I start my undergrad investments class by posing the following question: what is a financial asset? Wikipedia gives the following painfully vacuous definition: "A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than other tangible assets, such as commodities or real estate."
Blockchains aren't ethereal beings which can exist entirely separated from the real world. Blockchains merely record and intermediate real world transactions. If you wish to issue a token representing the profits from a certain business venture or representing a real estate asset, this token is a promise that must be enforced in the real world.
What blockchains do is reduce the blast radius of trust. If you want to swap asset X for asset Y, a blockchain allows you to do so trustlessly. You still have to trust the promises behind X and Y, but no other middlemen. Far from flipping the table, this, just like advances in any field, will just create another layer of abstraction that will enable people to build more and more complicated transactions on top of.
The author's Crypto as Religion comes to its peak with his final paragraph. But, I would ask him to think about what has happened in the past few decades when markets get more efficient. Far from the rose-colored dream of human harmony and brotherly love, efficient markets and the superstar effect breads more inequality. And, looking at our dear author's resume, I think he's hedging his bets.
Thanks for writing this. Agree with Jason, I like the mental model of "the market for promises".
A stub of a thought: the traditional market for promises is riddled with time-inconsistent promises. Sometimes it's the state's inconsistency, sometimes a counterparty's; sometimes the inconsistency is immediately obvious, sometimes not. I wonder to what extent we'll see a larger share of time-inconsistent promises (well-intentioned and less so) housed on blockchains. In some equilibrium they shouldn't ever be made, but...
The market for promises is an excellent mental model. Unfortunately, much of crypto is based on promises: Terra's APY, Bored Apes going up, HODL mentality. We need to focus on empiric evidence rather than future promises if we want to make progress.
Blockchains aren't ethereal beings which can exist entirely separated from the real world. Blockchains merely record and intermediate real world transactions. If you wish to issue a token representing the profits from a certain business venture or representing a real estate asset, this token is a promise that must be enforced in the real world.
What blockchains do is reduce the blast radius of trust. If you want to swap asset X for asset Y, a blockchain allows you to do so trustlessly. You still have to trust the promises behind X and Y, but no other middlemen. Far from flipping the table, this, just like advances in any field, will just create another layer of abstraction that will enable people to build more and more complicated transactions on top of.
The author's Crypto as Religion comes to its peak with his final paragraph. But, I would ask him to think about what has happened in the past few decades when markets get more efficient. Far from the rose-colored dream of human harmony and brotherly love, efficient markets and the superstar effect breads more inequality. And, looking at our dear author's resume, I think he's hedging his bets.
Thanks for writing this. Agree with Jason, I like the mental model of "the market for promises".
A stub of a thought: the traditional market for promises is riddled with time-inconsistent promises. Sometimes it's the state's inconsistency, sometimes a counterparty's; sometimes the inconsistency is immediately obvious, sometimes not. I wonder to what extent we'll see a larger share of time-inconsistent promises (well-intentioned and less so) housed on blockchains. In some equilibrium they shouldn't ever be made, but...
The market for promises is an excellent mental model. Unfortunately, much of crypto is based on promises: Terra's APY, Bored Apes going up, HODL mentality. We need to focus on empiric evidence rather than future promises if we want to make progress.