchains are labor agnostic, democratic, and meritocratic.
- Blockchains do not compensate workers in fiat currency but through digital tokens.
- A blockchain’s value is immeasurable, providing the illusion that its tokens are valueless.
In a departure from a single company owning a software network, blockchains are not owned by any single entity. They are labor agnostic – indifferent to who elects to work on them. Since these networks are not owned by companies that can incentivize labor directly through commissioned salaries, if an individual has the capacity to perform the work desired by the blockchain, then the blockchain will gladly accept this work. However, humans collectively decide which blockchain networks are worth building – in essence, blockchains are democratic. They exist in the digital economy to be expanded upon or discarded; leveraged or forgotten. Additionally, blockchains are meritocratic; the engineers who decide to advance the network are the meritorious ones. If I develop or provide a service to a blockchain I am advancing its network and should expect payment for the service I have provided.
Since public blockchains are open (not owned by companies) no entity exists to pay individuals in fiat currency. Consequently, blockchains issue tokens for work provided, and different blockchains pay for different types of work: “Bitcoin pays for securing the ledger [and] Ethereum pays for (executing and verifying) computation.”  Blockchains create an open-source meritocracy where software engineers can plug into a network, perform work, and receive compensation for the service provided via token issuance. These tokens can then be used for a variety of functions and are frequently traded for fiat currency.
The value of a blockchain is consequently a referendum on the value of its network. This is difficult to internalize so I will frame it through a thought experiment in Bitcoin. Assuming Bitcoin’s mission was realized to completion, it would disrupt several existing institutions. In one possible realized terminal state, we may find that:
- Bitcoin has made checking accounts redundant since users can directly transact across wallets.
- There will be no need for entities that currently exist to verify the legitimacy of transactions since each transaction is cryptographically verified by Bitcoin engineers.
- Custodians would no longer be needed to secure deposits since Bitcoin wallets are secured.
- Any other grandiose disruption you can think of.
This is one of many potential realizations of Bitcoin’s mission; it may never realize this particular configuration, but the point remains that Bitcoin’s adoption frees capital that is currently committed to certain industries to be deployed elsewhere. Of course, it is practically impossible to quantify the net economic value generated by this freed capital, and as such, it can appear that bitcoins (the token) are valueless since we cannot directly measure the value Bitcoin (the blockchain) is generating; again, Bitcoin is not a publicly-traded company and has no financial statements to report. Once you understand that a blockchain’s value generation is opaque, you understand why tokens may appear to be valueless. And you also understand why that cannot possibly be. Thus, a well-constructed blockchain theoretically eliminates any redundant entities via cryptography and computation to ensure legitimacy, fungibility (uniqueness of the tokens), and security.
Blockchains similarly take advantage of the network effects software companies currently exploit – “adding a new participant to the network increases the value of the network to all existing participants.” Those who adopted Bitcoin’s network early on are rewarded by each subsequent individual who adopts the network. This positive feedback loop plays into the exponential rise in bitcoin’s (again, the token) price.
We must also recall that network effects are responsible for the creation of ecosystems. The crypto community has seen a strong proliferation in numbers the past five years and a widespread effort is being made to enhance blockchain functionality as a result. Non-fungible tokens (NFTs) have exploded in recent months, and since Ethereum enables developers to create programmable smart contracts, these NFTs are secured by the Ethereum blockchain thereby ensuring that users purchasing these NFTs are able to verify unique ownership of the digital asset.
On the Bitcoin side, there now exists Stacks – a startup focused on bringing Ethereum-esque smart contract capabilities to Bitcoin. Stacks is an open-source platform of applications that enables software developers to build applications leveraging Bitcoin’s infrastructure.  Consequently, given Bitcoin’s “market cap,” there exists approximately $1 trillion in available funding for a Stacks-based application to develop Bitcoin-backed applications, incentivizing developers to work on the software of a Stacks-based application rather than the traditional Bitcoin incentivized problem of securing the ledger. In essence, Stacks enables developers to be compensated for securing the ledger or for executing and verifying computation, much like Ethereum. This is a tremendous development, and if Stacks manages to firmly establish itself, it serves as a strong proponent to the Bitcoin thesis.
We are a long way from developing any notion of what Bitcoin’s terminal state may be, however. This is currently one large experiment, and even Bitcoin’s largest advocates should be keenly aware that this experiment could fail due to security issues (the blockchain is compromised), transaction fraud, or any other concerns. For instance, implicit assumptions are currently made around the legitimacy of bitcoin transactions, specifically with respect to Tether, a stablecoin.
One Tether is currently assumed to be 1 USD because there is allegedly enough USD backing Tether to cover its outstanding issuance. Consequently, if a token was purchased for 1000 Tether, it would be priced at $1000. If it turns out that there is not enough USD backing all outstanding issuance of Tether, it could lead to a significant devaluation of cryptocurrencies everywhere given that Tether comprises an outsized share of crypto transaction volume as of this writing.
To that end, the New York Attorney General recently finished an investigation into Bitfinex and Tether, finding that “Tethers weren’t fully backed at all times.”  This investigation pertains to the period of 2017 and 2018 and markets seemed to have brushed this violation aside to date, for Tether still trades roughly on par with the dollar. However, the point remains that any violation in the parity assumption will likely lead to a significant hiccup in the widespread adoption of cryptocurrency. Consequently, any developments in this realm must be closely monitored.
The End of History
To this point, we have discussed the flavor of capital from historical precedence, how the adoption of the Internet changed the manner in which capital is deployed, and have discussed the difference in composition across technology companies and blockchain-based applications. The economic value generated (and to be generated) by blockchains is undeniable, and I imagine we are only scratching the surface as to what this technology will be capable of in the future. Indeed, I believe we will realize its full potential.
But I am uncertain if humans understand the consequences of the complete application of blockchain technology. For if we manage to realize the complete application of blockchain, the human cost will be extraordinary. Humans have applied economic constraints for negative externalities such as pollution, but we fail to apply constraints for the negative externality of economic redundancy and disenfranchisement from the labor force. This is the source of a human existential crisis and it would be a fate we engineered ourselves: the complete application of blockchain technology implies human subjugation to a concept we incepted. We will be working to advance the goals of blockchains that no single human controls; it is deference to precision, calculation, and computation. In a world swimming in data, it becomes incredibly difficult to source true information. Consequently, the line between reality and virtual reality becomes increasingly blurred, and we march headlong into The End of History, the title of my next collection of essays.
The End of History will explore the themes of the complete application of technology, human economic redundancy, and the consequences of this disenfranchisement. When humans are dissatisfied with the reality that faces them, they turn to virtual realities – realities that are close to, but not quite, objective reality (for instance, Disney World or a biased media outlet). If we cannot escape our tendency to push for the complete application of technology, we will continue taking incremental steps toward the end of history. Unfortunately, I believe that this hyper-technologicalization is inescapable. With that, I leave you with some remarks from Jean Baudrillard:
At the hegemonic stage of technology, or world power, human beings have lost their freedom, but they have also lost their imagination. They been made unemployed in a way that goes far beyond work: it is a mental and existential unemployment, replaced by dominant machines… The passage to electronic calculation, to engineering and computerizing is disastrous: more than a failure of will, it implies the disappearance of every subject, be it the subject of power, knowledge, or history, in favor of operational mechanics and the total dereponsibilization of humankind. 
What do you do when you have mastered the universe?
 ibid. The thoughts Naval shares are central to this piece.
 From Jean Baudrillard’s The Agony of Power.