Amid the mixed messages and uncertainty, a new generation of capabilities are being born and need to be nurtured in spite of the challenging times, and the trial and error that comes with the territory.
Macro's mixed messages
Sounds positive right?
- The jobs report for May (released this week) was better than expected.
- The US employment rate is 3.6%
- Slightly less bleak picture for the future of social security
- 15,000 tech workers were laid off in May, and per layoff tracker layoffs.fyi, June so far isn't looking any better.
- Sequoia tells its founders to cut costs and get ready for lean times via this Adapt to Endure presentation (PDF - highly recommended).
- There are too many digital currency projects and most will collapse.
So what is going on?
- The service and retail sectors are still struggling to hire and retain needed staff (hence the "positive" May jobs report).
- At the same time venture investors (ie the financial backers of the tech sector) are experiencing a major sentiment change: This year's layoffs are coming from last years unicorns: these tech companies just a year ago had wild valuations that no longer seem realistic.
Sorting out FUD vs Useful Caution
The sentiment has become so gloomy that we probably need to pause for some perspective. Example: As if the macro environment weren't causing enough concern, some have now taken up the worry that quantum computing could render bitcoin useless - it could become so powerful that it could defeat the basic functions that enable blockchains to confirm and store transactions.
To be clear, this is a bit of a stretch given the current state of quantum computing. Quantum in its current state is a bit like a car that can break the sound barrier - but there no way to steer it.
Interesting applications for quantum computing are foreseeable in our lifetime, but don't expect anything too soon. And don't expect blockchain technologies to stay stagnant long enough for quantum to ever catch up. Never say never, but its interesting to me to see the levels of negative noise that are out there, and the reaching for more reasons to be gloomy.
Whether its the sour grapesters gleefully calling the fall of Cathie Wood, the Dogecoin founder trashing crypto, these shrill voices miss something essential: skepticism is great, if distributed equally to the system we know, and not just the systems we anticipate.
Its one thing to urge caution when entering new territory. Its another thing to create a false sense that the system we have isn't imposing negative impacts already.
In crypto and non-crypto many have been drawn in by "get rich quick" dreams. But there is another group who are simply innovating and improving our financial tools because the see flaws in the current system and see opportunities to make things better for everyone. Let's not let the fear uncertainty and doubt (FUD) make us stop building and nurturing the truly valuable new and better capabilities we need.
How to evaluate winners vs losers
The economic conditions ahead will no doubt drive a necessary and beneficial separation of the wheat vs. chaff in the venture space - and this applies to both crypto and non crypto. Those who focus on building long term value will probably be fine if they stay on the right side of what Paul Graham calls “default alive” and manage their cost/revenue (see Trevor Blackwell's handy Startup Growth Calculator).
When thinking about any investments, you and your trusted advisor need to decide what risks you are comfortable with. Here are some options for increasing your visibility into the long term viability of a currency or project:
- Think about what kinds of products or companies non-discretionary even absolutely essential when times are tight: essentials, efficiency enablers, non-negotiables (like security, regulatory compliance, insurance or risk protection, etc).
- Check the standing of crypto companies/projects in the Digital Asset Classification Standard (DACS) - well organized lists of the top contenders in each web3 / crypto industry segment.
- Check out the discord channels of a project or company. Right away you'll see some are well organized, and customer centric. Others are messy, and customers wander in and out begging for help.
- Review Pitch decks and or white papers - do they make sense for the long term? Are they thoughtfully constructed? or just opportunistic?
- Notice the frequency of communication via blogs, Twitter etc. Has time passed since the last post?
Alternative Local Currency Projects
Local Currencies = Local Benefits?
Matt Prewitt’s highly recommended essay on local currencies offers proposals for strengthening local economies, backed by some very astute observations about the function of money and how it’s flaws can be improved upon. I wanted to dig into this topic because I think its a great example of the difficult problem solving and exploration that comes with committing to try to build a wealthy world vs a wealthy few.
Prewitt's proposals are offered with a refreshing humility and the frank admission that they are works in progress. Still, I wanted to call out a few of Prewitt's astute observations because regardless of how feasible his local currency ideas may be, his observations in themselves are very pertinent:
- His concept of "money as communication" is useful for anyone trying to design a digital currency.
- The cognitive burden of making decisions on things you aren't well positioned to know or understand - a general economic problem, particularly acute in healthcare.
