The Marginal Utility
It's What Matters
Packy McCormick blogged about stablecoins. If you have followed crypto, one of the areas that crashed and burned horribly was stablecoins. The ones backed by a network, or backed by some algorithm bankrupted a lot of big organizations.
The crash has given detractors delight, but it has given another black eye to crypto innovation and adoption. A person not immersed in crypto reads the headlines and sees fraud, deception, and crashes. That’s not confidence-building.
It’s a long post but I think it is worth reading, especially if you think crypto is bunk.
I think the advocates for crypto ignore a lot of the opportunity costs embedded in our financial system. There are many reasons that they exist. For example, DeFi exchanges seem super on the surface and so does DeFi clearing. But, in practice, it might actually be a terrible thing to apply to free markets. However, there are certain pieces of DeFi that existing markets and clearing mechanisms should implement to make them slightly more efficient, potentially lowering costs.
Packy highlights Circle’s stablecoin that hasn’t changed in value, hasn’t crashed, and is backed 100% by fiat currency. It is a digital US dollar.
Readers of my blog know I am against the Federal Government issuing its own digital dollar. I wrote this post about it over a year ago.
If a private company wants to issue a stablecoin based on the US Dollar it is different.
Because the private company can’t turn it off if you aren’t politically aligned in the way the government wants you aligned. See China.
However, if you are merely trading a paper dollar for a digital dollar, what’s the benefit? Packy makes some good points. Stablecoins are:
So are existing US dollars.
No doubt, I would agree with crypto people that using fiat has more hurdles, chokepoints and higher costs than a stablecoin. Those hurdles allow brokers to get in the middle. Some of those hurdles are caused by regulation.
For example, there are Know Your Customer Anti Money Laundering (AMLKYC) regs that institutions must implement when they move money around. Those don’t exist in crypto. That regulation creates costs.
Is the regulation worth the costs?
My problem with a lot of the “revolution” I see in crypto is that it is at the margin. It takes an existing system that works pretty well and simply makes it a little better. The marginal bettering of the process isn’t enough to push the system from the way it works currently to a crypto-based system.
Put economically, the MR<MC of implementation.
That doesn’t mean you throw the baby out with the bathwater. It means that in order for crypto to really be something, you need to innovate outside the lines. So far, all we have seen are innovators grab candy. They made products for speculators to trade. That makes it easy for detractors to cite tulip bulbs as being similar.
Lines narrowly drawn, the detractors aren’t wrong. Dogecoin is good for what? Bitcoin is good for what?
The thing that crypto advocates have going for them is also a concept in microeconomics surrounding how consumer/producer surplus is allocated. Crypto allocates more of it to the consumer. Hence, it’s going to have to be consumers that drive the innovation because producers have no economic incentive to embrace it full scale.
Packy’s post delves into smart contracts and I think there is a ton of potential here. The problem is the stranglehold that the gatekeepers have on the implementation of those types of contracts. Could you imagine Michael Burry trying to do what he did with a smart contract instead of a heavily lawyered and investment-banked process? He’d have never gotten his big short on. It’s important to note that these smart contracts aren’t exchange-based, non-standardized, and bi-lateral. Still, it’s a big total addressable market in dollar volume. I am not sure about the actual volume of transactions.
However, you can see where there is a great utility for things like international payments. I just bought some wine from France. I had to wire money to a bank in Paris. It certainly would have been easier to just send money from a crypto account to a crypto account at the winery. One of our portfolio companies, Pipit.Global, is doing some unique stuff with moving money around like that.
Innovation moved a lot faster in Web 1.0 and Web 2.0. It was easier. Web 1.0 was led by consumers who embraced home computing and were enabled by Netscape’s browser. Web 2.0 was led by consumers and embraced by mobile phone users. Innovation in Web 3.0 is going to be slow and plodding. So far, consumers have been able to speculate, but have no real utility beyond that, and producers have shown an aversion to it because they aren’t threatened by it.