#1: The politization of Blockchain

When #Bitcoin first gained global attention, everything blockchain related was viewed with a hint of politics, regardless of the underlying value, use case or business models the technology provided. To be fair, at that time, people were often busier finding a problem that fits the solutions blockchain (back then with poor smart contract functionality, if any) was providing. The value in Bitcoin, the most popular blockchain, is also not easy to explain, and highly controversial due to its stance on the macroeconomic status quo and the role of central bank hegemonies.

Today, the technology is starting to provide solutions to many problems in the private and public sector. To an extent, however, the political coloring is still there, even though not attributable to one particular side of the political spectrum.

I believe that this political coloring, the hype around get-rich-quick-speculations, mixed with a pinch of fraudulent activity fueled in popularity by cases like the #squidgame token and horrible architectural mistakes as in the Terra-Luna case have overshadowed the true value, blockchain technology can provide as we transform from an internet of information to an internet of value — in business and society.

This series shall demystify some of the misunderstandings around #Web3 and blockchain technology that I think are still holding back the technology to reach mass adoption and unfold its full potential. I do believe though that it is just a matter of time until we cross that bridge. And today, many of have been at the forefront of condemnation, have pivoted in an astonishing way. The most popular example certainly is BlackRock CEO Larry Fink , who stated, live and on national television the value he sees in bot only blockchain technology, but perhaps what is the most political of them all, #Bitcoin.

Let’s be clear: Bitcoin is an international asset. It’s not based on any one currency, and so it can represent an asset that people can play as an alternative.

Those who know me and have read some of my work in the past, which mainly revolved around balance of power theories and the tectonic shift in the geopolitical landscape before dedicating my career to #Web3, will probably not be surprised that the first paper of this series focusses on monetary policy and tries to decouple the technology from the currency-use-cases. I thought about how to start this series and I am fully aware of the fact that there are probably millions of topics I could have picked that are “sexier” than this “Fiscal” angle, but I decided to pick a rather sober, but in my opinion fundamentally relevant topic to kick this series off. The monetary policy angle to blockchain is in many ways responsible for the political coloring the technology has to date. And the reason of course lies in the history of Bitcoin.

The end of fixed exchange rates

On August 15, 1971, former US President Nixon interrupted one of the most popular TV shows in the United States at that time — “Bonanza” — to make an announcement that had tremendous global impact. He announced that he was ending the convertibility of the USD into gold, ending what was known as the Bretton Woods Monetary System, which had prevailed since the end of the Second World War. The Gold-Exchange-Standard of the Bretton Woods System was one of the backbones of US American Foreign Policy Power, fixing the US Dollar to gold at the existing parity of 35 USD per ounce. All other countries had fixed (but slightly adjustable) exchange rates to the USD, and were able to redeem their USD reserves (via their domestic central banks) into gold with the US Central Bank at any time. Humanity lived in an era of fixed exchange rates, money was a relatively scarce resource.

Such a system however required that every country — particularly the major reserve currency provider — applies appropriate policies to ensure the maintenance of that fix. Once an economic disequilibrium arises in the global economy (i.e., as the result of monetary overprinting, the rise of a new economic superpower or a new, competing currency), the system becomes vulnerable. Economic policies are consequently required to preserve the fixed exchange rate system when such a disequilibrium occurs, leading to massive FX speculation against a currency.

One key factor leading up to the events in 1971 was the heavy overspending in the Vietnam war that lead to the printing of massive, new monetary supply. The gap between the value of gold stored in the FED and the total circulating USD supply did not match the 35USD per ounce peg anymore. Either a devaluation of the USD to gold by the American administration, or a raise of foreign currencies’ value against the USD were necessary to maintain the peg. But neither were some of the US’ key partners willing to raise their respective currencies’ values against the USD, nor were the US willing to devalue their currency against gold. As a result, the US refused to exchange any more dollars for gold. Since then, currencies have been floating against the dollar. Fixed exchange rates were history. Humanity since lives in an era of flexible exchange rates.

In particular after the expensive war in Vietnam, mixed with a period of economic challenges, the US was struggling to make sure that the USD as a world reserve currency represents in fact the most important currency in terms of value and circulating transactional-volume. Hence why former state secretary Henry Kissinger established relations that set forth to shape not only the future of the Middle East, but also the architecture of the global balance of power. The US government made a deal with all oil exporting countries in the Middle East. The deal was built on the basis of one main cornerstone. All oil and gas exports by the major, oil exporting states, are only sold in USD - and these countries reinvest their returns in US American bonds. In return, the US provides security guarantees to these countries. This not only explains why almost all oil and gas trades are denominated in USD globally, but also the sometimes intransparent alliances in the Arab World, which have grown historically, based on this incident.

After the gold-standard, the USD had a new peg, and the #petrodollar system was born, in fact not only saving saving the USD’s reserve currency status, but beyond that, manifesting it for decades ahead. That did not help to combat inflation in the long-term, of course, and only is a solution if these countries do not decide to switch to selling their ressource in EUR or RMB, which is exactly what we are seeing today.

