In my first post, I went over the pre-history of the crypto space to argue that we’re all now part of the Cypherpunk movement. This time around, I want to build off those ideas to draw a vision for what the future of this industry may look like.
This article aims to describe the ideal scenario - if you want to read about the nightmare scenario wait until a later post. That will be a fun one. Regardless, the groundwork I lay here will be just as important in understanding the nightmare scenario. I also want to lay the groundwork for more application-focused (and shorter) posts on the possible implementations of some of the concepts I will discuss.
I will try to keep things brief this time, but if you’d like to continue jamming on the concepts I lay out you can reach me on Twitter @Fiat_Bad.
Refresher on Hayek’s Spontaneous Order
The study of Austrian Economics is centered around the concept of Spontaneous Order - borrowed from Adam Smith’s concept of “the invisible hand of the market” in Wealth of Nations - and mixed with the views of Scottish natural law philosophers. The original concept coined by the Scots was used to argue that society developed from a spontaneous order resulting from human action but not human design. Hayek felt that the Scots’ argument was too simplistic to explain how the “invisible hand” worked since it failed to account for the complexities of human nature. At the time, most schools of thought in the social sciences had one of two glaring issues in their model: under-socialization and over-socialization.
Under-socialization is what can be seen in mainstream economics, where the individual actor is expected to be a fully rational being without influence from emotion or social context. In this model, the individual’s only goal is maximizing economic gain.
Over-socialization describes the opposite problem. A good example of this would be in behavioral economics where irrationality is assumed, but social context takes on such a large role that the individual’s decision-making vanishes.
In both categories, the individual is improperly modeled because they become a robot that can be predicted by either the social context or economic reason.
The Austrian Economic tradition tries to solve this dilemma by emphasizing a multidisciplinary approach to economics, in a discipline called Social Economics. From this perspective, Hayek argued that society developed through tradition and reason together. Not just “human action without human design”. Reason alone, he argued, was not limitless so it could not be the explanation for human advancement. This is all to get to the core idea that society at its core is too complex to be created piece by piece in a strictly logical manner- so viewing it as arising from either strictly logical or strictly random processes was the wrong way to approach modeling the economy.
Hayek believed that if you only look at the world as having the two categories of “planned” or “unplanned” consequences - you would not be able to understand his notion of spontaneous order. For example, he would argue that the market economy (probably the most advanced human institution) did not fit into either the “planned” or “unplanned” category so it required a new group.
This third category also included concepts like language or money. No individual coordinated the creation of these things - but regardless they were necessary to advance humanity. At the same time, these things are not the result of “randomness” or chaos. They are the result of spontaneous order.
Hayek’s key insight was that these institutions naturally arose from the behavior within a social network, where self-interested individuals that are not intentionally trying to create order from planning end up creating order from chaos.
I could write for hours about the implications that this simple concept can have on political theory, the economy, and the very role of government. If you want to learn more dig into the articles linked at the bottom of this post, but for now I will try to keep us focused on cryptoeconomic implications.
The High-Tech Hayekians believed that networked computers would usher in a new era for society because of their ability to decentralize commerce and democratize access to knowledge. This would come as a result of behavior from self-interested individuals that would eventually (& unintentionally!) create order from chaos.
This explains how the novel concepts we see popping up in the crypto space (boom of DeFi, NFTs, DAOs, and novel chains) were not explicitly planned by the Cypherpunks/creators of other L1 chains, nor were they the result of pure randomness. They were in one way or another, inevitable.
So that begs the question: given what we know about the chaos in the current state of the crypto industry & society at large, what kind of order could come as a result of us self-interested individuals being, well, self-interested?
A Brave New Economy
Before we can begin to answer that question, it will be important to get a high-level overview of Cryptoeconomics & Mechanism Design.
According to policyreview.info, Cryptoeconomics is defined as an interdisciplinary, emergent and experimental field that draws on ideas and concepts from economics, game theory and related disciplines in the design of peer-to-peer cryptographic systems.
