What We’re Reading (Week Ending 02 January 2022) - 02 Jan 2022
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 02 January 2022):
1. I Have A Few Questions – Morgan Housel
Who has the right answers but I ignore because they’re not articulate?
What haven’t I experienced firsthand that leaves me naive to how something works? As Jeff Immelt said, “Every job looks easy when you’re not the one doing it.”
Which of my current views would I disagree with if I were born in a different country or generation?
What do I desperately want to be true, so much that I think it’s true when it’s clearly not?
What is a problem that I think only applies to other countries/industries/careers that will eventually hit me?
What do I think is true but is actually just good marketing?
What looks unsustainable but is actually a new trend we haven’t accepted yet?
What has been true for decades that will stop working, but will drag along stubborn adherents because it had such a long track record of success?
2. TIP409: 2021 Top Takeaways w/ Trey Lockerbie – Trey Lockerbie
Trey Lockerbie (00:00:02):
In today’s episode, I am sharing my top takeaways from some of the conversations I had throughout 2021. I can’t express how grateful I am for having the privilege to learn from some of the greatest minds in finance, business, and investing. People like Howard Marks, Jeremy Grantham, Joel Greenblatt, Kyle Bass, Chamath Palihapitiya, Jim Collins, and so many more…
…Trey Lockerbie (00:04:47):
All right. So keeping on the topic of inflation, I also wanted to highlight this soundbite from episode 351 with Morgan Housel. At the beginning of the year, a lot of people were speculating around hyper-inflation just simply because of the money being printed.
Trey Lockerbie (00:05:01):
But Morgan’s point was highlighting that hyper-inflation really doesn’t happen until there’s also the supply side component. Now funny enough later in this year, we’re starting to see some real inflation numbers due to supply-side issues. But what Morgan’s really getting at here is how at risk, the dollar is from hyper-inflating away.
Morgan Housel (00:05:18):
Most historical periods of hyper-inflation if we’re really talking about real hyper-inflation, virtually all of them, I would struggle to find one example that did not take place in a society where they had massive output shrinkages. Because either it’s during the war and their factories are bombed to rebel, like happened in, Weimar Germany, or happened at the end of world war II in a lot of countries, or if it’s because the government has confiscated the major industries and run them into the ground as happened in Venezuela and Zimbabwe.
Morgan Housel (00:05:45):
It’s never just too much money, it’s always too much money during a time where your production, your GDP are collapsing. And I think that’s really important because of what happened after 2008 when the Feds started printing a lot of money. So many people, including myself, by the way, were saying, “Hyper-inflation right around the corner,” Feds printing so much money, you know what’s going to happen.
Morgan Housel (00:06:04):
And it didn’t. And I think the reason it didn’t is that the economy was well able to soak up a lot of that excess liquidity because our factories still had all the capacity that they can make stuff and produce stuff in a way that did not exist during Weimar Germany, or in Zimbabwe when the government had confiscated so many of the firms and run them into the ground. Or in Venezuela where the oil industry has been confiscated and run into the ground because they didn’t keep anything up.
Morgan Housel (00:06:30):
So it’s not to say that you can’t have a rise in inflation unless you have a decline in supply. It’s not that, but most of the time, big bouts of inflation come from a massive shrinkage in any economy’s ability to produce. Now, could that happen in the United States, too? Sure. Could it happen that we just don’t keep up with factory investment or we’re not investing in the right fields and we get to a spot where supply is shrinking, yes, of course, that could happen.
Morgan Housel (00:06:53):
And it’s happening right now in some specific fields. What’s happening in housing right now and particularly lumber is really fascinating, where the price of lumber is just going berserk. It’s going off the charts. I think it’s up about fivefold in the last year, the price of lumber to build a house. And from my understanding why that is, is not because we ran out of trees or even ran out of cutdown timber, there’s plenty of timber that’s been cut down and stripped of as bark, there’s plenty of that.
Morgan Housel (00:07:18):
From my understanding, a lot of the mills last spring said, “Oh, because of COVID, we’re going into the next great depression, shut down the mill, don’t invest in the mill, lay off the mill workers.” And now even though there’s plenty of logs, there’s not enough supply to manufacture finished wood. So we do have a decline in output in something like that. And sure, in enough we have nearly hyper-inflation in lumber.
