Since the introduction of Bitcoin, a lot of attention has gravitated towards the blockchain and cryptocurrency space. However, media headlines constantly focus on the price action of cryptocurrencies and miss the bigger picture. The more interesting story to tell centers around the convergence of many macro narratives which has led to blockchains and new digital economies.
Excitement around the potential of blockchains and digital assets, including cryptocurrencies, can be summed up by a deceptively simple idea:
“Blockchains allow us to create digital jurisdictions that are not defined by geographic borders.”
Blockchain-based digital jurisdictions are conceptually analogous to countries. Like countries that exist today, they have their own underlying markets, incentives, governing mechanisms and assets. Collectively, we refer to these ecosystems as “digital economies”.
Understanding how value is created and accrued within digital economies requires a different way of thinking. One that combines ideas across many disciplines: from computer science, behavioral economics, finance, psychology and political science.
This article presents a multidisciplinary set of 3 critical “macro narratives” for blockchain-based digital economies. By extension, it also provides context for why cryptocurrencies and digital assets are often necessary and important to the functioning of these systems.
- Macro Narrative #1, “Why now — The Convergence of Three Mega Trends” discusses the convergence of three megatrends across technology, money and political governance that is setting the stage for a more interconnected and decentralized world.
- Macro Narrative #2, “What’s different — From Traditional to Digital Economies” explores how the traditional definition of an economy is changing. Analogs between traditional economic structures vs digital economic structures are explored — from governance mechanisms, money supply, to assets.
- Macro Narrative #3, “Where we’re headed — New Battlegrounds” summarizes where the likely battlegrounds will be as more value is digitized, and provides a basis for interpreting opportunities in the space.
Macro Narrative #1: Why now?
The Convergence of Three Mega Trends
Human history is built upon successive waves of innovation that have shaped how we collaborate with each other. Society now sits at the beginning of another wave, where 3 megatrends around technology, money and political governance are rapidly converging.
Megatrend #1: Technology
Mainframes were introduced in the 1950s-60s, which enabled high-volume data processing and computation. The Personal Computer (PCs) emerged and evolved through the 1970s-2000s, bringing these computing capabilities into the home. Mobile devices and smartphones further distributed these capabilities to the masses by the late 2010s. In parallel, the introduction of the consumer internet in the early 1990s, has progressively made society more interconnected. Today we live in a world that — for the most part —can ubiquitously share information across borders.
Megatrend #2: Money and currency
Money is a construct that was invented by humans to address challenges associated with a barter economy. In a technical sense, money has three important properties. It is a store of value, a unit of account, and a medium of exchange. In a less technical sense, money is simply a “point system” that keeps track of everyone’s contributions to society over time.
The first forms of what would be recognized as money were commodities (like gold, silver, salt and spices). Later, abstractions of commodities surfaced in the form of paper notes that were backed by commodities (like gold certificates). Finally, in 1970s the world went off of the gold standard. Fiat money — money that is minted by central banks and backed by claims on a country’s GDP — took off to arrive at the system we have today.
The ability for countries to print their own money has introduced both practical benefits and moral hazards when it comes to monetary policy. Recently, many people have questioned if such a monopoly on money is beneficial for society — especially as we are more than a decade into the largest monetary policy experiment in our history vis-a-vis Quantitative Easing (QE).
Megatrend #3: Political governance
Governance can be loosely defined as the set of formal and informal rules under which human beings interact. Modern day societies adhere to a baseline set of rules and regulations defined by nation states (e.g. countries). Nation states arise from physical borders formed around groups of people with similar beliefs, history, and geographic proximity.
In the 1970s, a shift towards neoliberalism and the Washington Consensuscharted a path of globalization and the rise of Multinational Corporations(MNCs). MNCs, which operate cross-border, and are intertwined with the politics of the nation states in which they operate, have become de-facto states in their own right.
In the 2000s, we saw the emergence of another significant global power: social networks. Platforms like Facebook further connected the world by allowing people to plug into digital borderless p2p communities. These new digital communities introduced new forms of social consensus and governance. Some argue that networks like Facebook have grown to become quasi-states themselves, as their user bases dwarf the population of many world economies.
Today: Blockchains and digital assets
The convergence of these 3 megatrends has led to the present day.
As a more digitally interconnected world brushes up against century-old economic conventions of money and value, some question if a new model for human coordination may be needed. The introduction of the Bitcoin protocol after the Great Financial Crisis provided a blueprint for how traditional economies could be redefined, digitally, using blockchain.
Emerging use cases to-date have been as philosophical as attempting to create new global sound money not monopolised by central banks (Bitcoin), as inventive as creating the decentralised Internet (Web3 Protocols) , to as practical as digitising any and all assets for more liquid markets (Tokenised securities).
Macro Narrative #2: What’s different?
