Original author: Packy McCormick

Original translation: Luffy, Foresight News

Any technology that has enough value in an ideal state will eventually reach that state.

The ideal state referred to here is the ultimate goal or highest potential that technology can achieve, assuming all problems are solved and the technology is widely adopted.  

Understanding the ideal state may be the most important thing for technology to do in its early life, because if the ideal state represents enough value to enough people, then the problems will be solved and the technology will become popular.  

The boom and bust cycles of these technologies are useful noise. The boom can attract resources, and the bust is useful for reorganization, problem-solving, and drawing the roadmap for the next phase.   

In any market cycle, the expectation for the ideal state is like a magnet, attracting new researchers, entrepreneurs, and investors to improve the work of those who have not achieved this goal. If you believe that the ideal state is achievable, then you will attribute previous failures to timing or inappropriate approaches and continue to try new methods.  

Artificial intelligence, autonomous driving, and augmented reality/virtual reality have been stagnant for decades, consuming billions of dollars in funding, and now they seem to be exploding. This is capitalism: if the opportunity is big enough and feasible, ambitious people will continue to try to find ways to make it work. Even if thousands of dreamers die along the way, those dreams will not disappear.

Recently, there have been voices claiming that cryptocurrency is dead. Prices are falling, activity is decreasing, and people are leaving the industry. I know, it's harsh and boring. But I am convinced that cryptocurrency is one of those dreams that will never die.  

A half month ago, I wrote an article "I, Exponential", which is a tribute to capitalism. The ideal state of cryptocurrency is to make capitalism more efficient.

This is a grand claim, but it may also be too grand. Cryptocurrency is not lacking in grand claims, and I will describe my thoughts as specifically as possible in two parts:

• Capitalism is good and it evolves continuously.

• Cryptocurrency makes capitalism more efficient.  

Capitalism is good and it evolves continuously

The way capitalism works is to incentivize people to act in their own interests and make it as easy as possible for them to do so. The way capitalism works is to let anyone offer the best solutions for any problems they see in the market. Many will fail, but some will succeed.

This is the core principle of capitalism: incentivizing entrepreneurship and increasing the variance of inputs leads to better outcomes.  

If you want to believe in my argument, that is, allowing capitalism to be more efficient will make cryptocurrency valuable enough, we need to agree on two premises: capitalism is good and capitalism is constantly evolving.  

Capitalism is good.  

The invisible hand creates modern miracles through the invisible coordination of billions of "selfish" people. The improvement in the world's GDP (per capita gross domestic product) over the past two centuries shows that the living standards and quality of life of billions of people around the world have been improved (capitalism truly began in the 18th century).  

As Robert Zubrin pointed out, not only has per capita GDP improved, but it also "grows in proportion to the cube of the population." Malthus' mistake was that under capitalism, more people are not consumers of resources. More people, who can contribute their best efforts or ideas, are the resources.   

Capitalism is good, but it is not perfect. Fortunately, capitalism is evolving.  

Capitalism is constantly evolving.  

People often see capitalism as a static system, which not only allows for the continuous development of goods and services enjoyed by mankind, but it is also constantly evolving itself.  

Think about the Industrial Revolution, the increase in productivity brought wonderful results, just look at the GDP chart! But there is also a cruel side, with children as young as five or six years old working twelve to sixteen hours a day, usually seven days a week, in very unsafe working environments.

Child labor during the Industrial Revolution

Today, owning the means of production is still better than working for the means of production, but thanks to the joint efforts of unions, journalists, regulatory agencies, and even progressive businesses, working conditions have been greatly improved. For example, Henry Ford implemented a five-day, 40-hour work week in 1926, not out of kindness, but to test his theory that reducing working hours can improve worker morale and productivity.  

Let's consider the financing methods for ambitious technology companies. Prior to the 1950s, to develop and expand a new technology, you either needed to be wealthy enough to provide the funds yourself, convince a bank to provide a loan, or build within an existing company. Technology entrepreneurship was a daunting task for ordinary individuals. When Sherman Fairchild wrote a $1.4 million check to form Fairchild Semiconductor with the "Traitorous Eight," a new funding model emerged.

Venture capital, also known as risk capital, ignited the tech industry as we know it today. As Sebastian Mallaby writes in his book "The Power Law," "This unique financial form fostered a entrepreneurial culture in which talent could transform ideas into products, combine unconventional experiments with commercial goals, and make Silicon Valley so prosperous."

I don't believe we have reached the end of history or the end of capitalism. I believe cryptocurrency can make capitalism more efficient.

