Will we ever get PMF as a better money?

This post will discuss the possibilities in the market for blockchain-based money and financial products outside of speculation. I will argue that the situation isn’t great.

The product-market-fit of money is the stability and ease of transacting

The thing about money itself is that you don’t want it in itself, you want it because you think someone else will accept it in the future, in exchange for something that you do want. Good money is a bubble that doesn’t pop, because the forces buoying its value upwards (e.g., collective dreams like trust in its future value and exchangeability) are stronger than the forces dragging it back to its wretched little reality as a slip of paper, a lump of shiny metal, an entry in a database, or a u256 in the Ethereum state.

The US dollar is historically a somewhat stable money. The powerful US government backs it, and although their level of fiduciary responsibility to minority dollar holders has been under question lately as they massively dilute the share pool, we have spent the past 10 years feeling largely comfortable that we’ll be able to buy yogurt for a price within an order of magnitude of where it sells today.

Dissecting the Fiat Moat

A huge number of “micro-forces” are constantly re-centering the dollar’s value. Every time an exchange takes place, both parties nod at the value of the dollar in terms of its purchasing power for concrete goods with use-value. Every second, the dollar is hammered into human minds as having the possibility to rapidly turn into a concrete parcel of yogurt, gas, financial risk, stock, weapons, drugs, animals, land, sex, medicine, or movie tickets.

Uncertainty about the value of the dollar is (most of the time) squishy and theoretical for the average person, measured in “9% inflation over a year”- a tenth of a dollar over a full year of paychecks. You can make arguments about the dollar (and Miko did) having devalued 93% in a century, but the frog seems pretty happy in its rapidly warming pot, for all Coinbase’s beautifully constructed propaganda. Read “When Money Dies” for a beautifully documented historical example of what goes down during hyperinflation in a developed society very similar to our own- the details shed a lot of light on how you can expect humans to behave.

People express feeling short USD annually in elections, complaining online about the government, or (for hedge funds and doomsday preppers) hedging. Almost nobody shorts USD by churning away from using USD. The threat of catastrophic hyperinflation is a distant black swan that we all mostly ignore, which is necessary for society to continue functioning.

Certainty about the dollar is thrown in our faces daily, and is measured in being able to obtain Chipotle with (lately a somewhat larger amount of) Apple Pay US Dollars. People express their certainty about USD daily by continuing to participate in the dollar economy instead of defecting to euros, yuan, gold, or canned goods, and they constantly witness others expressing these signs of certainty and stability as they participate in the market.

This leads into the other side of fiat’s moat: Your bartender and your grocer and your barber and your landlord and your tax-man all take USD. You will carry a method of giving them USD until almost all of them no longer accept USD. To start inconveniencing yourself to carry Money2, you’ll need to expect be forced to pay Money2 when you’re doing errands, which statistically means a sizable chunk of places will need to accept exclusively Money2. But they won’t accept it until everyone else does either.

Money is extremely hard to dislodge

Between these two factors, we see a very powerful self-reinforcing emergent phenomenon that coexists well with the human tendencies to discount theoretical future risks, prioritize immediate needs, prioritize convenience, and go along with the group opinions. Money evolved with our society, and we need it as much as it needs us, but the relationship is mostly very comfortable and stable.

Some users get an extremely bad UX with the fiat money in itself, like people in countries with hyperinflation or cash shortages, but this is historically quite rare. A serious inflation event that dislodges the day-to-day trust in money, combined with good UX of stability on an alternative solution, could theoretically pull people away from fiat money. People are not likely to undertake the extremely costly move of moving money systems without a societal catastrophe, and the government is not likely to facilitate it. Additionally, they’re much more likely to move to a different fiat money system that excitedly welcomes them into a usable and well-developed infrastructure.

Can crypto expect to dislodge users?

No crypto (except pegged assets) has the requisite stability or widespread usage to tick either of these boxes. The forces weighing on the prices of Bitcoin and Ethereum (the most stably valuable non-pegged assets) are:

• the price of electricity or risk-free rates (for proof of work and proof of stake) (small effect),
• the day-to-day noise of retail speculation (small effect),
• the demand for blockspace based on user volume in various apps (none with a durable user base) (small effect),
• and the macro trends of ETFs and other institutional capital inflows, government regulation, risk-off behavior during low interest rates, which drive large momentum from follow-on retail and institutional speculation. (in combination, an extremely large effect)

This makes Bitcoin and Ethereum unsuitable candidates for being money in themselves. There isn’t any quick go-to-market that I see to get them to that point- even if crypto gets traction, people will defect to using stable pegged assets atop them, because of the volatile forces above. The stability of fiat comes from the network effects, but is also a precursor to achieving product market fit and growth. Extremely problematic.

