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(1/2) Ultra-Liquid Crypto Capitalism

Updated: Nov 24, 2022

Fwiw, I'm neither a historian nor a fortune-teller. I have but my intuition and my best attempt at painting the long arc of history: where we are, what's ahead, and what's needed (especially as an investor) to navigate the muddy waters to get there.

Bear with some storytelling and simplification.

Part 1: From Digital Feudalism to Ultra-Liquid Capitalism (This essay) Part 2: The (Pragmatic) Token Maxi


Part 1: From Digital Feudalism to Ultra-Liquid Capitalism

1.1 Digital Feudalism

... Feudalism created a static system, marked by STRATIFICATION, LOCALISM and EXCLUSIVENESS. The estates of the hundreds of feudal lords existed as virtually independent units each being interested in its local affairs and was exclusive in the sense that it hardly needed to maintain contact with other units. --

The quote above describes Western European feudalism pre-industrial revolution, but hell it reads eerily like the state of the digital economy today.

We have the Nobles and Lords, who, to their credit, have built out relevant infrastructure (≈"land") that underpins our most popular content platforms, social networks, games, and digital marketplaces (≈"Tsukuda/farms"). And so Lord Meta, Lord Snap, oh and the recently-naturalized Lord Tik Tok, are able to permanently seize the raw materials of production (≈"data") and harvest heavily on fruits (≈"audience, user attention") in return for profits (≈"ads revenue").

Below them, we have the Knights, who are the top-notch one-in-a-million creators, KOLs (your Joe Rogans), your marketing SaaS companies, etc., pledging allegiance to platform Lords, they do quite well for themselves, frequently minting multi-millionaires.

The bottom of the pyramid are us the Peasants, otherwise known as long tail creators/users (UGC, right?) or a drop in the ocean for "website/app traffic". Some of us get peanuts from stuff we post online, but most are fortunate to relish the 24/7 delight of Tik Tok feeds curated by omnipotent ad algorithms. And when we make purchases recommended by targeted ads, we close the loop properly: we are the user, the audience, and the consumer.

Finally, sitting on top is King Apple Inc., the sovereign and the rule-setter for this all, to whom our noble Lords and Knights regularly (often grudgingly) pay their due share. And of course, games and other apps with "mini-transactions" aren't exempted from the King's reign -- after all, in-app purchase is a powerful thing.

The whole system works like a self-enclosed machine with rather impressive precision. But there's one element glaringly missing: the internet has no native property rights, no free markets -- NO CAPITALISM. What we have is a static (albeit fine-tuned) system governed by "centralized planning", not a dynamic, trade-based economy.

  1. Skewed value distribution. Most value is accrued to the "feudal lord", while others are paid, in most cases, a minutiae share of income needed for subsistence.

  2. Lack of incentives. Without digital-native property rights, most players (besides the centralized platforms) don't have the right incentives to invest, build, and improve products & services on top.

  3. Risk of resource misallocation by "central planners". Capital allocation in the digital economy, therefore, relies on the discretion of a handful of companies, often hijacked by short-sighted shareholders and/or fallible founders. Centralized strategic planning, no matter how "data-driven" or "well-deliberated", can frequently result in expensive mistakes (look no further than Coinbase's NFT marketplace debacle). Even worse, in a system that worships centralized power & authoritative figures, malicious actors (such as SBF) can quickly garner and abuse resources & power.

The move from the feudalist equilibrium to capitalist equilibrium has unlocked immense value in the meatspace economy, despite flaws & frictions. The digital economy is in desperate need of a similar Capitalist unlock.

1.2 Ultra-Liquid Crypto Capitalism

Crypto is the missing technological rail for that perennial unlock.

Building on top of "global arbitrator machines" (open blockchains), crypto offers the most frictionless, cost-effective means for

1) digital private property rights;

2) global price discovery through free exchange, with two important primitives: tokens (asset ownership) and pools (permissionless liquidity).

Elements for production (blockspace, compute, capital, data, etc.) AND output of production (arts, content produced, game assets, etc.) in the digital space can be represented, exchanged, and rehypothecated with the combo of [tokens + pools], with ease, to a level of granularity never achieved in the past. I call this ultra-liquid crypto Capitalism.

In it, we find an evolution of the three key pillars of Capitalism: property rights, capital formation, and free markets.

1.2.1 A Story of The Commoner's Sword

Enough with the conceptualization. What exactly would ultra-liquid crypto Capitalism be like? An example speaks a thousand words.

Imagine an in-game asset (let's say, a sword, and let's call it the Commoner's Sword). Here's the story of the Commoner's Sword in our premier hypothetical crypto game Second Life Lottery.

What would have been a $10 sword sold, used, and depreciated in a traditional game economy, turns into an episode of "Crypto Dream" and a huge boost to game GDP. It's all just crypto fiction until you realize that nearly all ecosystems could be run as some sort of game and/or meta-game, and nearly everything in our digital space could be Commoner's Sword.

From cyber Kings, Lords, and Peasants to the little story of the Commoner's Sword, this is all you need to know about the arc of history towards ultra-liquid, highly-granular crypto Capitalism.

1.2.2 Crypto's Ultra-speculative Machine

How exactly do we go from here to there? How do we unlock the 10x, 100x multiplier for the digital economy? Many factors, but let's look back in history (again) to find likely clues for some of the major ones.

The period covering the 12th and 13th centuries witnessed rise of trading and commercial activities. [Merchants and traders] were a unique class of individuals in that they were not bound by obligations, thereby conducting trade in their own interest, or else everything would come to a standstill. Merchants started to transform society, from a subsistence to an economic one, thereby revitalizing the notion of capital gain. ---

If history is any guide, self-interested "merchants" (traders, arbitrageurs, speculators) will be key to getting free markets up and running in the digital space.

They already have. They are the Bitcoin miners, Ethereum stakers, DeFi farmers, NFT flippers, and market makers/speculators for whatever the next iterations of crypto tokens are (game NFTs, social tokens?). The best thing is, they aren't even self-aware of the role they play within the larger picture -- they are simply transacting for their own interest and nothing else. Such is the beauty of the free market machine.

Speculative mojo is a feature not a bug in crypto. It's just Capitalism. Crazy people play around with things built by even crazier people for profit, and they go bust 99% of the time. But 1% of the time, something sticks around and produces 1000x economic value in the long run. Those projects have little resemblance to their purely speculative vaporware predecessors. But the dynamic process of permissionless innovation, propagation, and competition, all on free markets, is a necessary step to the evolution towards a sound economy and Lindy assets. The 24/7 crypto speculative machine stirs up an otherwise static system and makes it a dynamic one, just like English merchants did centuries ago.

1.3 History Rhymes Again?

History often rhymes. We have in front of us, a multi-decade arc towards a new type of digital economy, one that's ultra-liquid, highly granular, and ultimately Capitalism on steroids. Crypto, with its highly programmable, composable primitives (tokens, pools) and 24/7 global free markets, is the key to unlocking that historical transformation.

My overly-simplified picture may have sounded idealistic. But the clues are hidden in plain sight. A realist needs only observe and study patterns of history to position for what's to come.

To be continued.



Twitter: @simiao-li

Telegram: @SimiaoLi

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Twitter: @GMMaverickCap

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