Hackery Hacker Hacks; Economic Rent-seeking is Universal; Digitization of All Asset Classes (via Autonomous ?NEXT)

Hi fellow futurists -- here are our top 3 favorite thoughts. I've been on leave the last week, so these got a bit ... philosophical. Would love to hear your feedback as we work through these issues.

Hackery Hacker Hacks

So how likely are you to get hacked and lose all your magic crypto beans? If we believe this list, over 20 exchanges have gotten hacked. In total, there are probably 125-250 exchanges (data point 1, 2). So that would suggest that over a 4 year period, 5-10% of all exchanges have been compromised in some way. We also looked at Bitcoin and Ethereum hacks that are in the public domain and added up the USD impact as of the time of the hack. We then also took that USD value as a percentage of the outstanding Bitcoin and Ethereum market capitalizations at the time to arrive at percentage of funds that were hacked per year.

2014 was Mt Gox and 2016 was the DAO, thus the big outlier numbers in those years. 2017 saw more regular smaller events consistently tied to ICOs. Outside of programming errors, exchange servers hacks, and attacks on wallets, human behavioral hacking increased. Think about ransomware or phishing on social media. If you're interested in more granular data along these lines, see Chainalysis. The good news is that as the overall marketcap grew, these losses became smaller as a percentage of the whole. Going forward, we would expect 50 to 300 bps of the market capitalization of cryptocurrency to be at risk for loss from hacking or other cybersecurity failures. Or alternately, it looks like crypto hacking is a $200 million annual revenue industry.

Can decentralized exchanges built into software, liberated from centralized servers to be their full capitalist selves, solve this problem? See Airswap, 0x. In theory, decentralized exchanges and atomic swaps should be more secure than centralized exchanges, which hold the keys for millions of user accounts on their servers. Decentralized exchanges are also much harder to shut down, as there should be no particular centralized counterparty once a project is off the ground. Think Bittorrent, rather than Napster. Napster was shut down, Bittorrent has spread all over the web and cannot be stamped out. But, decentralized exchanges face the same issue as the DAO. Bugs in the smart contract code itself, rather than in the security infrastructure, could lead to a smart hacker finding a way to trick the contract. Also decentralized exchanges may not be as liquid as centralized ones, something that is still being worked out.

Source: Autonomous NEXT

Economic Rent-seeking is a Human Trait

The post-AI and post-crypto world will reconfigure many of our basic economic assumptions and requires a bit of philosophizing. So forgive our attempt, but we need to talk about economic rent-seeking and wealth creation. The Peter Thiel definition of building a successful company is to discover a piece of information around which a monopoly can be built. Building a monopoly is the primary reason that supports the venture capital industry model of rushing to massive unprofitable scale fist, and then creating moats and extracting value (i.e., economic rents from the monopoly/oligopoly position). See Amazon, which has leveraged not-caring about profitability into an unshakeable bedrock of retail. And once you have rent-seeking monopolies in place, they grow tendrils into media, politics, and customers -- and are very hard to remove. This snowballs and leads to extreme inequality, which is exacerbated by the power laws of software and the attention economy.

In the crypto world, there is a techno-utopia story that posits that a decentralized open technology ecosystem will be the antidote to centralized institutions that are controlled by questionable interests. A key argument by bitcoin maximalists is that central banks print fiat money at will (often at the behest of bailing out Wall Street), which represents debt that erodes regular people's hard-earned savings through inflation. The argument goes that Bitcoin, on the other hand, has a fixed supply of currency and therefore cannot be manipulated to enrich some particular hegemonic party. This view is unsurprisingly contentious and only tells some of the story. We may be upset with instances when governments, which are to some extent accountable to citizens, use sovereign power to lower our purchasing power. But does that mean anyone and everyone else should be able to do the same?