An economic catastrophe like dollar hyperinflation is not bullish for crypto, except via the secondary effects of institutional buys who believe the thesis that fiat collapse means crypto success. Economic collapse is likely to push people to join a currency zone with existing stability, infrastructure, and network effects. As I alluded to earlier, the owner of the incoming currency zone will shovel resources into promoting this shift, because it cements their soft global power over the collapsing economy. We’ve seen this historically over and over again in cases of colonization, predatory “development” investing, hyperinflation, and governmental collapses.

Unpegged cryptos without nation-state support lack the power, stability, and usable infrastructure to properly take advantage of these situations.

As I see it, Bitcoin and Ethereum may be investable as short-term macro or regulatory bets, medium-term bets on their ecosystems’ product-market fit, or long-term (in my opinion clumsy) fiat hedges, but they won’t be finding product-market fit as money.

Are gas fees bullish? Theoretically, yes, but practically…

Gas fees could stabilize the price of Ethereum or Bitcoin by having demand for network compute becoming the predominating factor in the price. However, this could only happen by getting stable, scalable product market fit for apps built atop them. The only app that really can be built atop Bitcoin is Bitcoin, which creates a bit of a chicken and egg situation, because Bitcoin is not good money. The only apps atop public blockchains like Tron and Ethereum that seem to have strong and durable product-market fit are Farcaster (durable crypto social), ponzi-scheme timing games and other popular casinos (Uniswap, DeFi, pump.fun, OpenSea), and stablecoins/RWA (proxies for non-digital value, intended for avoiding transaction UX problems).

I have more theoretical arguments about why other apps don’t need blockchains, but the fact that these are the only ones that have non-farming stabilized demand after fifteen years of web3 and billions of dollars of capital investment is a sufficient argument, in my opinion.

The first two are easy to strike out as non-durable/scalable and unlikely to make a public blockchain’s gas token stable enough to be used as “world money”. Farcaster only has product-market fit because people believe in crypto (or, cynically, want to land on the right side of a ponzi)- another chicken-and-egg that can’t necessarily scale to become a massive emergent phenomenon like money. Our gambling is a prime target for regulation, especially because our casinos are more degenerate and predatory than any house in Vegas, and we are virtually a news factory for ugly high-profile fraud cases. Stablecoins are… a bit more promising.

Stablecoins and RWAs

Pegged assets’ suitability to be “proxy fiat” obviously depends on the quality of the peg, as we’ve seen throughout crypto.

The highest-quality fiat pegs hold treasury bonds in a high-quality DAO or regulated and audited entity, and track balances on-chain in an ERC20. This makes them more or less a standard bank, except with their database on a blockchain. This also opens them up to regulation, because the most trustworthy design for an on-chain asset involves a centralized entity that can be laser-targeted by regulators. Obviously, this is a prime target for regulation and regulatory capture. Therefore, I am not convinced that the blue-chip stablecoins’ product-market fit atop existing public blockchains is scalable: even at our current small level of traction, Circle supports sanctions for USDC as a first-class feature. Clearly, the government could twist their arm to do much more.

The highest-quality RWA pegs are in the same situation. It is very rare to have a purely digital object with real and non-speculative stable value: data brokerage is harebrained for reasons I’ll eventually write about, and decentralized cloud as a digital commodity is a shitshow for reasons I’ll also eventually write about. Most “digital” products are a title of a physical object, which is secretly just a piece of paper that lets you point the government’s monopoly on violence at whoever claims they own your thing. This means the guarantor of the title (DAO, company with a smart contract, whoever) needs to be able to back up their claims to be able to enforce the state of the database in the real world. They either need to be able to (and trusted to) protect the resources themselves, or the government needs to recognize that this company and its smart contract is reflecting real enforceable property rights. These are, once again, an obvious target for regulation and regulatory capture, and the only reason we don’t see pushier enforcement is that none of them have sizable traction.

