Money Reimagined: Defanging FAANG

Most people would be happy to have World Wide Web creator Sir Tim Berners-Lee’s wealth, which is reportedly somewhere between $10 million and $60 million.

Yet, Berners-Lee’s net worth pales into insignificance against that of Amazon founder Jeff Bezos, who last week became the first person ever to be worth more than $200 billion.

There’s something wrong with this picture. The inventor of an information system that transformed the world has earned from it a tiny sliver – no more than 0.03% – of that which has flowed to someone who controls one of that system’s 2 billion websites. Amazon.com has delivered Bezos a fortune that exceeds the gross domestic product of 159 countries and is 3.3 million times more than the U.S. median household income.

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Many Americans will view Bezos’ Amazon, whose $1.73 trillion market capitalization makes it the second-most valuable corporation in the world, as a symbol of the U.S. economy’s success. The same people think similarly about the U.S. roots of the four other companies in the world’s top five: Apple, which last month became the first company to surpass a valuation of $2 trillion and is now at $2.1 trillion; Microsoft ($1.71 trillion); Google owner Alphabet ($1.1 trillion); and Facebook ($835 billion.)

I argue the opposite: These ridiculously large numbers are evidence of a deep problem with the American economy.

This is not the argument of a socialist, as I have sometimes been wrongly described by people who hear me say such things. I thoroughly believe in a free market economy in which entrepreneurs are incentivized through profits to improve and grow their businesses.

It’s just that there’s no way a single person or company can accumulate such a colossal amount of money, relative to that of everyone else, without operating a competition-killing monopoly, without acting as a rent-seeking gatekeeper of others’ capacity to generate income and innovate.

This is the destructive nature of the centralized platforms the internet has spawned, a situation that gives Berners-Lee such angst that he’s now seeking to tame the beast he created. With network effects to their advantage, these behemoths have a data-monopolizing capacity that lets them control and quash competition. And their algorithms have accumulated such a deep knowledge of user behavior that they can bend us to their will. It’s a power as great or more than that of governments, which is why they represent as big a threat to the free market as excessive regulation.

A solution may lie in a new breed of blockchain-powered “Web 3.0” protocols. These will give users control over their data and enable them to join decentralized communities and marketplaces to share content and products without middlemen. These models could break the back of the internet platforms’ – so long as users can be convinced to migrate away from them.

Still, even if these newcomers are successful, the Bezos lessons should be heeded. Power bases forming in the blockchain ecosystem around “whales” resemble those of the centralized internet, where a capacity to set the rules of the game are vested in a few. The crypto community should welcome innovative governance solutions that push back against that inequity and foster broader distributions of power.

Limiting the spoils of growth

Monopolies harm an economy for various reasons. In the trust-busting era of President Theodore Roosevelt, the concern was that an absence of competition empowered companies to impose above-market prices on consumers. But they also constrain innovation, creating an opportunity cost for society. If better alternatives to the status quo aren’t brought to market, productivity stagnates.

Capital markets perpetuate this problem. Investors favor the big guys – witness the investment advisor mantra of “just buy FAANG” (Facebook, Apple, Amazon, Netflix and Google) – leaving their competitors with comparatively more expensive capital, which only makes the challenge of surpassing the platforms even bigger.

Their advantage is buttressed by legal ambiguity. Antitrust laws fixate on the prices paid by consumers, but as the American Economic Liberties Project notes in a piece calling Amazon a “21st century gatekeeper,” the consumer harm done by the e-commerce giant “tends to be disguised or hard to calculate.” The report’s authors say regulators should instead be looking at how it manipulates everyone – suppliers, potentially competitive startups and customers – by placing them into “a position of dependency, and then exploiting that dependency to leverage itself into powerful positions in new markets.”

It’s not clear, though, that the solution lies with government.

Washington could, for example, break up Amazon, Facebook et al. But what’s to stop each of the component parts obtaining their own gatekeeper powers? Alternatively, it could regulate the platforms as utilities. But do we really want Uncle Sam regulating – censoring? – an information platform? Or it could subsidize promising startups aiming to beat the platforms at their game. But even if a challenger can garner the network effects necessary to overcome barriers to entry, their own shareholders will ultimately pressure them into using the same exploitative methods.

Web 3.0 to the rescue?

This is where crypto-based solutions hold promise. In Web 3.0, user networks exist on top of a decentralized protocol that no single party controls.

Web 3.0 startups must still convince users to migrate from a big, proven network to a small, unproven one, but growing concerns about privacy, censorship and fraught battles over disinformation, “fake news” and toxic behavior could encourage them to do so. And recent progress in the development of Web 3.0’s underlying infrastructure offers hope that gatekeeper-bypassing internet applications are on the horizon.

