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Liquidity: An Internet of Money

Liquidity: An Internet of Money

It's often difficult to see the future with a beginner's mind.

In the early days of the Internet, it wasn't obvious that there would be billions of websites. People thought the Internet would more closely resemble the distribution pattern of traditional media, such as newspapers and television networks. The novel capacity of user-generated content broke that frame. Chris Anderson's book 'The Long Tail' describes this phenomenon in detail, illustrating that platforms like YouTube generate the majority of their revenue from a 'long-tail' of content. Unlike the Pareto distribution (80/20 rule) found in conventional media, revenue in the Internet age is generated from many instances of niche content.

For better or for worse – the Internet is made up of cat videos and posts of what people ate for breakfast.

We often reason with analogy rather than from first principles. Most people today apply the same heuristic used to imagine the future of the early Internet to the future of blockchain. This time though, the dominant comparison is not that of newspapers and television stations, but of national currencies and stock markets. This is a simple analogy. Today the consensus view is that there will be a limited number of highly valuable (and/or useful) tokens. Certainly your cat does not need its own token. Why not just transact in ETH, BTC and DAI?

It requires one to look at the blockchain more like the Internet itself, or at least a new version of the Internet, in order to identify the patterns that exist between them. In 1993 it wasn't obvious that your cat would have an Instagram page – the notion of that alone would have been quite literally absurd.

From the perspective of first principles, what enabled the Internet was 'the vast reduction in the marginal cost of the creation and distribution of information'. It became free to create and share information with virtually anyone, anywhere, at any time. This reality in turn created new and interesting ways to share information that were not yet obvious to an average person living in 1993.

The blockchain offers a similar thing as the Internet along an orthogonal axis. It enables the vast reduction of marginal cost for the transferring of value. To anyone, anywhere and at anytime. Just as the Internet digitized 'information', the blockchain digitizes 'value'.

It's really not that hard to imagine. Nearly everything in physical reality is already digitally represented as information on the Internet – your home, your car, your relationships, your headphones, your chair, your cat – even your last conversation. In the not too distant future, nearly everything in physical reality will have a corresponding 'representation of value' that is 'tradeable' on the blockchain. More significant than this still, is the very real possibility that the digital economy will become far larger than the physical economy. Just as the Internet enabled the creation of vastly more digital information relative to physical books, magazines and newspapers, the same possibility exists for blockchains to do the same for everything that we currently value.

The Liquidity Problem

Most blockchain assets today face the very real problem of liquidity. Liquidity represents the degree to which one asset can be easily converted into another, without significantly losing value. The cash in your pocket is highly liquid and can be easily converted into goods and services. Your home is less liquid than cash. Your ideas are even less liquid than your home.

In order to create an Internet of Money, a long-tail of 'instances of value' need to be easily convertible (i.e. compatible) with one another. If you tokenize something, its liquidity cannot be impacted negatively if it is not popular. If the blockchain is going to follow a 'long-tail' distribution pattern like the Internet, instances of value need to be highly interchangeable (i.e. liquid) with one another. If you post a cat video that only has 17 views, you still need to be able to easily share it with your friends. I need to be able to buy your token. But, I can only buy your token if I know I can use it to pay my rent and buy food.

Today, blockchain technology and the structure of the industry is not yet engineered for this level of ubiquitous liquidity. Creating a highly liquid token is challenging for even the brightest of entrepeneurs and engineers. Ubiquitous liquidity will be required in order for crypto to achieve widespread adoption.

One of the unique features of Zero is not only the ability for members to reward other members for their content in crypto, but to do so in 'native community currencies'. Communities can mint and exchange any type of tokenize good or service via fungible or non-fungible tokens. Think virtual property, licensing, human capital and even real estate. All tokens are automatically exchangeable with one another, irrespective of a tokens popularity (i.e. the total number of buyers and sellers that exist for a specific token at a moment in time).

In the context of an Internet platform or marketplace, this opens a wide possibility of use-cases. Initially, we believe that the first major industries to tokenize will be digital graphics and software development (think tokenized 3D assets and tokenized code). More than just a 'social network', which is generally premised on the exchange of information, Zero is a 'coordination network' for not only information, but 'value'. This provides an alternative lifestyle (and business model) for individuals and creative communities. One where they can operate according to their own schedule, internal governance, and focus areas while earning crypto for the value they create.

Today open-source developers and indy artists represent a small fraction of the overall economy. The majority of commerce happens inside private companies that develop proprietary IP within closed networks (e.g. Google, Facebook, Netflix, Pixar, Marvel, etc.). We believe this distribution will eventually flip, where initially the most talented (and eventually the majority of) creators will begin to create open-source content with open technology on public networks.

The fundamental notion of the corporation itself will soon be obsolete. This is due to the relative advantage in coordination capacity for distributed organizations on open networks, as compared to conventional corporations. It's Bitcoin versus Money. Ethereum versus Nation States. And Zero versus Big Tech. Eventually the entire societal stack will move to a distributed and fractal network structure. Networks will soon overtake money, institutions and companies.

DeFi, NFTs, and DAOs

This may sound far fetched, so let's review concrete examples of how this is playing out in the real world right now.

Decentralized finance (or 'DeFi') is a strong use-case for how smart contracts are enabling the facilitation of loans and other financial services, directly between individuals and independent of traditional banks. Since October of 2019, the amount of capital locked in DeFi smart contracts has grown from a few hundred million to nearly $42 billion USD today, ~1,000x in about two years.

TLV in DeFi (USD) |

Digital Art is another industry that is growing rapidly. The creation, purchase, and sale of NFTs (non-fungible tokens) directly between digital artists and collectors. Most notable is the amount that collectors seem to be willing to pay for 'purely digital' art works. For instance, the digital artist Beeple sold a single NFT for over $69 million at a Christie's auction. The monthly sale of cryto art volume has risen massively to $150 million per month.

Both DeFi and crypto art represent the emergence of entirely new type of 'value network'. Networks that are not just capable of coordinating information ('pixels' in the case of crypto art), but also capable of 'coordinating value' between participants in the network with less intermediaries and costs.

DAOs are next.

DAOs represent an entirely new level of supply chain efficacy for the discovery of innovation, knowledge, and wealth.

DAOs are made possible by the same pattern used in coordination networks like Bitcoin. However, instead of coordinating the scarce resource of 'distributed verification' required to maintain the integrity of a currency ledger (Bitcoin), these systems enable the coordination of the scarce resource of human ingenuity.

It is only a matter of time before blockchains merge with artificial intelligence. Their first task will be to reorganize the structures that coordinate us.

From Zero to Infinity,


P.s. A special thanks to @realfrankwilder for the creation of The DeFi Dinner – currently being sold on MakersPlace.