How cryptocurrencies make capitalism more efficient

What makes capitalism more efficient?

As shown in the two examples above, capitalism does not progress along a single trajectory. Improving working conditions and new financing models both make capitalism more efficient.

Cryptocurrencies may improve capitalism in many different ways. When I asked Claude, an artificial intelligence at Anthropic, what ideal capitalism would look like, it told me that while economists do not agree on the answer, there are some basic principles:

• Strong property rights and contract enforcement.

• Free markets where prices are determined by supply and demand.

• Low barriers to entry for entrepreneurship.

• Healthy competition among companies with low concentration of power.

• Trade and capital flow between open nations.

• Democratic processes that reflect public opinion and interests.

• Equal opportunities regardless of identity or background.

• Business interests aligned with long-term social welfare.

• Limited regulation focused on correcting market failures and protecting rights.

• Government providing sufficient funding for public goods such as infrastructure, education, basic research, and social safety nets, to address the structural challenges of capitalism.

We can express objections to specific details, but the result is already close enough to the ideal state. What surprises me is that the first seven read like a list of characteristics of the ideal world of cryptocurrencies.

• Cryptocurrencies enhance digital ownership and have self-executing smart contracts.

• Now I can directly get the current price of HarryPotterObamaSonic 10 Inu or monkey jpeg purely based on supply and demand. 

• Composability, open-source code, and shared infrastructure make it relatively easy to launch new applications. 

• Competition forces protocols to have the lowest degree of value extraction. 

• Cryptocurrencies are a 24/7 global market, with users and developers all around the world. 

• Decentralized protocols rely on the governance of their holders. 

• The most popular new applications in the crypto space are built by anonymous developers. 

If you read carefully, you will find that not all of these have reached the ideal state. 

HarryPotterObamaSonic 10 Inu is a trash coin; who cares if you can find its price and trade immediately? 

Governance also has issues: low voter turnout and votes easily manipulated by whales. 

We can argue whether friend.tech is good or bad, but it is the most popular new application demonstrated by all the funds and efforts invested in the field so far, and that's not worth celebrating. 

Amidst all the chaos, there are signs that we are moving towards the ideal state. I found some particularly notable approaches.

Firstly, if you value the internet, giving digital assets physical properties (such as ownership) is a big deal. 

For example, I wrote about the necessity of cryptocurrencies that allow people to control their personal AI models, an idea that may seem strange now but won't be for long. Taking away your @x handle is one thing, taking away your girlfriend is another. 

If you're starting a company, having a computer that can make commitments becomes even more important. Just as entrepreneurial activity in society is determined by property structures, digital entrepreneurs need commitments that can't be revoked or restricted in their access.

Companies built on the blockchain (based on L1s like Ethereum and Solana, L2s like Base, Optimism, and zkSync Era, and protocols like Farcaster) need to improve performance in several aspects (cost, speed, security, UX). In fact, protocols can incentivize developers to build upon them and adjust incentives in the long term through protocol token ownership. This is an idea I wrote about in "Small Apps, Growing Protocols," and this transition should accelerate when performance trade-offs disappear.  

Digitized assets guaranteed by the blockchain have the potential to increase online entrepreneurship activities like offline physical property rights. Incentivizing entrepreneurship and increasing input variance lead to better outcomes. Or as Chamath Palihapitiya said, "some will work, some won't, but always learn." 

Furthermore, cryptocurrencies make it easier to create global free markets based on supply and demand compared to any other technology or platform to date, even for nonexistent things.

Cryptocurrencies offer the opportunity to apply free markets to almost everything. Decentralized exchanges like Uniswap were the first products that allow anyone to list any digital asset, provide initial liquidity, and create intermediary-free markets. 

It is certain that most things traded in today's cryptocurrency market are garbage—99% of all tokens and NFTs ever created are practically worthless—but noise is a feature, not a bug. 99% of websites on the internet are garbage. 99% of people's ideas about building companies, explaining natural phenomena, or designing the next big technology are garbage. Capitalism works because it allows less than 1% of truly great people to emerge. 

Molecule is one of my favorite examples of a new decentralized marketplace. It utilizes so-called IP-NFTs to fund scientific research by bringing "the rights to intellectual property and research data onto the blockchain, unifying the rights of research projects, access to data, and economics within cryptocurrency on Ethereum." It funds research on longevity, hair regeneration, autophagy, and Alzheimer's disease.  