Morgan Housel (00:07:41):
So it can happen in specific industries. I wont to be surprised if it happens in airlines this summer too, where you have airlines, some of whom have laid off tens of thousands of their workers or just through attrition have lost thousands of workers, flight attendants, pilots, and whatnot. Because last year, there was no work for any of them, and now this summer everyone who’s vaccinated is going to want to get on a plane and go somewhere.
Morgan Housel (00:08:02):
And so at the same time, you’re going to have maybe record demand, you have a huge decline in supply and could that lead to huge inflation in airlines? I think almost certainly. I think it’s some senses it will. The other area where I know it’s happening right now is rental cars. Where last year, a lot of the rental car companies just in a bid to survive started liquidating their fleets, just so that they had enough money to survive.
Morgan Housel (00:08:25):
And now that everyone wants to book a vacation right now, there are so many fewer rental cars available right now than there were last summer. So is there going to be huge inflation in rental cars this summer? Probably, but again, I’m making this point that it’s not just the money coming in, it’s the supply that went out that really causes the problem…
…Trey Lockerbie (00:57:51):
And as far as my favorite definition of risk, I think it came from Morgan Housel’s book where it says risk is what is left over when you think you’ve thought of everything. And in my episode with Morgan, he shared some amazing color around it. Here it is.
Morgan Housel (00:58:05):
People hear that and they think, “Okay, that’s great,” but let’s talk about the biggest risks that are out there. And you’re like, “No, no, no. The biggest risk is what no one is talking about because it’s impossible to know.” Or it’s so unlikely, it’s so crazy that people just wouldn’t even think about. Here’s a story that I wrote about this week that I think is really fascinating.
Morgan Housel (00:58:20):
During the Apollo space missions in the 1960s, before we started launching ourselves into space in rockets, NASA tested all of its equipment in super high altitude hot air balloon. So they would take a hot air balloon up to 130,000 feet, like just scraping the edge of outer space and they would test their equipment. They’d test their theories before they actually went up in rockets. So one time in 1961, NASA sent up a guy named, Victor Prather to 130,000 feet.
Morgan Housel (00:58:48):
And the goal of this mission in this hot air balloon was to test NASA’s new space suit prior to actually going into space. They wanted to go up to 130,000 feet, make sure everything was airtight. It worked under pressure, et cetera. Victor Prather goes on this mission, goes to 130,000 square feet, test a suit, the suit works beautifully everything’s great. Prather, Is coming back down to earth and when he’s low enough, he opens up the visor on his helmet, the face shield on his helmet.
Morgan Housel (00:59:13):
When he is low enough to breathe on his own, he can breathe the earth’s air, he’s low enough that he can do that all fine. He lands in the ocean as his planned and as the rescue helicopter comes to get him, he’s trying to tie himself onto the rescue helicopter’s rope and he slips, slips off his craft and falls into the ocean. Again, not a big deal because as soon is designed to be watertight and buoyant, but Victor Prather had opened up the mask in his helmet. As he falls into the ocean, he’s now exposed to the elements. His suit fills up with water and he drowns.
Morgan Housel (00:59:44):
And this to me is so fascinating because the NASA space missions during the moon race in the 1960s was probably the most heavily planned mission ever. You had thousands of the smartest people in the world, planning out every single minute detail and checking it over and over again, and being signed off by the most sophisticated expert risk committees that exist in the world, and they were so good at it. I mean, to have men walking on the moon, you need like every single millisecond was planned out every detail. And with Victor Prather, it was the same thing. They planned out every second of that mission.
Morgan Housel (01:00:20):
And then you overlook one tiny little microscopic thing, like opening your visor when it’s okay to breathe the earth air. And it kills them, and that to me is just an example of a risk is what’s left when you think you’ve thought of everything. And I think that’s an example of what happens in a lot of fields. Think if you were an economic analyst in the last five years and your job is to forecast the economy and you spend all your day, you spend 24 hours a day modeling GDP, modeling employment trends, modeling inflation, every detail about what the federal reserve is doing.
