New Economics, Clean Money, NFTs that Think, FDIC for Stablecoins and VC Strategy
The Tech Tok Weekly #31
Happy Monday everyone, and welcome to the resumption of the Tech Tok Weekly!
Monday Musings
The entrance of new technologies always seems to throw up new opportunities and highlight glaring gaps in the market. In the crypto space, a new area that is becoming more and more integral is tokenomics, or the economics that make up all the activities associated with a crypto token. It involves everything from decisions on the number of tokens to distribute, the bonding curve to use, and the distribution of tokens to shareholders, to the vesting schedule, the revenue drivers for the token, and the staking model. Tokenomics is extremely complex, especially for creators new to the crypto space to design, and is therefore a science that can be learned, with those who are ‘experts’ in the field able to rent out their skills to projects that need to design their tokens to suit their specific use cases. There can even be a ‘Tokenomics DAO’ created by and for Tokenomics experts that brings together all of these freelancers and makes it a lot easier for projects to outsource their token design skills. Tokenomics represents only one potential greenfield where new skills can be learned and monetised – others could be experts in regulation, or Web3 social media or community management. Being the equivalent of an early adopter in this space has the potential to be extremely lucrative in both, the near and far future, with the added bonus of spearheading the growth of a paradigm-shifting industry.
Meanwhile, this week…
CORE shines the spotlight on how a new VC curriculum may be needed in today’s world, MakerDAO proposes how its protocol and token could be used in the battle against climate change, and Mario Gabriele focuses on the need for ‘NFTs that think’. Also, the US’ FDIC is exploring deposit insurance for stablecoins, and a16z highlight the need for VCs to focus on differentiating their strategies.
#1 Is It Time for a New Economics Curriculum?
Economics is a social science that is heavily influenced by politics and current events and is therefore dynamic and constantly subject to upheaval and change. The way we thought about economics changed after the Great Depression, dominated by the line of thinking encapsulated in Paul Samuelson’s textbook Economics, where a Keynesian vision of an active governmental role in managing the economy was absorbed by generations of students. A team of international collaborators led by Samuel Bowles and Wendy Carlin is aiming to shake up the current doctrine yet again in a world post the Global Financial Crisis, wealth inequality, climate change, and a global pandemic, via the CORE (Curriculum Open-Access Resources in Economics) initiative and a textbook called ‘The Economy’. Their textbook puts market failure at the front and centre, covers economic history and thought, game theory, behavioural economics, and comparative international development in a lot more detail than conventional economics does, and its focus on GDP takes into account the costs of widespread environmental degradation and the value of domestic labour. The last few years have brought into stark perspective just how imperfect markets can be. An economics curriculum that focuses on the market not always being right would be beneficial for how the market evolves in the future, putting more of a spotlight on the underlying inefficiencies in the distribution of income, wealth, and power that underpins neoclassical economics and enabling a potential restructuring of society to ‘achieve other values than maximizing output of material goods and services.’
The book included the idea of self-interest, but “also added altruism, reciprocity, inequality aversion—it was just completely different.” One of the key things that CORE does differently is depict people, economic agents, more realistically, more three-dimensionally.” The book also “really exposes periods where economists got things wrong and makes you take the models and the theories that we are taught with a pinch of salt.”
The world of DeFi offers a sea of opportunity for restructuring finance far greater than high yields from tokens. With its ability to carefully construct incentives for all stakeholders, Rune Christensen, founder of MakerDAO, proposes the power of MakerDAO and DeFi to solve the core problem at the heart of the climate crisis: the inability of the global economy to plan for anything other than the short term. Christensen suggests that the key features of the blockchain (immutability, verifiability, transparency) can be harnessed to develop verifiable processes that ensure that all Maker collateral is in sustainable and climate-aligned assets, unlocking DAI as a coordination tool for the response to climate change. Maker and DAI can pour money into ‘senior credit positions for projects that will build solar farms, wind turbines, batteries, recharging stations and other cost-efficient renewable energy solutions, as well as their supply chains, sustainable resource extraction and recycling.’ The collateral behind DAI also needs to be resilient to climate change, and ‘Climate Alpha’ needs to be considered – i.e., the assets need to be correctly priced with climate risks fully factored in. The bulk of RWA (risk-weighted assets) collateral needs to be diversified into countries that are both climate-resilient and socio-politically stable, while accumulation of ETH and collateral derived from ETH would be prioritised. The end goal would be to create a community where everything in the Maker protocol – governance, tokenomics, NFTs, etc. – are all aligned towards creating a political and economic equilibrium that supports the widespread use of ‘Clean Money’.
If we’re able to align the success of the vision of Clean Money, and the public good that it can create, with the self-interest of MKR voters, then it will be possible to maintain a stable and self-regulating governance equilibrium that is ultimately enforced and driven by individual self-interest of MKR holders - in particular those locked up in the Sagittarius Engine.