Interoperability protocols such as Cosmos and Polkadot, which allow digital asset exchanges across blockchains, have reached key development and funding milestones in recent months. Decentralized storage and hosting solutions such as Sia and Filecoin are garnering both user and investor interest. A host of self-sovereign digital identity providers are starting to offer users a way to keep their data private and interact autonomously with each other without relying on the platforms’ identity management systems. And all this is happening during an explosion of innovation in decentralized finance (DeFi), which could enable smoother integration of payments and finance in a Web 3.0 environment.

Crypto inequity

To be clear, blockchains are no panacea against monopoly.

For one, crypto has its own inequality issue. Because of sharp price appreciation and the front-loaded issuance schedules built into many cryptocurrency protocols, a small number of early adopters have profoundly more wealth than the vast majority of later participants. (One analysis of Bitcoin’s Gini wealth coefficient, a common measure of wealth inequality, put it in a range of 0.88 to 0.98 between 2012 and 2019, higher than any country in the world.)

One could argue it’s the removal of gatekeeping intermediaries, not inequality itself, that matters. But the reality is that “whales” with large token holdings have outsized influence over blockchain governance systems and can often dictate terms in their favor. This is especially so in proof-of-stake consensus systems and it’s playing out in voting on interest rates, collateral rules and other parameters attached to decentralized finance (DeFi) protocols.

It’s also relevant to bitcoin. Wealth is necessary to build the big mining farms needed to consistently win block rewards and although core development work is, by definition, a not-for-profit activity, the most prolific contributors to its code are funded by wealthy bitcoiners. While their financiers’ largesse is justified in terms of protecting a public good, their direct line to the engineers affords them real influence over protocol development.

Still, blockchain-based protocols create opportunities for founders to experiment with governance to get around these problems, which, encouragingly, is happening in DeFi. (See the item on “fair launches” below.)

We’ll never attain utopia, but at least in crypto there’s an innovation-driven approach to finding a path to it.

Denominators matter

At a glance, the first chart below from DeFi Pulse, which tracks the value of all crypto assets locked as collateral in Ethereum’s DeFi ecosystem, suggests the spectacular bubble of August might have met its end in early September.

And yes, the first week of September is a reminder that what goes up can come down. Still, it’s worth looking at the charts further below the first one to remind ourselves that discussions of crypto value tend to be distorted by the denominator of measured historical performance. Any assessment of the U.S. dollar (USD) value of funds invested in DeFi collateral contracts is beholden to the value of the dollar itself, which will vary against the key crypto denominators according to a vast array of factors that have very little to do with DeFi.

The charts below measure the amount of actual a) ether or b) bitcoin that’s locked up in DeFi contracts.

The good news for DeFi believers is that even with the damage that this week’s sell-off has done to the dollar value of bitcoin and ether, the crypto community’s internal bets on the DeFi system continued to rise, albeit at a slower rate. The unanswered question is, how truly independent of the fiat world is this system? Will the past week’s slide in the value of ether and bitcoin versus the dollar start to impact how holders of those cryptocurrencies think about their yield-earning opportunities in DeFi? Or are there now greater incentives to cash out back into dollars? Time will tell.

Global town hall

FAIR LAUNCH = FREE LUNCH? One of the hottest of the many hot new speculative projects to flow through the booming DeFi universe has been that of yearn.finance, whose YFI token soared by more than 700% in August to flirt with a $1 billion market capitalization. It was more than the price gain that got people excited. It’s that the founder, Andre Cronje, launched the project without retaining any of the tokens for himself beforehand, carrying out what’s being called a “fair launch.” Unlike the leaders of many projects who typically set aside around 20% of tokens to compensate founders and developers for the time and effort put into building the project, Cronje and his team had to commit their own capital and time their bets right to ride the speculative boom in YFI.

One reason why this is appealing is that it creates a framework for more equitable governance of the tokens, whose conditions are determined by token holders according to the protocol’s consensus-based voting system. Typically, the largest holders can sway votes, which means token-holding founders can set the game up in their favor. Ian Lee, IDEO CoLab Ventures managing director, says such models pose a threat to venture capital managers like himself. If projects can launch without prior equity or token exposure for either founders or funders, what’s in it for VCs? he asked in a blog post.

Who would fund such projects? People who simply want to see new financial innovations live in the wild and are prepared to bet further on them after they’re built. Well, Lee and some of his team members appear to be among those types of people, as they quickly rolled out a new concept – note: not an entity per se – called “fair launch capital.” Described as a “community resource providing free access to capital for new Fair Launch networks and projects,” the group is receiving an “incredible amount of interest and support from the crypto community,” he said.

Meanwhile, Yearn itself fostered a new concept that could further unlock capital for such launches: a “delegated funding DAO vaults,” which essentially use the power of connections and relationships, along with some fancy insurance-like mechanisms, to provide unsecured lending for developers of such projects. A lot of bets will go wrong, no doubt. But this kind of experimentation with new forms of governance, risk management and credit are what make the DeFi movement so interesting.