Morgan Housel (01:00:50):
You built the most sophisticated model in the world to predict what the economy’s going to do next. And then a little virus sneaks in and 30 million people lose their job. That’s how the world actually works. No economists in their right mind would’ve included that in their forecast. If you go back to 2019 or whatever, no one would’ve said, “Oh, I expect GDP is going to fall 20% next year, because we’re going to have…”
Morgan Housel (01:01:12):
No one said that. Of course, you couldn’t. You would be ridiculous to say that, but that’s how the world works. And I think it’s the same thing if you look at September the 11th or Pearl Harbor or Lehman brothers going bankrupt, because I couldn’t find a buyer, all the big events that actually move the needle, are things that people didn’t see coming.
3. Brantly Millegan – Ethereum Name Service – Eric Golden and Brantly Millegan
[00:05:40] Eric: And so I think a fun part to jump off, as I went through this, I’ve just learned so much about naming numbers, which is way more complex and interesting than I ever could have imagined. I think something that would be interesting is to just start with Web 2.0, and how Domain Name Services worked in general, and this idea of DNS. So if I wanted to own Ericgolden.com today, how would that work? How does the current internet work with naming numbers?
[00:06:05] Brantly: DNS actually predates not only Web 2, but it actually predates Web 1. It was not invented for the web. A lot of people think of these as like web domains, because that has become their primary use case. But it was actually not invented with the web in mind because the web didn’t exist. The current DNS came out 1984, 1985. The basic thing is, okay, you have types of identifiers that make sense for software. A software, if you have a string of 15 numbers, it can identify that, that number, non-number a second, it takes is easy. It can generate these things automatically. But of course, people can’t read this not friendly. We need language and social context, which computers, at least for the time being, are terrible at. Maybe AI will solve this problem, but right now it’s not. So naming system, at least with DNS, it’s just trying to bridge that gap. In some ways, the basic concept is to look up system. You have a name and you have data attached to that name. So when you type in a name somewhere, your computer just goes and looks it up on the system and grabs the relevant data and brings it back, just does all this in the background. The current system DNS has the best of 1980s technology. Something for people to remember on that is okay, public private key cryptography, which was invented in the ’70s, that was illegal to use in most contexts in the 1980s.
It was invented by some people in the United States, U.S government basically recognized that this is extremely powerful technology, we need to protect this. It wasn’t until the ’90s, there was this PGP movement with Phil Zimerman and Hal Finney and a couple others, that basically pressed the issue with the U.S government, eventually convinced the U.S government to make it no longer considered a munition, basically made it so anybody could use it. You wouldn’t get in trouble for sharing technologies with our enemies or something. That public private key cryptography technology, that is necessary for how the whole internet works. It’s the basis of wallets. So cryptocurrency wallets is just a public private key pair. It’s what it is. You have your private key and you have your public address. It’s really the hash of your public address. But this is critical technology. That was not legal in the ’80s. So all this is to say is DNS was designed and built without this. This is like the level of technology. And there have been attempts after the fact to try to add this into DNS, but it doesn’t even necessarily have wided options. It’s kind of hard once you build something. So DNS is very simple. It doesn’t have all the best technology. Something I will say for DNS though, is that it overall works extremely well. In insane engineering achievements in the world that this little project in the ’80s which was never intended to be used by the whole world, successfully scaled it up to billions of users. It’s spectacular. I have huge respect for the DNS community.
[00:08:48] Eric: Research this and getting to about ENS and DNS, I learned this idea called the Zooko’s triangle, that you needed these three properties to have an ideal naming system. Human meaningful, which is the fact that those numbers don’t mean anything to us. So how can we use English language or language to connect security and decentralization? So to your point, DNS is created in the ’80s. The decentralization for was essentially illegal. How did DNS satisfy those things today? How did names work today?
[00:09:20] Brantly: Is DNS decentralized? Depends on what you mean by this. There’s aspects of DNS that are very decentralized. So there’s parts DNS that are not decentralized. I’d say with our standards today, we’d probably say it’s not decentralized. It lacks things like users don’t have self custody of their names. So the way DNS works, if you own brantly.com, the fact that you own that depends on a number of other trusted third parties to maintain that for you. You can’t do self custody of brantly.com. That’s not possible given the way the system works. There’s always other people who have access to your name and could take it away from you if you want. By the way, that’s good and bad. Obviously it’s bad because it can be abused, censorship or something. It’s kind of good though. It’s really convenient. People who do a lot of bad things on the internet, it’s really convenient that the powers that be can just shut it off. It’s a double edge sword. But what ENS does is takes a lot of the DNS architecture, it virtualizes it, it puts it on Ethereum. It takes out all of those trusted third parties that they’re just required based on how the technology works with the old system, and allows for things like self custody and censorship resistance, which I think are very powerful.