Mechanism Design is the sub-discipline of economics dedicated to studying how to design protocols that incentivize rational actors to behave in socially desirable ways. It is the inverse of game theory - where you start by defining desirable outcomes then work backwards to create a game that incentivizes players towards those outcomes.
At first, these definitions may seem conflicting & unnecessary. The key is that Mechanism Design is its established field of mathematics & economic theory, whereas Cryptoeconomics is an area of applied cryptography that takes economic incentives into account to build something completely novel.
Cryptoeconomics is what makes blockchains different from other technologies- it is not just the application of economic theory to cryptocurrency or token markets. Instead, it is the field that describes how multiple disciplines can be used to build decentralized systems using cryptography & software. It has the most in common with Mechanism Design, but it is also not Mechanism Design. The tools of Mechanism Design are well documented & apply to various fields, whereas Cryptoeconomics only applies to the blockchain industry.
Cryptoeconomic design tends to optimize for lower transaction costs, composability, decentralization, immutability, and the top-down transfer of value.
If we look at Bitcoin as a prime example of Cryptoeconomics at play - we can understand what led Satoshi to build it as he did. He wanted to build a system that could reach consensus about its internal state while being resistant to censorship - and then he set out to design the system that he felt would achieve those properties given that people interacting with it are all self-interested.
Why am I going over this?
I believe that by looking at the concept of Spontaneous Order from a Cryptoeconomic lens, the direction that the industry is trending towards becomes slightly clearer.
Chaos and Order
A very uncontroversial statement is that the crypto industry is a chaotic one - with all sorts of verticals and horizontals. There are Layer 1/Layer 2 blockchain platforms, and then DeFi, NFTs, zero-knowledge solutions, and DAOs built across each one (each with its verticals); with various degrees of similarities and differences. Things are very fragmented, but also in some areas extremely integrated. Generally, though, there is a high degree of disorder and chaos across the industry.
So if we also take into account the fact that individual users, protocols, and different blockchains are all self-interested agents; what order may eventually rise from the chaos?
In my opinion, the trend toward efficient market allocations & the creation of a global economy independent from the nation-state’s fiat system. This is unlocked by the composable nature of crypto applications, where protocol X can use the infrastructure from protocols Y and Z to provide a new form of value to the end user. This is particularly true for DeFi applications, where economic relationships between tokenized assets & cash flows can be layered on top of each other to create new primitives that can then be built on top of again.
For example, Yearn can integrate Compound to provide yields, and then Alchemix can integrate Yearn to create a new primitive: the self-repaying loan. The Yearn, Compound, and Alchemix team never have to meet - and are fully self interested - yet they are able to work together thanks to the cryptographic infrastructure they’re built on.
This same concept will eventually apply across multiple blockchain platforms when solutions like the one from Quant network begin to come online to enable interoperability across the highest level of fragmentation (different layer 1/2 blockchains which each have vastly different tech stacks).
At the same time, we are actively seeing the tokenization of everything. From native digital assets like governance tokens and payment streams to traditionally “physical” things like real estate, court orders, mortgages, gold, silver, and the US dollar.
The tokenization of everything allows anyone, anywhere, to get liquidity from what they own; and also participate in the global economy. Interoperability makes it so that users don’t have to think about what’s under the hood. When grandma presses buttons on her screen - she doesn’t need to know about the layers of wrapped assets or swaps being done behind the screen to let her do whatever it is she’s trying to do.
The limiting factor here is the coordination layer. Fragmented markets & lack of crypto-native coordination tooling make it difficult to unlock the next layer of efficiency. This comes down to the fact that DAOs are still very nascent, without much standard infrastructure allowing for the efficient flow of information on-chain. DAOs also have very little, if any infrastructure, to securely operate beyond a single chain.
If Decentralized Finance is the financial layer - Decentralized Social is the coordination layer. This is more than just DAOs as it expands to the way we plug our existing digital identities & data into the chain. Barring privacy concerns (wait until the nightmare scenario) the growth of Decentralized Social will lead to efficiency in markets that have previously been impossible for humanity.