The explosion in popularity of NFTs has been headlined by the huge volume of transactions driven by Axie Infinity and the rise of new IP empires that can be extended across formats like CryptoPunks and the Bored Ape Yacht Club. A lot of these projects, though, have ‘thin IP’ which have no lore or character depth to draw on. NFTs have the potential to drive empires like those of Marvel and DC, headlined by NFTs imbued with emotional traits and rich personalities. These types of NFTs could be far more valuable to collectors since their NFTs could be at the centre of a film, TV show, or book that catapults them to fame. With each NFT in a collection having different attributes, they become even more unique and valuable. Imagine a world in which CryptoPunk #1111 wears a bowler hat, has an analytical mind, is prone to impulsiveness, and is a master polo player. If, for example, United Talent Agency decides to make a CryptoPunks TV show and #1111 is the main character, the owner of #1111 would suddenly be in possession of an NFT that millions around the world would crave to own. Mario Gabriele has proposed a new experiment and released a set of ‘NFTs that think’ – 100 Philosophical Foxes with ‘narrative weight’ that are multi-dimensional characters. It will be interesting to see how the experiment plays out, and whether this is the next logical step in the evolution of NFTs, or whether the market veers into a completely different direction.
Every Fox in the collection has something on its mind. Some are deep, some are shallow, some are jealous, some are angry and some are romantic. One fox ponders Nietzche, another plot something dastardly, a third only wants a slice of bread. With just a few words, we can add texture to the character, giving a sense of their personality and motivations. The fox that thinks of arsenic is very different than one that fantasizes about frenching Elon.
#4 US FDIC Said to Be Studying Deposit Insurance for Stablecoins
In another sign of the growing turn towards the mainstream for digital assets and cryptocurrencies, the US’ Federal Deposit Insurance Corp. (FDIC), a key banking regulator, is exploring the possibility of stablecoins potentially being eligible for its coverage. Pass-through FDIC insurance would insure holders of the tokens against losses of up to $250,000 if the bank holding the collateral for the stablecoin were to fail. In addition, the FDIC is looking into what direct deposit insurance might look for banks that issue stablecoins. What would be difficult, though, is determining what exactly the stablecoin is backed by. As has come into the spotlight again in the search for the missing $69 billion that Tether is backed by, there is a lot of uncertainty around the collateral that these stablecoins are backed by and whether they are, indeed, redeemable 1-to-1 for cash on demand. If the stablecoins are backed by riskier assets like commercial paper that are more liable to default, and there is an equivalent of a bank run on the stablecoin issuer where holders want to redeem their stablecoins all at once and the issuer defaults, the likelihood is that the FDIC would be on the hook for a significant sum. The stablecoin issuer would also need to keep track of who is the current holder of each stablecoin and how many they own, which could present a significant technical burden.
If the FDIC went ahead and provided deposit insurance for stablecoins, it would apply only if a bank that was banking a stablecoin issuer or that was issuing a stablecoin itself went into receivership. Even in this scenario, it’s rare that FDIC insurance would enter into the picture because the agency generally takes a failed bank’s assets and deposits and sells them to a healthy bank.
We’ve spoken a lot on this blog about how the traditional VC model has faced significant headwinds from the likes of Tiger Global, SoftBank, and Coatue, and how the pace of VC funding has shot up rapidly in the last few years. Dror Poleg now puts the spotlight on a VC’s strategy. Traditionally, VCs differentiated themselves by focusing on geography, funding stages, or sectors, but the way they conducted business was similar. An example is the competition between Burger King and McDonalds, and Hilton and Airbnb. While the former try to outdo each other in the same activities, the latter compete by deploying entirely different business models to attract the same customers. The traditional model was unopposed for years, until market dynamics flipped from scarcity (more risky venture companies looking for money than dollars available) to abundance (more money available than ever). Conservative and retail investors all want to get in on the action in a low-interest rate world where network effects offer the opportunity to garner market-capturing returns. Now, the onus is on strategy differentiation – to succeed in the midst of ultra-fierce competition, VCs like Andreessen Horowitz are turning towards a model with a management layer that helps support their portfolio companies in a myriad of ways. The underlying message is that every VC firm that wants to rake in long-term profits needs to devise a strategic approach that substantially differentiates it from its competitors and provides a value-add to its portfolio companies that competitors cannot match.
a16z is not just acting strategically in order to gain an advantage. It is imposing a whole new cost structure on its competitors. As a result, a handful of other firms will try to catch up and become equally giant; a variety of "boutique" angel investors and syndicates will live off relatively small (and absolutely large) crumbs, and many of the big-but-not-big-enough funds that currently exist will disappear or gradually become irrelevant.
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