From Traditional to Digital Economies
At its core, an economy is a collection of transactions. Buyers and sellers exchange goods and services. Exchange is often intermediated through a marketplace. The sum of all transactions across all marketplaces within a physical jurisdiction equals an economy.
In a traditional economy, the production of goods and services are measured at a country level (e.g. A country’s GDP). The value of goods and services are denominated in a specific fiat currency based on physical jurisdiction (e.g. The US Dollar for the US, Euro for the EU). Each jurisdiction has a government that sets domestic and cross-border trade rules, and a central bank (e.g. the Federal Reserve, ECB) that controls the supply of money.
In a digital economy, blockchains provide the public infrastructure necessary for creating economic systems not based entirely on physical jurisdiction. Digital economies can be composed of any arbitrary set of marketplaces and underlying transactions operating across borders. This is achieved by the shared maintenance of a reliable global ledger (blockchain) that keeps records of transactions and ownership of value.
Digital economies can also be designed with unique properties that are less practical if attempted in traditional economic systems. In digital economies, the money supply and monetary policy can be set algorithmically, assets can be self-custodied, and liquidity doesn’t need to be pooled in large institutions like banks and asset managers. Combined, these features make it possible to have a truly modular economic system.
Just as traditional economies have their own assets (e.g. currency, commodities, contracts, property), digital economies naturally do as well.
Assets in a digital economy (digital assets) are represented by tokens which can be programmed to take the form of something fungible (items that are not distinguishable from others) and non-fungible (items that are distinct from one another). Fungible assets include things like cryptocurrency and smart contracts for contractual claims on cashflows (stocks and bonds). Non-fungibles include things like digital deeds to property (real estate, patents) and collectibles (art).
Depending on the design and function of the economy, value will accrue in different ways to each type of asset. Some digital economies accrue more value to a cryptocurrency (typical of deflationary systems). Other digital economies accrue more value by holding onto rights to property and contractual cashflows (typical of inflationary systems).
In traditional economic systems, decision making power is granted based on a representative democracy. In a representative democracy, citizens periodically elect representatives at the local, state and federal levels to carry out their will on all decisions.
In digital economies, decision making power is often more granular and is further decentralized amongst an economy’s participants. As digital economic networks have to carefully balance the needs of different participants (transaction validation nodes, investors, core developers, and end-users) a more flexible form of liquid democracy is needed.
To keep everyone aligned to the same objectives, digital economies must engineer incentives in a way that encourages collaboration amongst strangers. The core of this is to ensure that value created within the economy is fairly distributed amongst each member of the economy based on their contributions. In the Bitcoin economy for example, the reward for providing provable digital scarcity is the receipt of newly minted Bitcoin and/or fees denoted in Bitcoin.
Macro Narrative #3. Where we’re headed
In theory, all economies today could be redesigned in a digital way. In practice, it’s unlikely that this happens as we live in a world that has physical realities and frictions. Because of this, there will be certain transactions and markets that are better suited for digital economies compared to others.
One lens to evaluate where the emergent battlegrounds will be drawn, is to segment potential markets based on their digital attributes. Doing so yields three buckets: digitally-native economies, digitally-enabled economies, and offline economies.
In a small number of situations, the digital economies that emerge will be based on net-new goods and services that have less linkages to physical markets.
For example, the Bitcoin economy centers around the ability to buy and sell digital scarcity in a globally consistent and reliable way. This is a property that uniquely allows for experimentation with new stores of value (e.g. Digital gold) and global sound money.
For a larger set of use cases, traditional markets can be digitised to create digitally-enabled economies.
By representing assets in a programmable way via tokens, there will be opportunities to create new marketplaces and experiment with new asset allocation and structuring models. For example, tokenisation of real-world assets like art, patents etc, will create new forms of tradeable collateral and greater market liquidity. In short: we will see the ETF-ification of everything.
Finally, there will remain a large number of markets that are still heavily tied to physical markets – like real estate, agriculture and social services markets.
In these examples, blockchains will purely serve as an operational efficiency lever. Most of these markets are differentiated by geography, local rules and regulation, and local enforcement. Fiat currency is likely to remain the preferred transaction medium and unit of account.
With more interest, awareness, developer mindshare, and investment going into the blockchain and digital asset space every day, its safe to say that the proverbial “train” has left the station.
There is a case to be made that filtering out the noise within the blockchain, crypto, digital asset, DLT, (insert next buzzword) space, comes down to understanding how new developments fit into this digital economy narrative.
As new digital economies develop — sometimes with their own currencies, assets and governance — new game theory will as well. Keeping true to the title of this post, “macro narratives”, analysis of these new systems and how they will interact with traditional economies, brings about a new branch of “Global Macro” strategy. Future posts will build on this framework to explore the implications.
I hope you have enjoyed this introductory piece. We’re still in the early days. These are exciting times we live in.