Mikey Kremer from Messari believes that when Decentralized Social plugs into Decentralized Finance - we will have what is known as “The Hyperstructure”. This is a mechanism for 1:1 deterministic correlation between social coordination and financial assets of literally anything you can possibly imagine. This is basically the holy grail of economics & efficient market allocation.
In the same way, web2 data monopolies provided most economic entities with a superior method of market allocation by giving them targeted ads (to be leveraged by anyone from flower vendors to global corporations), “The Hyperstructure” would allow these same entities to plug into the global economy in an exponentially more efficient manner. More importantly, in a manner that doesn’t rely on the state-operated fiat system. This system would, by its very nature, attract trillions of dollars to crypto in an instant. A truly free market.
Hyperstructure Theory
The Hyperstructure is an idealized future global economic machine built on cryptography. It is essentially the geodesic economic dream outlined by the High-Tech Hayekians, but it doesn’t necessarily align with the full vision of the Cypherpunk movement because of the lack of explicit checks on tyranny and Orwellian control. This is where Hyperstructure Theory comes into play:
Hyperstructure Theory is the notion that in a decentralized economy, protocols designed to run for free and forever, without maintenance, interruption, or intermediaries, are the most important building blocks for creating a true geodesic market. The term Hyperstructure in this context is not referring to the ideal future economic machine (The Hyperstructure), but rather the individual public goods which create a positive-sum ecosystem for any participants in the developing economic machine. The term Hyperstructure here comes from Jacob Horne, founder of Zora.
This is to say that there’s much more to building ecosystems in crypto than simply “not being fiat". If we were to look at this from a cryptoeconomic design perspective, we can analyze a certain set of qualities that these protocols should strive to meet.
According to Jacob Horne, something can be considered a Hyperstructure if it is:
Unstoppable: the protocol cannot be stopped by anyone. It runs for as long as the underlying blockchain exists.
Free: there is a 0% protocol-wide fee and runs exactly at gas cost.
Valuable: accrues value that is accessible and exitable by the owners.
Expansive: there are built-in incentives for participants in the protocol.
Permissionless: universally accessible and censorship-resistant. Builders and users cannot be de-platformed.
Positive sum: it creates a win-win environment for participants to utilize the same infrastrastructure.
Credibly neutral: the protocol is user-agnostic.
But, Fiat_Bad, we are self-interested individuals! Why would anyone build something that brings them no value? What is the incentive to make it work?
Hyperstructures are not a model for every protocol, but they are a model for the underlying infrastructure which millions of builders could expand upon. Hyperstructures take a lot more time to design, but if done properly they are the key to building liquidity & fees that can be used to expand the ecosystem; not extract from it. They are essentially public goods that can also generate revenue, and be used by developers to more easily build their products.
The incentive is the outcome. This can be seen through the one of most powerful Hyperstructure that currently exists: Nouns DAO.
Nouns DAO sells 1 Noun NFT every day, with 100% of the proceeds going to a vault operated by the Nouns holders. This enables funding of public good projects in the “nouniverse”. Nouns artwork is CC0, meaning anyone can use it for any purpose, at any time. The DAO funds everything from artistic to technical projects that expand on its mission.
Nouns have an ever-growing treasury and are actively leaving their mark on the space. By its very nature, it creates a “virtuous cycle” where the net externalities are positive & in theory, the system could not be suppressed by outside forces.
Another solid example is Uniswap:
Uniswap launching their UNI token was the first involvement from the core team since deployment. Up to that point the protocol had supported over $20bn of volume traded by over 250,000 unique addresses across 8,484 unique assets. They had $1bn in TVL from LPs who had earned $56m in cumulative fees. What a hyperstructure!
Hyperstructures are not a rigid thing, they are a fundamentally novel mental model for what’s possible with crypto protocols. The tools at our disposal allow us to flip the way financial systems work on its head and truly build infrastructure that supports the top-down flow of value; such as in Nouns.
