September 09, 2022 - 23 min read
Humanity has developed incredibly complex societies and experienced rapid economic development as a result of many things, one of which was their adoption of money. It seems obvious to most, but asking ourselves about the nature of money almost never occurs since it functions so well as a way to preserve one’s hard work to be exchanged for future goods or services. Unfortunately, our money can be easily corrupted, and even cleverly-designed systems don’t always go according to plan. The same corruption can affect economies more broadly, especially when too much interference undermines the process of price discovery and decision-making of individual participants.
This is a matter of fact, as history has taught us that if given enough time, currencies are always debased by various means, often by shaving off bits of precious metals, counterfeiting, or via hyperinflation at the hands of those in charge of a currency’s creation. Not only that, but in the case of economics, those with the power to do so will almost certainly intervene with rules and regulations which often favor some participants at the expense of others; but more on that later.
When money is respected, individuals are capable of making reasonable plans for the future as a result of their confidence in determining future prices and their ROI, thus facilitating the creation of short, medium, and long term contracts. On an even smaller scale, knowing the price of milk and bread at the store next week helps individuals sort out their monthly budgets so that their lives are predictable, and without undue chaos at the cash register. It is the basis for a stable society.
In other words, when the conditions for stability are present, sound investments can be made knowing what the returns might be, more or less. On the other hand, the consequences of destabilizing a market’s pricing mechanisms can range from mildly annoying to absolute devastation.
It’s also crucial to know if our money is being used in efficient ways, especially since it is often taken from us via taxation or other fees charged by intermediates like banks and payment processors. Is the money we give up being well spent? Is the accumulated wealth of an economy being built upon a solid foundation, or is it quietly leaking in places that most people don’t stop and think to examine? If economies were rocket ships or cruise boats, we would insist that their designs be airtight so as to function properly. So, it only stands to reason that we should make attempts to perform routine maintenance on our economies, so we can identify their shortcomings and put a stop to any leaks.
We also need to consider why regulators are so eager to clamp down on anything which could prove the status quo to be wanting. Are more rules going to protect consumers? The given reasons for regulators to step in always come in the guise of protection, but words and actions are two distinct things. Who is protected, in reality, and who benefits? When money, or markets for that matter, have been undermined and disrespected, economies failed, with participants doing anything they can to either spend their money before it loses value, escape burdensome taxation, or else move their wealth into a different form of money with a greater degree of respect, like harder money. This calls for innovation; hello, Web3.
Overly cumbersome compliance measures brought upon by regulators serve to stifle this needed innovation. Users of Web3 are aware of how much more efficient payment systems can be, and how much money and time they could be saving if the industry is allowed to flourish unencumbered. Regulating innovation out of existence is probably the wrong path forward.
Thus, contemplating the nature of money and uncovering the unnoticed inefficiencies of our economic arrangements is to the benefit of humanity, and properly scaling its ability to collectively flourish. In order to understand exactly why we need better and more efficient money, we will contemplate not only their benefits, but the potential consequences we might already be suffering, but of which we’re currently unaware. To put things in perspective regarding this matter, the works of a 19th century French thought leader put forth some useful insights regarding the opportunity costs of not optimizing our economic cooperation.
Claude-Frédéric Bastiat published his last and perhaps best work in 1850 on the economic concepts of the seen and the unseen. He essentially argued that the difference between a good and bad economist is that the good one considers the unseen and potentially disastrous long term effects of a given policy in addition to the immediate, more concrete ramifications of a policy that are seen. Essentially, he wanted people to consider the opportunity costs of their economic decisions and use this concept to better guide their decisions thereafter.
While Bastiat’s arguments were originally and primarily focused on the dynamics of taxation and government spending, his works can also be understood through the lens of heavily regulated industries and specifically, traditional banking incumbents. Think of finance, medicine, insurance, energy production, farming, education, or space exploration; all of these sectors are incredibly difficult to enter into, compete within, or innovate meaningfully upon. While regulations set out to protect consumers, they can also hinder innovation, and prevent individuals from meaningfully contributing to progress in these sectors. Is this a healthy economic arrangement for all of us collectively? Let’s explore this idea further to find out.
Publicly-funded or legally enforced services are commonly understood to be necessary for addressing the collective needs of any populace. When these services are carried out by governments or private bodies heavily controlled by regulation, the people see it and declare it to be good and necessary. Who else would build roads for common use if not for the government?