[00:10:31] Eric: So people that were studying DNS and thinking about doing naming services with the introduction of Blockchain, it doesn’t seem like ENS was necessarily the first, but it does seem like it’s become very popular. And I’m always cautious with the word winning or the best. To me, and I’ve heard you talk about this, I just think about the usage. I see a lot of people with .eth names that it’s kind of being adopted. So I guess when people had the depth of history you had of DNS, saw Blockchain, give me a little understanding of there was Namecoin or there were other projects that I think attempted to do this, and how did they lead to ENS and how are they different?
[00:11:08] Brantly: Satoshi Nakamoto invented Blockchain technology because he wanted to have a decentralized currency, that was his motivation. That technology, as we all know well now, can be used for other things. Decentralized currency or peer-to-peer currency is just one application of Blockchain technology, of many. And people realized this pretty early on. The first non-currency use of Blockchain technology or attempt uses, was for internet naming. So Namecoin was some people called the first altcoin. Whenever you talk about a first, it’s like, “Well, what do you count?” There was that little project that kind of got going, but didn’t last very long. Do you count that. Namecoin was certainly the first important one, I would say. It has its own Blockchain, it has its own coin, it has Dot-Bit names. I think Satoshi was involved. Aaron Schwartz who sadly took his life in that whole MIT debacle thing, he was involved. There were a bunch of other people involved. They were right, that Blockchain technology is great for naming and provides a lot of interesting things. Namecoin’s now a dead project, it’s not doing anything. The problems with it is that you now had bootstrap your own Blockchain, it was kind of siloed off. They had problems with the distribution of names, things like this. But then came Ethereum in 2015. Ethereum was a revolution in the Blockchain space. There is like before Ethereum times and the after Ethereum times. Before Ethereum, if you wanted a new application, you had to build your own Blockchain and bootstrap it. This is very, very difficult to do. If you ever wanted to change anything about it, it’s really hard to change. Ethereum said, “Hey, let’s have a general purpose Blockchain. You can put any application on it. You don’t have to launch your own Blockchain, you just launch it on our Blockchain. Launch new applications easily.” And this led to this explosion of creativity and experimentation and development.
So ENS launched 2017, it has a huge number of advantages of Namecoin. So one, it’s in the Ethereum ecosystem. So it has composability. It can interact with everything else in Ethereum. It benefits from all the Ethereum infrastructure. We don’t have to build our own metamask and our own wallets and things like that. It’s like it all just in the Ethereum ecosystem, benefit from the security of that. So we just focus on that application. I think we also learned from some of the other failures of Namecoin regarding distributions to Nick being from the beginning was Like,” we have to have the incentive setups to disincentivize squatting and incentivize use from the beginning.” Because if you don’t, it just gets taken over by squatters and no one uses it, and the project actually fails. There have been many attempts, good faith attempts over the years. I would say ENS is the first one that’s actually gotten serious adoption and has gotten escape velocity. And I would say it’s the first one that has a shot at actually becoming a new protocol of the internet, which I think is really exciting and also makes the core team feel law of responsibility. Like, “Oh crap, this thing that many people have been working on and thinking about for years and attempts, we actually have something that is working. We need to not screw this up.”…
…[00:18:59] Eric: So, one thing I want to go back to is the enforcement and this censorship resistant thing that gets people very passionate, and I definitely see the arguments. In the current DNS system, if I’m a malicious actor and I set up a website, you had mentioned earlier they could shut it down, this is the strength in the weakness. First question is, who has the rights under DNS to shut down a domain or a bad actor?