Projects funded by Molecule

Importantly, Molecule's potential is to bring the influence of free markets down to the level of research so that scientists can study what the market deems important. 

On-chain, even less obvious assets like creativity can create free markets. I like Jacob Horne's concept of prediction markets, and I tried my own entrepreneurial prediction ideas. You can imagine people staking their ETH on the outcomes they want to see, providing price signals before entrepreneurs take action. John Palmer of PartyDAO is building this toy model together with Idea Guy Summer: buy NFT to join the DAO, propose ideas, holders vote on them, execute with enough votes, and all ETH must be spent before the end of summer (September 23rd). Currently, people are proposing to buy NFTs and convert ETH to USDC, but as more economic activity moves on-chain, these ideas may become more substantial. 

Allowing any digital asset to find supply-demand-based free markets could potentially have unpredictable effects, but what is foreseeable is that existing assets are being put on-chain and it has already begun. 

Thirdly, real-world assets are going on-chain, which can lower the capital costs for businesses and projects, increase liquidity by entering a 24/7 global market, and reduce the barriers to entry for entrepreneurship. 

The potential is enormous, and I think this is the most apparent way in which cryptocurrencies make capitalism more efficient. When capital can easily find suitable opportunities, frictionlessly and with low transaction costs, capitalism becomes more effective. When funds freely flow to the most promising businesses, products, or ideas, productivity and progress are maximized. The frictionless flow of capital allows for quick redeployment when new opportunities arise, meaning less pointless loss when capital is weak. Lower transaction costs mean more capital available for value-creating activities rather than being extracted by intermediaries. 

In the "Not Boring" guest article "Everything is Broken," Kevin Miao from Blocktower explains his expectations for the securitization transition to the blockchain. The Centrifuge DeFi protocol for real-world assets ("RWA") streamlines the traditional fund transfer into a four-step process, as opposed to the original nine steps involved. This process involves 14 participants...

Participants in securitization transactions, source: PwC

Source: Kevin Miao, Everything is Broken

Kevin Miao points out that simplifying the process not only reduces the basis points of capital costs - "given the $14 trillion size of our securitization market, even a 25 basis point improvement in efficiency would save borrowers $35 billion annually" - but also means that developers can provide value-added services on top of Centrifuge, which is trustworthy, neutral, public, and open.

Despite being in a bear market, Centrifuge's total funding more than doubled in 2023, reaching $436 million. Although this figure is insignificant compared to the total securitization market, the growth rate is promising.

RWA DeFi could have a greater impact on markets that traditionally lack liquidity and accessibility.

Goldfinch and Jia provide loans to small businesses around the world. My sister works in microfinance in Africa, so I've heard terrifying stories of the high interest rates these enterprises have to pay for capital – sometimes as much as 12% per month. Both Goldfinch and Jia allow these small businesses to access global liquidity and cheaper capital on-chain, using off-chain assets and revenues as collateral. As they repay on time, the small businesses build up on-chain credit scores and gain access to lower interest rates.

Jia just launched their first lending pool in Kenya and the Philippines this summer and has already seen strong early results. Goldfinch began lending in December 2020 and currently has $100 million in outstanding loans, with a default rate of 1.66% after experiencing their first loss this summer. They have recovered $27.6 million in loans so far.

Another project that caught my attention is Plural Energy, which allows people to invest in solar farms, wind farms, and battery storage projects for as low as $10, compared to the usual minimum investment of $50,000. Plural focuses on smaller projects that lack liquidity (too small for traditional infrastructure investors) and have lengthy and complex underwriting processes.

By filing with the SEC (under Reg A+), Plural can tokenize equity in their projects and use that equity as collateral for DeFi. Over time, developers will be able to borrow on-chain at lower funding costs compared to off-chain, as they hold their project's equity in token form on-chain.

These are just a few examples of RWA DeFi projects that are being built on-chain to eliminate frictions, increase liquidity, and reduce funding costs. They are early signs of helping global capital find suitable opportunities and drive capitalist development.

Over time, we will see more types of projects and assets being put on-chain. Ideally, capital can flow at internet speeds, making capitalism more efficient.

However, regulations remain a major bottleneck. Bringing assets like company stocks onto the chain is complex, especially in the United States. Ultimately, market opportunities will push regulatory bodies to establish sensible regulations. Large corporations like Visa and JPMorgan have announced on-chain settlement products in the past week, and companies like BlackRock have applied for Bitcoin and Ethereum ETFs. As large institutions continue to see opportunities to lower costs and increase liquidity, I expect them to lobby governments.