Indeed, who would offer education to the people of a nation if the government did not send teachers in to get the job done? Who else would be trustworthy enough to operate our banks, hospitals, and universities? The underlying philosophy is that humans need shepherds to herd them here or there, accomplishing all those things they would not do themselves. However, the existence of these public services are only that which is seen, according to Bastiat.
However, public programs, or industries closest to regulators, are often funded through taxation and deficit spending, or to put it crudely, the printing of fiat money. That means that resources are taken away from individuals to be allocated towards those public programs. Does this mean that these services are unnecessary or wasteful? Not necessarily. In fact, let’s not get bogged down on this debate just yet. Instead, evaluations should be withheld until we have considered the fact from several angles.
In this case, that which is not seen are the vacations which are never taken, the homes which are never built or renovated with the personal touches of their occupants, the businesses of passion which were never started, or other services which could be rendered to the people, but never came into existence due to the allocation of resources towards public services and away from individuals. Should we then forego hospitals, schools, and roads so that we can accumulate more things for ourselves? Such a proposal doesn’t seem right either.
However, it may be a faulty assumption that these things would not exist were it not for public services or other highly regulated agencies. If there is a demand for goods and services, there will be a provider to step in to accommodate the demand. The main caveat to this point is that there is a minimum stability threshold in a given society so that investors feel comfortable that their efforts will not be wasted. In other words, will there be a worthwhile return for their efforts? Unfortunately, the answer is a resounding “no” when there are too many burdensome requirements implemented by regulators, or if the public sector makes competition in any space untenable.
This effectively halts competition and therefore innovation. It depresses market participation, and harms the noble ambitions of individuals. It is not difficult to imagine that this heavy toll burdens the psychological well-being of an economy’s participants in addition to encumbering their dynamism. In contrast, Web3 participants feel that they have a stake in the success of the sector, and enthusiasm amongst the community as a whole is abundant. People feel optimistic about contributing to its development, and providing value to others. Most do not feel that they are in need of “protection” in the form of heavy regulation.
Bastiat thought of himself as a classical liberal and ardent supporter of free markets. That is, he believed in the ability of people to collectively cater to their own needs organically. In addition to his arguments for competitiveness as a driver of economic dynamism, he also opined on other economic assumptions he felt caused more harm than good. One of his most eloquent points was made through his famous parable of a shopkeeper who suffered a broken pane of glass. In his parable, he describes that a common reaction for many people to such a situation would be to declare that the broken glass is a net positive for the economy as a whole, despite the misfortune of the shopkeeper and the broken window pane.
That is, Bastiat sensed an underlying assumption within the zeitgeist of economic theory and governance that concluded such destruction actually generated economic activity since the shopkeeper must hire a glazier to replace the glass. After all, if shopkeepers never broke windows, what job would be left for the glazier to do? How would glaziers feed their own families or put roofs over their heads? The velocity of money is thus assumed to be a net positive; nevertheless, it is misguided thinking according to Bastiat.
If the shopkeeper’s window were never broken in the first place, then perhaps the money could have been spent on opening a second shop, and hiring a worker in place of the glazier, except the job is productive as it involves creating services as opposed to repairing destruction. In the case of the broken window and the glazier, economic progress is first lost and then regained after repair. This is the unseen consequence of the broken window and the diverted efforts expended to fix it.
So then, why don’t we hire personal window destroyers to go around breaking windows periodically in order to stimulate the economy, and encourage spending? Why don’t banks hire hackers to steal money so that they could go and get it back for you? Lots of jobs could be created, couldn’t they? Would this not have an even more pronounced net positive effect on the economy as in the example of the single shopkeeper and glazier from the original thought experiment? The notion, in fact, seems unmistakably absurd.
That which is seen, in the case of Bastiat’s parable, is that broken windows creates jobs and keeps society stable. However, if opportunity costs are not discussed, we cannot truly comprehend that this is not actually productive, and makes the future increasingly poorer. That is not to say that there are no winners; it is only to say that by and large the economy suffers a bit in unseen ways if we don’t identify and remedy inefficiencies.
