S3T May 29 - Memorial Day, state of crypto, the build mkt, Web2 vs 3, why algostables won't die, fledglings, guns, chainsaws...

The web3 and crypto industry is in its fledgling stage, already showing significant promise, accepting the bear market as a time to focus on building next gen capabilities and addressing the leadership deficts of the current status quo.

How early are we in crypto?

A16Z's newly released State of Crypto Report for 2022 says 2022 for crypto is what 1995 was for the commercial Internet. This highly recommended report provides a thorough review of current trends along with explainers for leaders still getting up to speed.

• Full report here (PDF - 50 slides)
• Excellent summary here

Highlights that stood out to me (very narrow selection of the total insights):

• How the "logic of the crypto market" works: The feedback loop between interest and innovation and why bear market = build market.
• Web3 platforms enable better financial benefits than the current set of Big Tech platforms: Compare the "take rate" (the fees or revenues taken by the platform vs the share that the app or content creator gets to keep. OpenSea, the web3 platform for creators, takes 2.5%. Compare this to the far less generous Web2 platforms: Apple store (30%) Youtube (45%), Meta, Twitter (~100%).
• We are still in the very early stages of Crypto in terms of usage and development, yet already have amassed transaction and asset levels that grab the attention of traditional finance. Related: CashApp and Wakefield study finds lack of knowledge biggest barrier to for those who are hesitant to buy Bitcoin.

The report has excellent coverage of the Ethereum ecosystem vs its competitors, with some interesting insights about how other emerging ecosystems are starting to follow the trajectory of Ethereum. Ethereum had an earlier start, which helped it gained a larger set of active developers. But it also is now dealing with technical debt and playing catch up to other newer entrants.

Change leaders should pay particular attention to the section on Decentralized Autonomous Organizations (DAOs). The more I learn about DAOs the more I realize it would be a mistake to dismiss DAOs as just digital communes for anarchists.  DAOs represent an organizational innovation that is already impacting how people think about their work and how they choose to leverage their time, expertise, and resources. I don't think its a stretch to expect that DAOs - with their innovations like token-based voting power - will ultimately impact how we design governance, corporations and communities.

Why Algostables?

In the wake of Terra's implosion, much has been said about the risks of algorithmic stablecoins - stablecoins that use an algorithm rather than collateral to stay pegged to the value of a dollar (or other currency unit).

Not nearly as much as been said about WHY. What is driving crypto innovators to make repeated attempts to create algorithm driven stablecoins?

There seem to be 3 primary motives:

1. Concerns about centrally controlled financial systems are subject to abuse. Those holding this concern will point to the Canadian government’s financial crackdown on the Freedom Convoy participants as an example of the dangers of currency tied to centralized governance.
2. The requirement for collateral places a constraint on the scalability of the decentralized financial ecosystem. As the US economy and use of the dollar grew, the US removed the requirement for collateral backing. Just as the world's current finance ecosystem needed a scalable reserve currency, so the decentralized finance ecosystem likewise needs a scalable reserve currency (as explained in this 2021 scan of algostable projects).
3. Concerns about how the current financial status quo is failing to track and manage inflation effectively - mind you, this concern predates the 2021-2022 inflation run up.

For these reasons, I don't think we've seen the last of the algostables. Frax is a hybrid stablecoin - backed by both an algorithm and collateral - that hopes to do a better job at protecting against inflation than the US monetary system has. The article link explains how Frax offers an new inflation measurement approach that at least sounds like it could be a better than CPI.

Why the Dollar gets away with being an "algostable"

Its not that much of a stretch to say that the US Dollar is backed by "an algorithm" - albeit one that takes the form of committee meetings and isn't proving to be particularly effective at managing inflation or ensuring equal access to financial security.

So is the Dollar vulnerable to the "Soros attack" that impacted the British Pound, Terra (and a surprising number of other currencies)?  

Probably not. Here's why:

To do an effective Soros attack, you have to have more liquidity than the currency you are attacking. You have to use a stronger currency against a weaker currency.

When you get to be the biggest, most widely used currency, you get to decide the rules. If its no longer convenient for your currency to be backed by silver or gold, then you get to say, "Hey, we're off that now."  

Which brings me to what I think is the crux of the matter:  

Yes, its regrettable when a financial instrument like Terra fails and causes people to lose capital. Yes, we should investigate and learn what went wrong.

But on balance - why aren't encumbents acting with similar urgency and boldness to solve the flaws in our financial status quo? Why is it falling to brave - perhaps reckless - newcomers to find a better way?

Nature Notes

It's Fledgling Season!

Over the next few weeks you will likely get the chance to see fledgling young birds who are venturing out of their nests. This week I noticed young Robins, Chickadees and Downy Woodpeckers around our yard.

Identification and observation tips:

• Scruffy appearance, with a mix of "baby bird" and adult feathers, as shown in the great photo below.

• Some like Robins and Bluebirds have spotted plumage that will gradually be replaced with their adult colors as they mature.

• Awkward, sometimes comical behavior as the birds learn basic skills like taking off, landing and keeping their balance on branches.
• Watch for groups of young birds following an adult and begging for food.  

These young birds are vulnerable. Natural predators like hawks will take a number of them. If you have cats, best to keep them indoors or supervised especially during the breeding season.  

Mental Health, Anger, Guns & Memorial Day

It's been a painful week leading into our Memorial Day weekend. As we prepare to remember those who gave their lives to protect our freedom, we also cannot escape a bitter irony: the military devices our protectors use in war, are being used to gun down our children - all thanks to an industry eager to profit from what can only be described as mental illness.  

The tragedy in Uvalde, Texas only increases the culpability of leaders who are indecisive and willfully confused about a very simple issue: a person who craves certain kinds of weapons is mentally unwell.

If this form of mental illness did not exist, there would be no civilian market for these weapons.  

To illustrate, imagine for a moment, you lived in a world where there were no trees, but there were movies and games featuring chainsaws used as weapons. If you found yourself fantasizing about buying a chainsaw, what exactly would that mean? It would mean you were fantasizing about harming people. It would mean you were mentally unwell.

Let's be clear: we must not stigmatize mental health conditions by assuming all conditions pose a danger to others. The data reveals a different picture: those with mental health conditions actually may be at increased risk for being victims of interpersonal violence. That said, there is evidence of a connection between anger related mental conditions and obsession with guns as a way of compensating for the helpless anger one feels.

The long running failure to take meaningful action shows the deep leadership deficit in the US.

Leadership deficits invite other forms of leadership. Ultimately, if the US cannot muster a solution for this national safety and mental health issue, I think technology interventions will be developed to render these weapons unusable. When this happens, it will be something to celebrate. But it will be too late for all those who died just so civilian weapons makers can profit from mental illness and death.  

Final Note

Truly this is a time for not only grief and anger, but innovative action driven by empathy. Take note of the anxiety of parents of school age children, and the struggle of so many to comprehend what is happening. Its definitely a time to be there for each other, on this very poignant Memorial Day weekend, and support each other as best we can.

Thank you again for reading and sharing S3T! Feel free to forward this to a friend and continue the conversation on the S3T Discord, Twitter or LinkedIn.  

Ralph

Opinions mine. Not financial advice. I may hold assets discussed.