“Well, fine, the RWAs and stablecoins can just coexist with regulation and exist happily in crypto, so my Ethereum bag is fine after all!” Actually, no. The regulatory burdens will only increase with time and traction, because we are messing with the financial system, which is a cherished US government muscle for soft global power.

An entity or consortium that can regulatory-capture stablecoins, RWAs, and CBDCs will have no reason to pay a gas royalty to the Ethereum network or even use a non-proof-of-authority blockchain. This entity or consortium is likely to be someone with finance, government, and NGO connections, who defects from the “web3 community” to build their own thing to the precise specification of the powers that be. In fact, this startup probably already exists, is working their network, and will bring a product to market by 2030. Meanwhile, a project that is successfully dodging regulators and executing on the anarcho-capitalist dream will never be allowed to scale beyond pockets of criminals and the dispossessed.

Our win won’t be money. It is banking for niche markets.

I won’t comment further on the competitive landscape of CBDCs and regulated RWAs because I’m not a regulatory expert, but I will say a few words about the “anarcho-capitalist dream” market.

Cash and checks had a shitty UX, so we now use digital US dollars administered by tightly-regulated banks who occasionally gently fuck us with overdraft fees, hazing about attempted withdrawals and wire transfers, sanction enforcement, and account closures. These bad things aren’t bad enough for most users to churn, so we all mostly use Apple Pay and Chase. There are a few exceptions to this rule, and those are what’s capturable.

Some users have an extremely bad UX with banks and money in ways that haven’t been solved yet. This includes people in industries that the banks feel are too risky to serve (drug dealers, organized crime, sex workers, crypto buyers, marijuana industry, startups, sanction evaders), people who are attempting to wire money overseas between shitty or incompatible banking systems, and people who exist in states with unstable, inflated, cash-insufficient, or otherwise degraded money systems. The overwhelming majority of transaction volume is not here, but we can serve these people.

In fact, we do, and that’s probably most of the non-speculative non-farming volume across the entire industry. There is certainly more market to capture, and more little niches within these segments to find and serve. Tron and USDT, people who slip through the gaps with USDC, privacy coins and swaps, and Venmo-like transfer apps are all finding strong product-market fit when they successfully go to market with people who are underserved with the banking industry.

Conclusion

All this is to say that the FDV of non-pegged public-blockchain L1 tokens should not ever be expected to grow to the market size of “money”. If you remove the enormous speculative markups, the correct valuation as a long-term asset is probably the expected distributed computation and consensus overhead costs to process the transaction volume of underserved people who churn from fiat due to UX issues with banks, regulation, or the money itself.

Arguing for expanded market caps on most of these assets is nonsensical. Maybe the word for it isn’t “fraud”, but it’s in the neighborhood. I don’t think there’s a navigable path to market capture, because the lack of stability and lack of network effects present a chicken-and-egg problem without the power of a nation-state to catalyze and enforce the currency on the market.

Technological issues are entirely orthogonal to the real problem.

Stablecoins and RWAs could print money, but most non-speculative value lies off-chain, and only the really good pegs are trustworthy. “Really good” means holding treasury bonds and legacy signifiers of trust and compliance. The ones that can capture sizable chunks of consumer and intra-financial-institution volume will not be built on public blockchains, and will be almost completely regulatorily captured, because the powers that be are both powerful and quite defensive of their monetary power.

I think we have found one durable PMF as peer-to-peer money for more organized and intelligent criminals. Tron/USDT is on a winning path to being a regulatory-loophole cross-border money for people and nations who are financially dispossessed.

We also have strong PMF for getting large sums of capital out of restrictive markets (China) in a legitimate-seeming way, although that’s not happening through simple token transfers, it’s happening via venture capital deals, which is a story for another time.

I find the equity of CBDC and RWA startups with extremely strong (interpersonal and professional) networks in government and finance highly investible.

I also might make a bet on the tokens of projects with a plausible case for strong consumer go-to-market (do not underestimate how difficult this is…) among a financially dispossessed niche, with a team that’s properly offshored and trained for jiu-jitsu with both nation-states and organized crime.

If I could bet on the market cap of USDT, I would. I am not comfortable with buying TRON token as a bet on their network size, for obvious Justin Sun reasons.

I am not bullish about much else around here “becoming money” or “eating all land deeds”.

Not financial advice. Ever. Why would you take financial advice from me. Please refrain.