The early signs of the ideal state of cryptocurrency - making capitalism more efficient - already exist. Cryptocurrencies can provide developers with property rights, encourage more entrepreneurship, and increase the variance of input as the lifeblood of capitalism. It can create a free market for anything. It is beginning to bring real-world assets onto the chain, allowing capital to flow more freely to the right places and reducing the barriers to entrepreneurship.

Even though these signs are overshadowed by the bear market, they are real and tangible.

We are still in the early stages

To be honest, cryptocurrencies in reality have not yet lived up to their promises on paper. There are highlights, but they are often overshadowed by bad actors, scams, and volatile price swings.

I have spent a lot of time trying to explain what cryptocurrencies have built so far, but the more I think about it, the less I understand it. As it stands now, that's important.

In the realm of gaming, it's foreseeable that cryptocurrencies lack widespread practicality. "We arrived too early!" That statement is often quoted, but I believe it to be true.

Ethereum, launched less than a decade ago, is the newest major technological platform we have. Artificial intelligence has been in development for almost 70 years, and the origins of virtual reality can be traced back to the Headsight and Sensorama of the 1960s. Something like Bitcoin, appearing for the first time as digital cash, was in Bruce Sterling's 1994 novel, "Heavy Weather." Smart contracts didn't truly surface until Charles Stross' "Accelerando" in 2005 and Daniel Suarez's "Daemon" in 2006.

Cryptocurrencies haven't had much time to prove themselves, and the time they have had has been spent in the whirlwind of the internet, which is both a very good and a very bad thing with money pouring in.

Little science fiction mentions cryptocurrencies, which may mean:

For science fiction writers, the value of this technology isn't enough to warrant their imagination.

It's a genuinely rare new idea.

I believe it's the latter. If that's the case, then we are still in the science fiction conceptualization stage of cryptocurrencies. In this stage, people dream about the potential use cases and ideal state that technology could achieve, and they just happen to be building it through it.

HG Wells envisioned the "networked world" in 1899, a very early idea of the internet. We spent a century pondering the impact of the internet before it thrived, and in the end, we came to this conclusion:

Awful websites from the 1990s like Amazon, Apple, Disney, Coca-Cola, and Webvan

Although the internet had a awkward start, and any company with a ".com" name made billions of dollars, the ideal state of the internet—connecting everyone in the world for communication and transactions—is clearly valuable enough that researchers, entrepreneurs, and investors stuck with it and built the internet we know and love today.  

At this stage, what is most important is grasping the ideal state. With a valuable enough ideal state, everything else is implementation.  

The ideal state of cryptocurrency is that it makes capitalism more efficient and accelerates progress in all industries. This has enough value in civilization that people will pursue it in both prosperity and depression.  

This is indeed happening. It is cliché by this stage of the cycle to talk about infrastructure investments, but Layer 2 infrastructure has made enormous progress in the past year.  

Optimism, Base, Arbitrum, zkSync, and Starknet, among others, are making block space cheaper. Innovations like account abstraction, supersends, embedded wallets, and multiparty computation give developers the tools to create smoother user experiences while preserving the advantages of cryptocurrency. As Visa highlighted when it announced using USDC on Solana to accelerate merchant settlements, stablecoins are becoming the infrastructure. Stanford researchers even propose the ERC-xR standard, which would make certain transactions reversible. I have spoken with many teams that are dedicated to fixing cryptocurrency flaws.  

Despite price drops and lack of activity, the progress in infrastructure suggests that smart people still have confidence in the ideal state of cryptocurrency and are dedicating their careers to it. This also acknowledges that regular users will not want to make trade-offs: they will want the benefits of Web3 and the convenience of Web2. While I don't think mass adoption matters yet, it will be critical at some point if cryptocurrency is to reach its ideal state. Entrepreneurs need to derive unique value from building on-chain. Businesses will need to turn to cryptocurrency for their project financing, and lenders will need to seek funding opportunities there.  

I believe the next decade will see faster progress and more economic opportunities than any previous decade. The wheels are turning, and this will happen with or without cryptocurrency. However, my hope is that we will speed up the process and allow crazier ideas to flourish by bringing more capitalist engines onto the chain.  

With everything becoming decentralized, cryptocurrency can push capitalism further to the edge, reducing the costs of market transactions and benefiting individuals and entrepreneurs.

Capitalism is good, capitalism evolves. I believe cryptocurrency can play a role in this evolution. With a valuable enough ideal state, it is inevitable.