[00:19:23] Brantly: So, there’s a bunch of different levels to the DNS system, but for the most part, generally speaking, people actually can’t just willy nilly shut down your website. And it depends on the reason why, and they’ve actually developed… See, something that the DNS community grappled with, actually early on, was there was no system for determining what could be shut down or not, or someone’s abusing something, can you do an enforcement action against them? And the DNS community, over many years, came up with a system called UDRP, which was an attempt to have a system with due process and everything. So, if you think someone’s misrepresenting themselves as you, or so something this, there’s a way you can take action. It’s not perfect. A lot of people think it’s just entirely arbitrary. That’s not true. It’s something. With ENS, when I tell people… Because some people say, “Well, what about abuse on the internet? You have to have a way to stop it,” which, actually, I agree on. We don’t want people using ENS for terrible things. But what I tell people is that you just have to come up with a new type of enforcement framework. What this means is, if someone’s doing something bad, let’s say, with .eth name, you can’t call up ENS and get them to fix it, you have to go to that person. You can’t do it through a centralized thing, you sort of have to go to that person, you have to find that person. Of course, you can always enforce something with the person themselves. That’s another thing, too. We use the word, like censorship resistance. That’s not the same thing as uncensorable. There is no such thing as something that’s uncensorable. That doesn’t exist in the world. Anybody who tells you that is not accurate. Censorship resistant just means maybe it’s harder to censor, or not through the normal ways that you would censor something.
4. The Lazarus heist: How North Korea almost pulled off a billion-dollar hack – Geoff White and Jean H Lee
In 2016 North Korean hackers planned a $1bn raid on Bangladesh’s national bank and came within an inch of success – it was only by a fluke that all but $81m of the transfers were halted, report Geoff White and Jean H Lee. But how did one of the world’s poorest and most isolated countries train a team of elite cyber-criminals?
It all started with a malfunctioning printer. It’s just part of modern life, and so when it happened to staff at Bangladesh Bank they thought the same thing most of us do: another day, another tech headache. It didn’t seem like a big deal.
But this wasn’t just any printer, and it wasn’t just any bank.
Bangladesh Bank is the country’s central bank, responsible for overseeing the precious currency reserves of a country where millions live in poverty.
And the printer played a pivotal role. It was located inside a highly secure room on the 10th floor of the bank’s main office in Dhaka, the capital. Its job was to print out records of the multi-million-dollar transfers flowing in and out of the bank.
When staff found it wasn’t working, at 08:45 on Friday 5 February 2016, “we assumed it was a common problem just like any other day,” duty manager Zubair Bin Huda later told police. “Such glitches had happened before.”
In fact, this was the first indication that Bangladesh Bank was in a lot of trouble. Hackers had broken into its computer networks, and at that very moment were carrying out the most audacious cyber-attack ever attempted. Their goal: to steal a billion dollars.
To spirit the money away, the gang behind the heist would use fake bank accounts, charities, casinos and a wide network of accomplices.
But who were these hackers and where were they from?
According to investigators the digital fingerprints point in just one direction: to the government of North Korea.
That North Korea would be the prime suspect in a case of cyber-crime might to some be a surprise. It’s one of the world’s poorest countries, and largely disconnected from the global community – technologically, economically, and in almost every other way.
And yet, according to the FBI, the audacious Bangladesh Bank hack was the culmination of years of methodical preparation by a shadowy team of hackers and middlemen across Asia, operating with the support of the North Korean regime.
In the cyber-security industry the North Korean hackers are known as the Lazarus Group, a reference to a biblical figure who came back from the dead; experts who tackled the group’s computer viruses found they were equally resilient…
…When the bank’s staff rebooted the printer, they got some very worrying news. Spilling out of it were urgent messages from the Federal Reserve Bank in New York – the “Fed” – where Bangladesh keeps a US-dollar account. The Fed had received instructions, apparently from Bangladesh Bank, to drain the entire account – close to a billion dollars.
The Bangladeshis tried to contact the Fed for clarification, but thanks to the hackers’ very careful timing, they couldn’t get through.
The hack started at around 20:00 Bangladesh time on Thursday 4 February. But in New York it was Thursday morning, giving the Fed plenty of time to (unwittingly) carry out the hackers’ wishes while Bangladesh was asleep.
The next day, Friday, was the start of the Bangladeshi weekend, which runs from Friday to Saturday. So the bank’s HQ in Dhaka was beginning two days off. And when the Bangladeshis began to uncover the theft on Saturday, it was already the weekend in New York.