Even now, we are seeing new technologies pop up that has the potential to change what’s possible to build on a blockchain. For example, Block-STM on Aptos (an upcoming L1 chain) may provide exponentially more efficient markets because of the parallel nature of executing transactions down to the atomic level. The ripe empty canvas that this gives developers is the perfect playground to experiment with designing new Hyperstructures & testing them out. The Move programming language also offers developers a more secure & intuitive framework for building smart contracts around resources - which may lead to more robust Hyperstructures. This language was originally developed for the Libra blockchain from Facebook but has since been used to build out new L1s such as Aptos & Sui.
My prediction, as of now, is that these new layer 1 platforms will provide a blank canvas for innovation that is not possible elsewhere where systems (particularly in DeFi) are already established.
At the end of the day, the #1 customer of a blockchain is not retail: it’s the developers.
The idea is that as a result of Spontaneous Order, developers decide to build more hyperstructures on these blank canvases- and value begins to come as a result of their inherent utility.
So what is the ideal future?
The ideal future is one in which immutable, permanent, and non-rent-seeking hyperstructures make up the underlying source of liquidity for a sprawling system of products & protocols. These would facilitate the transfer of value within society in a way that is far more capital efficient than the legacy systems- and far fairer.
It’s a future where the crypto-economic landscape has hyperstructures wherever possible, DAOs only where necessary, and other protocols as needed to empower a global economic machine. But this machine will not be used to its fullest extent until it is really needed by societies.
Crypto is not meant for institutions - it’s meant for the people. Hyperstructures are designed to empower the sovereign individual & usher in a geodesic market. The notion that we need to cater to institutional requirements to grow the crypto market is a deeply flawed one. Retail speculation has driven every single boom/bust cycle to date, with institutions only participating on the periphery as a result of retail’s interest. Crypto is inherently a populist movement aiming to strip the power from the cantillionaires that currently decide what happens in our “free market”.
Retail’s primary worry is inflation, followed by geopolitical concerns. A geodesic market would be a global free market which provides a much-needed haven as everything else starts to slowly fall apart and come back together in a new way.
As per Hyperstructure Theory (which I definitely didn’t just come up with), we would see Decentralized Finance - powered by hyperstructures - plugged into Decentralized Social to create The Hyperstructure leading to a great migration to a geodesic market economy. This leads to the crypto market cap hitting 1 quadrillion dollars & the existence of a truly free market operated by sovereign global individuals.
How could we get there?
This is not an exact path of what will happen, just a vision of one path that could happen. With that being said…
**Deep Inhale**
In the short term crypto eventually starts ticking down and then up as a result of the sentiment within society, particularly in lesser developed countries. Internet chatters among the “wall-street bets” and “moon bois” folk pick back up. Some token like Solana will moon, and then ETFs for Bitcoin will look like they’ll be passing. Twitter timelines become increasingly bolder. ETFs pass and it is seen as a huge moment of positive regulatory clarity - and BTC starts pumping heavily as the next cycle begins.
Then we may see bad policy news comes in around self custody & p2p protocol rights in the USA - which infuriates global retail. Hyperstructures pop up that by their nature can’t be stopped. The world begins to protest by buying - money and how you allocate it is the ultimate vote. Institutions stop participating beyond ETFs because of the compliance risks but retail becomes too big to f*ck.
The data is clear; people are voting for an alternative system.
By now crypto regulation infuriates enough voters that certain pro-crypto politicians within the GOP take advantage because they are team populist & working class. Hostile regulatory action is challenged in court. Web 3 haters clash with believers at scale. Inflation keeps rising. Energy prices keep rising. Young people keep demanding change & many find crypto as a solution. Politicians start to get scared - do they want backlash if they end crypto?
On a wider scale who will the Fed choose to support: the American middle class or treasury holders? They said they were going to raise rates, but realistically they have no choice but to go BRRR! Sorry treasury bond holders - enjoy negative returns. Fighting inflation as a political tool has become much less viable because chaos in the streets is a much bigger problem.
Inflation keeps rising, and the energy crisis continues to boil, but somehow stocks go up and the rich get richer. Other countries see pain come in first- does the Fed bailout US allies or leave them to die? My bet is on avoiding societal collapses.