PEOPLE’S PRIVACY. When it comes to China, the only thing to be said with any certainty is that mainstream Western portrayals will employ sweeping generalizations and miss a more nuanced reality. In a well-written take on Beijing’s surprisingly robust efforts to boost data privacy standards, MIT Technology Review writer Karen Hao describes one such situation.

While the article lays out the familiar story of the expansion of state surveillance under President Xi Jinping and the growing use of “social score” metrics, it also reveals how a pro-privacy activism among Chinese citizens is prompting some aggressive data protection responses from top Chinese officials, including measures that constrain the actions of provincial government agencies. With the country now implementing a legal model quite similar to that of Europe’s General Data Protection Regulation (GDPR), tensions with the national government’s own data collection strategy seem likely to arise. It remains to be seen what all this means for China’s implementation of its Digital Currency Electronics payments system, which Western critics often describe in ominous terms as a privacy-destroying “panopticon.”

As Hao writes, China’s privacy protection effort “raises a question: Can a system endure with strong protections for consumer privacy, but almost none against government snooping?” To be sure, that system, otherwise known as the Chinese Communist Party, has managed to accommodate many such contradictions in the past. But the message here is that we should not underestimate the voice of the Chinese citizenry – or, more precisely, of its Netizens, as China’s internet activists have become known.

THIS MEANS WAR. Those of us who write about how governments, companies and decentralized communities will compete to define the digital money of the future often use the term “currency war” to describe the competition for people’s monetary trust that looms on the horizon. The winner is the one that attracts the most demand and, therefore, most likely, rises the highest in value. But in traditional foreign exchange markets, the concept applies more to central banks using their powers of intervention and monetary policy to competitively drive down the value of their national currencies – in other words, reduce demand for them – so as to boost exports and make imports more expensive.

With the dollar falling consistently due the Federal Reserve’s aggressive COVID-19 monetary easing measures, concerns about such a war arising were given a boost when European Central Bank’s Chief Economist Philip Lane made what some labeled as a “verbal intervention” just as a rising euro was approaching the psychologically significant level of $1.20. As Bloomberg Opinion writers Mark Gilbert and Marcus Ashworth warn in response to Lane’s remarks, “A full-blown currency war … could distract policy makers from their key task of mending the post-pandemic global economy.”

All Lane said was, “The euro-dollar rate does matter” because it “feeds into our global and European forecasts and that in turn does feed into our monetary policy setting.” That’s a pretty indisputable point. Yet, the euro fell immediately after he’d dropped the comment. The remarks did break with international protocol, by which central bankers are supposed to resist mentioning their currencies and instead focus on domestic economic conditions, even when those conditions are the result of exchange rate changes. But it was hardly a declaration of war. Such is the super-sensitivity around the value of money right now that modest shifts in language can send markets into a tizz. There’s an end-game feeling to this.

Relevant reads

The Crypto-Dollar Surge and the American Opportunity. Don’t fear stablecoins, embrace them. That’s CoinDesk columnist Nic Carter’s message to U.S. policymakers. Yes, encouraging the use of these dollar-denominated digital bearer assets would entail giving up on the international surveillance that bank-based dollar surveillance grants the U.S., but the free flow of a new form of money with its roots in the U.S. will ultimately serve U.S. interests, Carter argues. The alternative is to allow people suffering under the regimes of pariah states like Venezuela to migrate to “slipperier alternatives.”

3 Reasons Bitcoin Just Tanked Below $11K for First Time in a Month. Bitcoin’s price has been on a rollercoaster ride this past week. After BTC briefly got above the psychologically important $12,000 mark in the New York afternoon Wednesday, successive waves of selling that began in Asian hours Thursday had pushed it within a few dollars of $10,000 just 24 hours later. Although it bounced off that level, the largest cryptocurrency was still struggling as of this writing Friday. Why the sell-off mid-week? Brad Keoun offers three plausible explanations.

For DeFi to Grow, CeFi Must Embrace It. For all the excitement around the DeFi phenomenon, it is still a miniscule part of even the cryptocurrency market. To make it more mainstream, CoinDesk contributor William Mougayer argues the centralized exchanges that dominate the larger, more liquid form of crypto investing should engage with DeFi protocols. How? By listing their tokens, building new, easier-to-understand products and creating user-friendly marketing information to bring them into the mainstream.

Brazil’s Central Bank Says Nation Might Be Ready for a Digital Currency by 2022. Brazil is the latest country to say it’s creating a central bank digital currency. In fact, it could have one by 2022, says the country’s central bank chief, Roberto Campos Neto. Danny Nelson reports.