“So you see the elegance of the attack,” says US-based cyber-security expert Rakesh Asthana. “The date of Thursday night has a very defined purpose. On Friday New York is working, and Bangladesh Bank is off. By the time Bangladesh Bank comes back on line, the Federal Reserve Bank is off. So it delayed the whole discovery by almost three days.”
And the hackers had another trick up their sleeve to buy even more time. Once they had transferred the money out of the Fed, they needed to send it somewhere. So they wired it to accounts they’d set up in Manila, the capital of the Philippines. And in 2016, Monday 8 February was the first day of the Lunar New Year, a national holiday across Asia.
By exploiting time differences between Bangladesh, New York and the Philippines, the hackers had engineered a clear five-day run to get the money away.
They had had plenty of time to plan all of this, because it turns out the Lazarus Group had been lurking inside Bangladesh Bank’s computer systems for a year.
In January 2015, an innocuous-looking email had been sent to several Bangladesh Bank employees. It came from a job seeker calling himself Rasel Ahlam. His polite enquiry included an invitation to download his CV and cover letter from a website. In reality, Rasel did not exist – he was simply a cover name being used by the Lazarus Group, according to FBI investigators. At least one person inside the bank fell for the trick, downloaded the documents, and got infected with the viruses hidden inside.
Once inside the bank’s systems, Lazarus Group began stealthily hopping from computer to computer, working their way towards the digital vaults and the billions of dollars they contained.
And then they stopped.
Why did the hackers only steal the money a whole year after the initial phishing email arrived at the bank? Why risk being discovered while hiding inside the bank’s systems all that time? Because, it seems, they needed the time to line up their escape routes for the money.
5. “Play-to-earn” and Bullshit Jobs – Paul Butler
In Bullshit Jobs: A Theory, David Graeber makes the case that a sizable chunk of the labour economy is essentially people performing useless work, as a sort of subconscious self-preservation instinct of the economic status quo. The book cites ample anecdotal evidence that people perceive their own jobs as completely disconnected from any sort of value creation, and makes the case that the ruling class stands to lose from the proletariat having extra free time on their hands. It’s a thoughtfully presented case, but when I read the book a few years back, I was skeptical that any mechanism to create bullshit jobs could arise from a system as inherently Darwinian as capitalism.
I’ve recently been exploring the themes around web3 to see if there’s a “there” there, and Graeber’s book has been on my mind again. One of the most apparently successful examples of web3 that people point to, aside from art NFTs, is so-called play-to-earn games. The most successful of these is Axie Infinity, a trade-and-battle game reminiscent of Pokemon.
In a crypto economy crowded with vapourware and alpha-stage software, Axie Infinity stands out. Not only has it amassed a large base of users, the in-game economy has actually provided a real-world income stream to working-class Filipinos impacted by the pandemic. Some spend hours each day playing the game, and then sell the in-game currency they earn to pay their real-world bills. That’s obviously a good thing for them, but it also appears to be a near-Platonic example of Graeber’s definition of a bullshit job.
Gamers have a word, grinding, to describe repetitive tasks undertaken to gain some desired in-game goal, but are not fun in themselves. This seems to sum up players’ experience with Axie Infinity, which is often described as work or a chore…
…There is some logic to the idea that the game could sustain a mix of players, some of whom are net recipients of capital and some of whom are net contributors who are in it for a good time. This is how other in-game economies have sustained themselves. I’m wholly unconvinced that Axie Infinity is headed in that direction, frankly, because it just doesn’t look fun enough that people will pony up upwards of $1,000 to play it for its own sake. Informal polls, unscientific as they are, seem to bear this out.
(As for power and respect, well. I’m old enough to remember the momentary schoolyard respect associated with earning a rare Pokemon in the original GameBoy game, but it’s not a kind of respect that can be bought and sold.)
By blurring the line between “player” and “worker”, the game has effectively built a Ponzi scheme with built-in deniability. Sure, some users will be net gainers and other users will be net losers, but who am I to say the net losers aren’t in it for the joy of the game? The same could be said about online poker or sports betting, to be sure, but we would rightfully recoil if those were positioned as a way to lift people out of poverty.