- Entropy in information systems - well worth digging into if you want to understand why rules based information systems (what's running the typical legacy enterprise in incumbent corporations) over time tend to get bigger, more expensive yet less capable of being responsive to market needs.
Flaws in today's markets
Prewitt correctly points out a key flaw in the way our markets work today: "markets aren’t finding out what everyone thinks about the value of things. They’re only finding out what the highest bidders think." This creates serious issues when the highest bidders have values that differ from most of the market.
Where I feel the concept needs more work is in the assumptions about difference in scale between a local person and the global market. The logic of the essay goes roughly:
- A person can't effectively price all the products of the global market because the cognitive burden is too much (there is so much they aren't positioned to know).
- As a result the markets are inefficient and the market operates only on "what the highest bidders think"
- If we priced things in local instead of global terms it would reduce this cognitive burden while also supporting local economies.
- Therefore we should design local digital currencies that serve as an alternative to fiat.
Prewitt recognizes a key challenge facing local currency projects: How to exchange the local currency for more universal currencies (like dollars), without threatening the local currency. This is a significant problem to solve, as a town in Vermont learned first hand.
The Burlington Bread Alternative Currency Project
Prewitt's essay reminded me of some reading and writing on alternative currencies I'd done in 2018 while spending time with family in the little town of Rosalyn, WA (yes, where the TV show Northern Exposure was filmed).
During my time there, I learned about the "Burlington Bread" alternative currency project that started in January 1997 and unfolded over 10 years in Burlington, Vermont. Amy Kirschner has written a thorough and entertaining history of the Burlington Currency Project that reveals the challenges and opportunities in this space. Hopefully someone has made or will make a movie about this.
The image above shows the color version of the Burlington Bread paper currency, courtesy of Vermont Woman magazine (apparently no longer in operation) which interviewed a merchant Jodi Harrington, City Market’s marketing and community relations manager. Harrington said they had no problems accepting the currency, but could never find a way to spend it: “We couldn’t just collect money that is unusable to us...we actually just ended up giving it away.”
Two issues ultimately led to the undoing of the Burlington Currency Project:
- Issue #1: The leaders of the Burlington project didn’t plan out how local businesses were supposed to spend (or otherwise get value from) the "Bread" they were accepting as cash from local citizens. The project's focus was on getting businesses to accept the currency, rather than first figuring out how to enable businesses to spend the currency. Any local business must be able to use the currency it receives from customers to buy more inventory using the preferred currency of the suppliers. Early on this became a problem, and the project ultimately never figured out a viable solution for it. The project's board of directors discussed but failed to agree on a buy-back proposal.
- Issue #2: Lack of organized ledger and governance capabilities. Over and over the project faced challenges tracking the supply of currency, wrestling with the implications of the valuation of the currency, and making decisions in a timely manner. The tokenized governance and blockchain based ledger capabilities that run many of today's crypto projects would have likely made a difference in the Burlington Bread project, perhaps buying more time to solve for Issue #1.
As shown in Figure 1, Alternative/local currencies need a minimum set of participants:
- Financial Service Providers
These must be able to participate and operate sustainably. This in turn requires a minimum set of functions:
- Protection from fluctuations in currency value - ie the ability to convert to stablecoins.
- The ability to interact with national (fiat) economies - the option to convert to fiat.
The Burlington Bread project struggled because it only focused on a and b without addressing c and d. They also - given the timeframe - did not have the option to use stablecoins. Digital stablecoins can offer faster settlements, lower costs and better monetary controls, but may threaten margins of financial services incumbents.
I hope this gives you insights and encouragement - as I mentioned at the beginning of this piece, this topic is a great example of the difficult problem solving and exploration required when trying to enable a wealthy world vs a wealthy few.
Welcome little Ungulates
Late May and early June offers opportunities to see newly born fawns and calves of Ungulates - the family that includes deer, elk and other hoofed species. A week ago this fawn was born in our yard.
If you are able to visit Cataloochie valley in the remote mountains of western North Carolina, you will get to see the elk calves. The photo below was taken in late June several years back.
Cataloochie Valley was once the location of a small town. Learn more about the history of this fascinating valley and plan your own camping trip, by visiting the link below.
Opinions mine. Not financial advice. I may hold assets discussed.