Crypto currency and tokens issued by projects, through ICOs or reverse ICOs or airdrops or forks, are all a version of money printing. Mature capital markets do this all the time, through the issuance of debt and equity that time-shift financial resources to enable productive use. We allow and regulate such activity to encourage economic growth -- but may rightly be concerned that oligopolies have captured the process and are taking economic rents by being closest to the river of money. But does that imply that any individual at any time should be able to issue personal currency in billions of flavors? And that those most enriched by this process are those with the highest control of the attention economy -- i.e., the armies of bots pushing the latest altcoin, the ICOs with the best bounty programs, the biggest celebrities, the largest pump and dump Telegram groups? Disagreeing with central bank policy execution does not imply a right to be a Bernie Madoff.

While the stated motivation for much of the crypto movement has been to solve economic rent seeking by traditional finance and governments, we are now at a place in the industry where crypto is full of rent-seekers. Crypto investors have focused on owning the protocols of the new world. That means owning the highways on which information travels and taking a toll (through capital appreciation) any time someone uses the highway. Is that a productive outcome for global wealth distribution? Look at the blockchain name game and the reverse ICO phenomenon. Telegram is aiming to raise $2 billion for which it will give out no equity, with 52% of the tokens will accrue to the company owned by the founders. Looks like a self-minting of billionaires - a massive economic rent on controlling a popular messaging platform that dilutes the ecosystem. And that's not to mention the self-enrichment from premining in forks like Bitcoin Gold. 

But the traditional system is catching on! See Japan's largest bank, Mitsubishi UFJ Financial Group, which plans to launch its own coin in 2018. If it is okay for tech firms to extract this type of value, then those who are most familiar with the money printing process will do it too. As another data point, Bank of America has more blockchain patents than IBM, trying to create intellectual property control over a resource that is meant to be open source and free. We need only look at the sideways journey of the web -- with the loss of net neutrality and the walled gardens of Facebook and its newsfeed algorithm -- to understand the danger of unabridged rent-seeking behavior on public goods.

So after all that, what is the answer? We don't have many. But we know at least to (1) highlight that rent-seeking is a universal human trait that exists in all types of communities, and (2) avoid cultish beliefs that are allergic to evidence. Penny for your thoughts?

Source: American Institute for Economic Research

Digitization of All Asset Classes 

So here's the good news. While we wait for blockchain to change the infrastructure of financial services, amazing things are constantly happening across the financial front office. The Fintech change is really here and we can see it -- especially if we look past cashflow and to customer experience. Using last decade's innovation of mobile and web, platforms have created access to previously expensive financial products. Digitization has led to the democratization of each and every asset class.

Here are a few data points, more of which you can always find in the body of the full email. First, digital lending -- 2017 saw increasing online lending activity. Even companies like Goldman Sachs are boasting about $2 billions of loans originated and $5 billion of deposits in their Marcus platform. That's Goldman, not Lending Club, but the consumer shouldn't care. The other side of the balance sheet, neobanks, are also maturing and growing their offering.Revolut has added insurance to its product portfolio, as did SoFi and N26 earlier. Monzo is opening up current accounts, while Tandem gets its banking license after buying Harrods. Such European startups have over a millions of eager users, which is why a $45 million check just went into an American neobank called Varo.

In digital wealth, Vanguard peaked over $100 billion in AuM, and the hybrid roboadvisor platforms (those where a human and algorithms are combined) are booming. Venture investors keep pouring money into the combination of traditional and digital -- see for example NextCapital's $30 million round. Access to and manufacturing of alternative investment products is moving along too. Real estate marketplace RoofStock gets a $42 million funding round on $1 billion transactions moving through its platform. And Wealthforge, a private offerings platform announced more than $500 million in investments processed. Insurance is not far behind -- take of example how insurtech Betterview used drones and machine vision to assess damage for claims during hurricane Irma.

So this is Fintech -- multifaceted, difficult, working with industry to impact the most people possible. Access and democratization are its core values, even if it is not decentralized nor truly disruptive. For the Crypto movement to have the most impact, it needs to retain this driving spirit to create services that help all people access better financial services to live better lives.

Source: AdvisorEngine, Betterview, Roofstock

Featured

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