6. Why it’s too early to get excited about Web3 – Tim O’Reilly
The term Web 3.0 was used in 2006 by Tim Berners-Lee, the creator of the World Wide Web, as a look forward to the next stage of the web beyond Web 2.0. He thought that the “Semantic Web” was going to be central to that evolution. It didn’t turn out that way. Now people make the case that the next generation of the web will be based on crypto.
“Web3” as we think of it today was introduced in 2014 by Gavin Wood, one of the cocreators of Ethereum. Wood’s compact definition of Web3, as he put it in a recent Wired interview, is simple: “Less trust, more truth.”
In making this assertion, Wood was contrasting Web3 with the original internet protocol, whose ethos was perhaps best summed up by Jon Postel’s “robustness principle”: “TCP implementations should follow a general principle of robustness: be conservative in what you do, be liberal in what you accept from others.” This ethos became the foundation of a global decentralized computer network in which no one need be in charge as long as everyone did their best to follow the same protocols and was tolerant of deviations. This system rapidly outcompeted all proprietary networks and changed the world. Unfortunately, time proved that the creators of this system were too idealistic, failing to take into account bad actors and, perhaps more importantly, failing to anticipate the enormous centralization of power that would be made possible by big data, even on top of a decentralized network…
…If Web3 is to become a general purpose financial system, or a general system for decentralized trust, it needs to develop robust interfaces with the real world, its legal systems, and the operating economy. The story of ConstitutionDAO illustrates how difficult it is to build bridges between the self-referential world of crypto assets being bought with cryptocurrencies and a working economic system where the Web3 economy is linked to actual ownership or the utility of non-Web 3 assets. If the DAO (decentralized autonomous organization) had succeeded in buying a rare copy of the US constitution at auction, its members wouldn’t have had a legal ownership stake in the actual object or even clear governance rights as to what might happen with it. It would have been owned by an LLC set up by the people who started the project. And when the DAO failed to win the bid, the LLC has had trouble even refunding the money to its backers.
The failure to think through and build interfaces to existing legal and commercial mechanisms is in stark contrast to previous generations of the web, which quickly became a digital shadow of everything in the physical world—people, objects, locations, businesses—with interconnections that made it easy to create economically valuable new services in the existing economy. The easy money to be made speculating on crypto assets seems to have distracted developers and investors from the hard work of building useful real-world services…
…There is another kind of bubble, though, identified by economist Carlota Perez in her book Technological Revolutions and Financial Capital. She notes that virtually every past major industrial transformation—the first Industrial Revolution; the age of steam power; the age of steel, electricity, and heavy machinery; the age of automobiles, oil, and mass production; and the internet—was accompanied by a financial bubble.
Perez identifies four stages in each of these 50–60-year innovation cycles. In the first stage, there’s foundational investment in new technology. This gives way to speculative frenzy in which financial capital seeks continued outsized returns in a rapidly evolving market that is beginning to consolidate. After the speculative bubble pops, there’s a period of more-sustained consolidation and market correction (including regulation of excess market power), followed by a mature “golden age” of integration of the new technology into society. Eventually, the technology is sufficiently mature that capital moves elsewhere, funding the next nascent technology revolution, and the cycle repeats.
An important conclusion of Perez’s analysis is that a true technology revolution must be accompanied by the development of substantial new infrastructure. For the first Industrial Revolution, this included canal and road networks; for the second, railways, ports, and postal services; for the third, electrical, water, and distribution networks; for the oil age, interstate highways, airports, refining and distribution capacity, and hotels and motels; for the information age, chip fabs, ubiquitous telecommunications, and data centers.
Much of this infrastructure build-out is funded during the bubble phase. As Perez puts it:
What is perhaps the crucial role of the financial bubble is to facilitate the unavoidable over-investment in the new infrastructures. The nature of these networks is such that they cannot provide enough service to be profitable unless they reach enough coverage for widespread usage. The bubble provides the necessary asset inflation for investors to expect capital gains, even if there are no profits or dividends yet…
…So is what we’re calling Web3 the foundational investment period of a new subcycle, or the bubble period of the preceding one? It seems to me that one way to tell is the nature of the investment. Is abundant financial capital building out useful infrastructure in the way that we saw for the previous cycles?