These alliances, and the cost benefit ration to maintain them is changing; And the pendulum of power is swinging, not towards the US though. Increasingly, oil exporting countries are opting out, at least in part, of USD denominated trades. De-dollarization is not only a concept, it is increasingly becoming a reality, outside of theoretical and announced approaches by Libyan and Iraqi leadership in the early 2000s.

“What does all that have to do with Bitcoin?”

“What does all that have to do with Bitcoin?”, you may rightfully ask. Fixed exchange rates can be a powerful tool for monetary stability. Bitcoin in many ways is far superior to gold as a commodity for a peg, and in a Bitcoin-based financial system, some of the mentioned mechanics that led to the end of the Bretton-Woods System could have theoretically been avoided.

Bitcoin and gold are both volatile short term investments, but given their stock to flow ratio, their scarcity and them being finite commodities, they may provide a hedge against unlimited money printing in a flexible-exchange rate monetary system. In short, the difference between the two is that Bitcoin has a much higher (and increasing) stock to flow ratio compared to gold, meaning that the total current supply of Bitcoin is much higher than how much new supply can be mined each year. Last year, the 19.000.000th Bitcoin was minded, so after 13 years, 90% of all Bitcoins have been mined. Estimates suggest that the last Bitcoin will likely be mined in 2140. In addition, Bitcoin has a huge advantage over gold in transactions. Clearance does not require any specific custodian, no central bank can control monetary decisions, decisions must be made in consensus within the ecosystem, etc. To quote Saifedean Ammous:

“Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. In other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest.”

That is why Bitcoin maximalists consider their preferred “currency” to be sound money, even though they disregard the volatility and many other aspects, the asset is still lacking to fulfill all requirements to be a currency.

If you read Ammous’ “The Bitcoin Standard” carefully, you will understand the deeply political nature Bitcoin in particular has. And considering that Bitcoin to date still makes for almost 50% of the entire crypto market cap, it is understandable that people connect Bitcoin to Crypto, and hence, Crypto to Blockchain.

In a way, Bitcoin is a natural enemy to the legacy financial system. It is celebrated across the spectrum, from socialists (which is odd considering their stance on centralization) to libertarians. Without a doubt, these debates shaped the anarchic image, the majority of the wider ecosystem, even the technology itself, has. And that is making mainstream adoption more difficult.

Nonetheless, that perception I believe, is a blatant mistake. And thankfully, it is changing.

Altcoins are investments in incubators, the currency part is just one of many utilities

For the above mentioned reasons, I find the terminology “cryptocurrencies” extremely problematic. If at all, this word describes somewhat the functionality of Bitcoin. All other ecosystems / Tokens (and even the Bitcoin ecosystem itself to an extent) represent shares. If you own ETH, ADA, SOL or whatever type Token, you own a share in a huge and growing infrastructure and incubator. These incubators are innovation networks, on the basis of which the way of doing business is redefined (some more, some less), and billions of revenue is generated.

The entire blockchain / Web3 universe is not an industry, or a vertical, much more, it is an infrastructure layer that in some shape or form will affect almost every industry we can think of, just like the internet. For almost every traditional business model, there is a blockchain-based peer, or even an alternative, in which cryptography plays an essential role. Not all of these peers make sense, of course. But many of them do. If we consider the gigantic metaverse potential, blockchain technology helps unlocking, the case becomes much more obvious from a TAM perspective. Blockchain solves the double-spend problem in the digital world, and it does that without needing to apply an intermediary. Hence, it will be essential in every digital transaction that requires any kind of scarcity / uniqueness. Not to say the impact that comes on the content industry, which now can leverage new, more individual, more direct monetization solutions, bringing the creator and the consumer closer to each other than previously possible and allowing entirely new monetitation plays for communities. And what about the remittance market, notaries, healthcare industry, supply chain, and so on.

Purchasing a crypto asset is like purchasing the engine of a new internet of value. Nobody knows what the endgame will be for the space, but it is unfolding. The fact that within the ecosystems, you can or have to use the native token as a currency does not change the point. In fact, it undermines it, because it suggests that every transaction should be worth the cost, and helps the ecosystem scale. Every ecosystem is built for different applications, with different emphases. There is not only one blockchain that will take the market on its own. Claiming that is like claiming that everybody who rides a car rides a Toyota. There will be many chains, for different use cases. Yes, but there are so many problems the blockchain does not solve. And that is true. But what is also true is that some of the brightest minds see a future in the tehcnology, leaving their jobs to work in this field. What is problems for many, for them is an poortunity, because they know if they solve the problem, they will unlock huge enterpreneurial potential.

It is not the speculation. It is not the decentralization alone, we had that in Web1 already. It is the convergence of creator, story, community, the opportunity to have digital scarcity, the trustless and immutable nature to transactions, and many other technological aspects, that underline the technology’s relevance. And the cherry on the cake is that the technology has facilitated the democratization of investments into an asset-class, that pre-blockchain, was only accessible to a very exclusive group of wealthy people: Venture Capital. The technology opens up a wedge into the world of VC to retail investors. If you consider that a political coloring, I will happily live with it.

Revised version of an article published in June 2022