That which is not seen, is that rather than making forward progress, society runs around in circles without going anywhere if all it does is break things and fix them again. Thus, productivity and efficiency are much more important than the number of jobs undertaken, unemployment statistics, or the amount of money which changes hands over any span of time.
Medical schools often ask their graduating physicians to take the Hippocratic Oath: first, do no harm. Perhaps we need to remind ourselves of this simple phrase regarding our economic policies and acceptance of heavy regulation or other forms of meddling. It would be unwise to regulate the dynamics of market competition right out of existence, as this effectively picks a few winners at the expense of everyone else, and consolidates the market dominance of those winners using the power of the law. This is not to argue for lawlessness or anarchy, but to temper our tendency to go too far and reduce any potential harm.
Bastiat was convinced that private labor and services would always be superior to that of public services, or those hampered by compliance and regulatory burdens, since private enterprises are punished by market forces for any failures to compete. This is comparable to how Web3 services provide cheaper and more efficient alternatives to traditional banking. Sending money from peer to peer has never been so easy with Web3, but fiat banks have barely begun to scratch the surface of offering anything comparable. Web3 protocols boast faster speeds and lower costs in many cases compared to their traditional counterparts.
Perhaps it’s because traditional banks don’t really have to deliver superior services, since they are protected by legal moats. After all, institutional money can barely afford to go anywhere near crypto because of the lack of regulatory framework and the fear of financial penalties which could come down on them at any time. While this certainly protects the regulators and those who work closely with them, it hardly benefits the people who waste their time and money on lackluster services which are effectively legally forced upon them by the status quo.
What’s more, those closest to regulatory protections grow larger with every failure. Ironically, poor performers or otherwise failing departments in the public sector often lead to calls for them to receive even more resources than before, and often with little to no accounting for why they couldn’t get the job done beforehand. The financial crisis which required unprecedented bailouts for big banks in 2008 clearly demonstrated this perverse incentive.
Following the bailouts of 2008, it was clear that there would be few, if any, corrective mechanisms to be allowed by free market competition. Those closest to the regulators were deemed “too big to fail,” and they were protected from the punishing forces of their failures. Consequently, people everywhere were silently made poorer in both seen (inflation) and unseen (lousy banking options) ways. Inefficiencies were never properly rectified by disrupting those systems which were obviously ineffective or worse, corrupt.
That is, the incentives are exactly the opposite as they should be if the goal is to preserve resources and deliver cheap and efficient services to the economy. If laws and regulations are meant to protect the public, then why did regulatory bodies trip over themselves to aid banks which had so poorly managed the finances of their depositors? To many, it appeared that the protections were provided to those closest to the government regulators, and not the consumers, in fact. This helps to explain why monetary and fiscal policy has become increasingly untethered from reality ever since.
Not only did this approach limit the options available to consumers by failing to allow failing participants to be replaced with more efficient and responsible caretakers, but it will continue to perpetuate economic stagnation, higher prices, and degraded quality resulting from the lack of competition. These distortions in the market meant that returning to an efficient and sustainable equilibrium were never allowed. Disturbing this reset harmed us all, but we almost never considered it since it was mostly “unseen.”
Startups must be dutiful to the needs of individuals across the world if they are to earn their business. While there are bad actors in any sector, the typical Web3 entrepreneur wants nothing more than to create a better and fairer world for their users. Projects do their best to cater to their user base, courting them with the same white glove treatment that regulators get from their traditional banking counterparts. Power is returned to the consumer via market forces, despite what risks may come along with using new technologies like public blockchains, cryptocurrencies, DeFi, and the rest of the Web3 stack.
There is always a drive towards creating genuine value and utility; any failure to do so means people will never touch Web3, and therefore remain within the bounds of traditional banking, or perhaps avoid those projects which have failed to establish themselves as trustworthy actors. This is the reason why mandated or heavily regulated services often become stagnant and frustrating for users, while the free markets of Web3 naturally lend themselves to constant progress and innovation; it’s because they must.
Expatriate remittances are a great example of how such a lack of private services can hinder economic development in places which cannot afford to waste their hard-earned money. In emerging Latin American markets in particular, there is a huge upside available if new competitors can introduce Web3 tech to more efficiently transfer money across borders without high fees and bureaucratic red tape.