It’s not clear to me that NFTs fit the bill. There’s no question, though, that the disruption of finance—in the same way that the internet has already disrupted media and commerce—would represent an essential next stage in the current cycle of technological revolution. In particular, if it were possible for capital to be allocated effectively without the trust and authority of large centralized capital providers (“Wall Street” so to speak), that would be a foundational advance. In that regard, what I’d be looking for is evidence of capital allocation via cryptocurrencies toward productive investment in the operating economy rather than capital allocation toward imaginary assets. Let me know of any good instances that you hear about.
To make clearer what I’m talking about, let me take an aside from crypto and Web3 to look at another technology revolution: the green energy revolution. There, it is completely obvious that bubble valuations are already financing the development of lasting infrastructure. Elon Musk has been a master at taking the outsized speculative price of Tesla stock (which at one point a year or two ago was valued at 1,500 years of the company’s profits!) and turning it into a nationwide electric vehicle charging grid, battery gigafactories, and autonomous vehicle capabilities, all the while catalyzing entire industries to chase him into the future. So too has Jeff Bezos used Amazon’s outsized valuation to build a new infrastructure of just-in-time commerce. And both of them are investing in the infrastructure of the commercial space industry.
In assessing the progress toward Web3 as advertised, I’d also compare the adoption of cryptocurrency for other functions of financial systems—purchasing, remittances, and so on—not only with traditional banking networks but also with other emerging technologies. For example, are Ripple and Stellar more successful platforms for cross-border remittances than bank transfers, credit cards, or PayPal, in the same way that Google Maps was better than Rand McNally or first-generation GPS pioneers like Garmin? There’s some evidence that crypto is becoming a meaningful player in this market, though regulatory hurdles are slowing adoption. Never mind remittances, though—what about payments more generally? How does growth compare with that of a non-crypto payment startup like Melio, which is focused on building against small business use cases? Given the interest in crypto from companies like Square (now Block) and Stripe, they are well positioned to tell us of progress for crypto relative to more traditional payment mechanisms.
7. Explaining Our Miraculous Flourishing – Marian L. Tupy
There is no God in Jonah Goldberg’s new book, Suicide of the West: How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics is Destroying American Democracy. But the book nonetheless revolves around a miracle. “The Miracle” is the shorthand Goldberg, a bestselling author, syndicated columnist, senior editor at National Review and a fellow at the American Enterprise Institute, uses to describe the escape of our species from the depths of ignorance, poverty and every-day conflict to the heights of scientific achievement, material abundance and relative peace.
To appreciate Goldberg’s Miracle, consider the following. Homo sapiens are between 200,000 and 300,000 years old. Yet the modern world, with all the conveniences that we take for granted (I wrote this article sitting on a plane 8 kilometers above ground, using an internet connection provided by a satellite orbiting 37,000 kilometers above the surface of the Earth), is merely 250 years old. Put differently, for the first 99.9 percent of our time on earth, progress was painfully slow. Then everything suddenly changed. Why? That’s the question that Goldberg strives to answer…
…The Miracle happened not because of, but in spite of, hundreds of thousands of years of evolution. Our rule-based society, where equality before the law takes precedence over the social and economic status of the individual, a staggeringly complex global economy that turns strangers from different continents into instant business partners, and a meritocratic system of social and economic advancement that ignores people’s innate features, such as race and gender, is both very new and extremely fragile…
…In a refreshingly non-relativistic manner, which is one of Goldberg’s trademarks, he writes, “I believe that, conceptually, we have reached the end of history. We are at the summit, and at this altitude [political] left and right lose most of their meaning. Because when you are at the top of the mountain, any direction you turn – be it left toward socialism or right toward nationalism … the result is the same: You must go down, back whence you came.”
And that descent (decline, if you will) is the key threat that we all ought to keep in mind. The forces of tribalism always linger just below the surface and are never permanently subdued. From Russia and China to Turkey and, to some extent, the United States, the all-mighty chieftain is back in charge. From the darkest corners of the web, where nationalists and anti-Semites thrive, to the university campuses, where identity politics flourish, group loyalty takes precedence over the individual. These dangerous sentiments originate, it is true, in human nature. But their renewed lease on life springs, as Goldberg reminds us, from something much more banal – ingratitude defined as “forgetfulness of, or poor return for, kindness received.”
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Alphabet (parent of Google Maps), Amazon, PayPal, and Tesla. Holdings are subject to change at any time.