Meanwhile, Russia/China and the yuan become stronger as it becomes the new petro-dollar & Germany has to give in or give up their quality of life. Each successive barrel of oil becomes worth more money. The dollar increasingly gets weaker, but the DXY currencies it’s compared to are getting weaker faster. Fed claims the dollar is getting stronger since DXY goes up - but now they are to aim for '“7-8% inflation”.
If the dollar is getting stronger - why are people increasingly not able to afford food?
Expensive energy starts leading to geopolitical tension: the US is weaponizing the dollar while Russia, China, and co weaponize oil. Everyone else is stuck in between. With the dollar collapsing their economy crumbles while energy prices collapse their quality of life unless they turn to the East, or to Bitcoin.
We begin to see many more “Sri Lankas” over the next 5 years.
Eventually, real negative yields come back in full force, and banks all in on more free money. The Fed seriously has no choice, tightening would lead to riots in the streets across the world. Meanwhile, all the nation-states that hold US treasuries need to sell them to capture any sort of liquidity they can. As a result the Fed’s balance sheet increasingly holds allied debt as these nations run out of treasury to sell; Japan, EU, etc. The Fed eventually has no choice but to give them more dollars to stay afloat.
Inflation keeps rising. Food is starting to get very expensive, people don’t have access to oil. The sovereign solvency of the global reserve currency issuer is at risk- they need to print more. 15%… 20%….30%….60%…80%…100%!! People are starting to get hungry and freak out. The debt bubble begins to pop, zombie companies with 75x debt/equity ratio begin getting rekt & many 401ks become worthless. What’s a debt-backed system without more debt though, right?
We might see a credit freeze - nobody is allowed to withdraw or transfer any sort of digital money as the piping from the world’s financial system is clogged. What do you do if you wanna buy eggs? Hope you have cash or coins lying around, unless you’re okay trading your TV for food. That one’s gonna sting once the credit freeze ends.
This might come after or before CBDC, either way, we will be forced to migrate to the new system in the US.
Inflation is high but as a result, eventually wages rise too. After a short period of slight chaos- society begins to adjust to the newest new normal. “Expect 5-10 years of high inflation” becomes the new narrative. Negative interest rates are the new normal. Only once there’s enough money in the system, can they raise rates and remove the deficit. It won’t be all out Armageddon, but dollars and the amount of them we use for day-to-day things will have a bit of adjusting to do in pricing all the real things in our world (labor, real estate, valuable companies). Things lag behind others but eventually, a new equilibrium is found, albeit with everything with more 0’s behind them.
Meanwhile, Bitcoin is a black hole absorbing the monetary premium of all assets.
There are ~20 million Bitcoins in circulation making it the ultimate collateral- and DeFi 3.0 has begun to gain steam and we see the space trending towards The Hyperstructure. Maybe AI is plugged in there somehow, too.
Though it may take decades before something like The Hyperstructure becomes real, emerging markets will begin to operate as experimental hubs for crypto-based end-to-end economies & the 1st world will begin to see more and more capital flow towards digital assets. We may even see some examples of tyrannical governments being undermined in meaningful ways through the power of cryptographic assets - just like the Cypherpunks had hoped. The geodesic market begins to come into sight.
Bitcoin is not going to be the “one true savior”, but it sure is better than these paper things we’re carrying around. It captures the beliefs of people all over the world, regardless of race, background, or anything else. The network effects that come as a result of building hyperstructures may just be the key to unlocking its full potential.
Sources:
Hayek’s Legacy of the Spontaneous Order by David K. Rehr via The Minneapolis Federal Reserve
Spontaneous Order: A Rich Tradition with Lessons for Today by Kai Weiss via The Austrian Economics Center
Hyperstructures by Jacob Horne
Messari Happy Hour on 7/12/22 by Mikey Kremer (AKA Tulip King)
Cryptoeconomics 101 by Nick Tomaino
Introduction to Cryptoeconomics by Vitalik Buterin
A Crash Course in Mechanism Design for Cryptoeconomic Applications by Alex Evans
The Emergence of Cryptoeconomic Primitives by Jacob Horne
Making Sense of Cryptoeconomics by Josh Stark