While e-payments applications are certainly making headway into the remittances market, many still operate ‘walled gardens’ in which their users become trapped in a given ecosystem or are limited in their ability to operate. On the other hand, Web3 firms are offering potential solutions in response to the needs of this market. Expatriates wishing to send their savings back to family members in their home countries may soon find that Web3 solutions save them both time and money. Another example comes in the form of El Salvador’s Chivo wallet, re-launched in February 2022, which is expected to save users over $400 million USD annually by drastically reducing the friction typically encountered when using banks or intermediates like Western Union.
What if those remittances could be saved and re-invested back into factories, machines, or tools? Couldn’t that money be converted into efficient capital that creates jobs for local workers? Why is it being spent on transfer fees, often leaking back into the hands of middlemen and other intermediates which extract more value than is generated by the service? Web3 tech offers better alternatives to traditional banking, placing rungs back onto the economic ladder and giving regular people the chance to find their feet before beginning their upward socioeconomic ascent.
The concept of walled gardens is simple to understand. Walls provide protection against weather, intruding animals, or other unwanted invaders. Walled gardens also allow for their gardeners to tailor the environment in order to target the growth of one or more aspects within their ecosystems. In the tech world, walled gardens also serve to keep users “walled in,” meaning they become stuck in a given ecosystem due to the inconvenience of leaving their walled gardens to try out competing products or services.
Tech companies accomplish this via crafting incentives or conveniences which don’t extend beyond the walls of their company’s product offerings. Presumably, companies design their products to work best with their own native software or hardware systems. In contrast, making external products or services incompatible within a walled garden ecosystem fundamentally disincentivizes users from ever leaving to explore alternatives.
Giants like Apple and Google are some of the most lucid examples of walled gardens. Users of the Chinese social media application WeChat may be even more familiar with this concept. Within the walled garden of WeChat, users can pay utility bills, purchase plane and movie tickets, invest in gold, or buy medical insurance. Restaurants wanting to offer discounts are made to work exclusively with WeChat, making alternatives difficult to seek out. When changing platforms, new users often feel anxiety learning to navigate a different operating system’s interfaces, or losing out on services to which they’ve become accustomed.
Traditional banking systems and fiat currencies are also walled gardens, only they may be more pernicious since they do not constitute free commerce and competition. Instead individuals are kept within these walled gardens by mandate. This arrangement does not lend itself well to innovation and meaningful development. These walled gardens are places where competition has been kept out, and individuals are effectively contained within.
The same sorts of arrangements can be enforced by governments via tariffs. Though we will not spend much time on this issue, readers may find Bastiat’s sarcastic petition to his own government at the time in France to outlaw use of the sun in order to protect the domestic candlestick industry. Not only would this make everyone miserable, but it would create rules which would be insane to try and enforce. Walled gardens might protect a few actors, but it’s hard to argue that the benefit extends equally to everyone regarding the quality of their lives.
Outside the walled gardens of traditional finance is the open and permissionless world of Web3. Sure, it seems scary right now because the landscape is still being discovered, but fearing the unknown is an unacceptable admission of defeat. Ask Elon and the engineers at SpaceX what they think about walled gardens. Indeed, it transgresses against the human spirit. To explore the unknown and bend it to our advantage is our oldest tradition, and Web3 is simply one of the new frontiers for us to explore bravely.
What traditional banking did not anticipate, however, was that Bitcoin and Web3 tech would emerge as a beacon of free market economics, shining a bright light on the unseen inefficiencies of their walled gardens! Perhaps there will be several attempts to construct walled gardens around themselves and around various competitors, in attempts to quarantine themselves from the market forces exposing their shortcomings. Whatever can be done to keep new market entrants at arm’s length will be done if it means they can defend their walled gardens.
Nevertheless, walled gardens do not lend themselves to abundance. They are by design limited in their scope and possibilities. True abundance can be found in the free markets of Web3, and innovation is one of the keys to efficient and abundant productivity. With Web3, there are far fewer walled gardens. With Web3, there are options.
In fact, interoperability is the name of the game in Web3, with developers and CEOs doing everything in their power to erode borders and limitations for their communities. The inclinations of Web3 open the world up to networks of infinite gardens, throughout which people can flourish voluntarily in a myriad of ways, without the unseen shackles of heavy-handed regulation and the weight of inflationary fiat currencies.
Money is not what people actually want; it’s actually the goods and services that money can buy which are most desirable. Nobody really dreams of swimming in a pool of cash outside of cartoons. In reality, they dream of swimming in a pool, and so they do work in order to get cash to spend on that pool. Therefore, it makes the most sense for economies to prioritize the creation of more goods and services rather than creating cash. With abundance, those things which were once expensive become cheap. This is the essence of economic progress and prosperity.
After all, an economy that produced nothing but cash wouldn’t have much to do except sit around lighting bonfires with all of it. If that imagery isn’t enough, images from the early 1920’s featuring Germans hauling wheelbarrows full of cash can be found on your favorite search engine. They were not wanting for more money; they needed something useful to purchase with all their cash. It is for this reason that the distribution of money is less important than the abundance of goods and services for people, which is most efficiently created by individuals serving their communities in useful ways.
So what does this have to do with Web3? Well, the industry at large represents a break away from heavily regulated financial systems and removes the friction that previously existed in P2P transactions, underbanked populations around the world, and even those users who believe they’re perfectly content with the status quo. Web3 showcases the financial waste, which so often goes unseen, by contrasting it so clearly with its increased efficiency and productivity. We’re talking decentralized, frictionless P2P liquidity across nearly every global asset, with far fewer intermediates than what’s come before it.
Contrary to the popular proverb, money is not the root of all evil. Bad money, or bad economics, is actually the culprit, though the two often go hand in hand. Is Bitcoin going to be the new standard for the world reserve currency? It still seems too early to answer that question with any certainty, and therefore certainty will not be feigned by this author. However, it must be said that the walled gardens of fiat money and traditional banking seem less attractive than the mysteries of what must lie outside the walls.
Free commerce and non-interventionism, on the other hand, is led by individuals and societies pursuing their own best interests. That does not mean harming others, since doing so would harm one’s own interest as well unless those doing the harm are protected from punishment via market forces. Commerce and the in-built competition drives individuals to carefully plan their endeavors, examine their inventory and budget for shortcomings, to take feedback and criticisms seriously, to foresee the wants of their customers, and to take any necessary precautions before proceeding with their efforts. In these arrangements, unnecessary waste is as unacceptable as high prices, since a more adept capitalist will inevitably replace those who can’t deliver what people desire.
Thus, it’s in the interest of any Web3 project to deliver superior products and services at the best possible prices, to economize and fortify all the details of its operations, and to attain the greatest results by the smallest efforts. Abundance and efficiency is the name of the game. What of traditional banks though, which have still yet to adopt even QR code payments? No, they have demonstrated that their efforts are aimed at securing their incumbency at the top of the food chain. Let us not be confused then, regulations claiming to protect consumers in the name of stability will mostly serve to guard the status quo. Let us remain vigilant to this likelihood.
Questioning the nature of money, and the consideration of both that which is seen and that which is unseen, are not obvious to most. However, it is a truly important question to consider if we care about giving people hope, and alleviating poverty. Humanity cannot afford to waste its economic efforts and squander its potential wealth. To illustrate with an analogy, imagine the tragedy of seeing someone bailing water out of their boat using a sieve, and now take this thought experiment further and apply it to the economy at large. Web3 is the equivalent of swapping the sieve for a pail, turning tragedy into opportunity.
By making the economy more efficient, we empower individuals to improve their lives. Building wealth and witnessing your own progress is inspiring, which is the lifeblood of anything meaningful we do. That is, people’s lives are changed when they no longer feel they are falling behind, or that their hard work isn’t paying off. Maybe improving the world isn’t a matter of creating more regulations or taxes to be redistributed. Maybe it is about adding more rungs to the economic ladder at every level; giving people more they can hold onto.
Our society is fragile, and we can’t forget to prepare ourselves for the unexpected. We cannot waste our efforts. Not only is it a tragedy, but it is wholly irresponsible. The dreamers amongst us wish to spread out amongst the stars so that we do not go the way of the dinosaurs. Consequently, we need to figure out the most efficient ways to organize ourselves, so we can prepare ourselves for cold winters, harsh summers, or even the dying light of the sun. Before readers think this is too doom and gloom, let’s remember that these potentialities can be averted by clever preparation and human ingenuity. Maybe Bastiat was onto something, or maybe not; but we still need to consider the unseen consequences of our decisions, though. With that, there is hope.
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