The emergence of open blockchains as one of the most hyped technologies of the past decade has led to the birth of cryptoeconomics, a discipline that combines computer science and economics to effectively design decentralized digital systems.
Cryptoeconomic systems like Bitcoin and Ethereum have proven useful for a small group of innovators and early adopters, but how can we encourage widespread adoption of products that the average person still doesn't see any need for?
Nobel Laureate Robert Shiller's latest book, Narrative Economics, may help answer that question. Shiller advocates for the development of empirical methods to assess the causal impact of narratives on economic phenomena. The cryptoasset market is an ideal testbed for running experiments in support of his ambitious research agenda. Crypto markets are global, run 24/7, and generate vast amounts of free, open data that can be used to conduct in-depth analyses of market dynamics and how they correlate with different narratives.
In this piece, I'll examine four current popular narratives in crypto to illustrate the important role they will play in mass adoption. In part two, I'll outline a future research agenda for narrative cryptoeconomics.
Narratives in Crypto
“Bitcoin is digital gold and a potential safe haven”
While Bitcoin’s role as a potential safe haven during economic crises has been called into question as a result of March 12th's major crash that correlated with the stock market's plummet, it still could evolve into a safe haven of sorts under the right conditions. BTC has recovered all of its losses since the crash and is still outperforming the stock market for the year. If, over the next few years, bitcoin can maintain its historically low correlation to other major assets and continue its historical trend of decreasing average volatility, it may become attractive as a safe haven to a significant subset of the global population. Surveys have indicated that nearly 1/4th of millennials prefer Bitcoin to gold and early research suggests that Ether could function as a safe haven.
Source: Bitcoin Volatility Index
“Open blockchains will re-decentralize the web”
As the tech titans like Google who "hijacked the web” face increased scrutiny from the public as well as federal and state regulators, a swarm of technologists are building potential alternatives to the centralized platforms society has come to depend on. Ethereum enthusiasts believe the platform will serve as the Internet's missing "value layer." This new layer, fueled by the cryptocurrency Ether, will support an ecosystem of new web applications built on open protocols. Web users will no longer depend on corporate monopolists to carry out daily activities like social networking, video streaming, and image sharing.
Instead, users will have access to open applications designed to give users ownership and control over their data. Truly open applications also give developers the ability to copy an application’s source code and spin up their own improved version if they feel the existing one is flawed. This could lead to the growth of a more competitive landscape for digital platforms where it is more difficult for dangerous monopolists to thrive. If a new Facebook or Google emerges and engages in dubious behavior, users will have the option to jump ship to a high quality competitor that meets their needs.
The Pre-Ethereum Internet
The Ethereum ecosystem is a digital Wild West attracting technologists who would rather ditch mainstream digital platforms and settle a new world of radical social experiments than attempt to change the behaviors of existing tech giants through activism or relying on regulators.
Yearning for Youtube alternatives? Look into Bitchute.
Tired of Twitch? Try D.live.
Ticked off by Tik Tok? Give Pepo a chance.
The fate of these fledgling protocols, platforms, and applications is uncertain, but they offer a tantalizing glimpse of what the future may hold. These bold social experiments have helped create a compelling narrative that has attracted some of the world's brightest developers and entrepreneurs.
“Decentralized finance will revolutionize the global economy”
1.7 billion people across the globe don't have access to bank accounts, and two-thirds of the "unbanked" have mobile phones that could give them access to basic financial services without needing to open a bank account. Decentralized Finance (#DeFi) applications are designed to support the creation of a global financial system that is more broadly accessible, transparent, and efficient.
While none of these pioneering products are ready for primetime, the pace of development and variety of experimentation being done is impressive.
MakerDao, Compound, and DyDx offer permissionless borrowing, lending, and leveraged trading. Synthetix and the UMA protocol allow developers to build custom synthetic assets and financial derivatives that track the value of real world assets like stocks and commodities. Augur and Gnosis allow anyone to bet on and forecast the outcome of any event. Melon is drastically reducing the cost and complexity of creating and managing investment funds.Maple has brought bonds to Defi. Opyn allows users to manage risk by insuring their DeFi deposits. Hegic brings non-custodial options trading to DeFi.
DeFi isn't free from systemic risk, but unlike traditional finance, anyone can audit the source code, books, and real time value flows of applications and services. This makes it easier for observers and users to assess risks and understand exactly why a system has broken down when it does. Developers are using these interoperable building blocks to cultivate blossoming "Open Garden" digital ecosystems. A quick glance at images depicting the growth of the network of users that use multiple DeFi protocols shows how DeFi is blossoming.
DeFi (November 2018)
DeFi (May 2019)
DeFi (August 2019)
DeFi (March 2020)
There is a tremendous amount of work to be done before DeFi can realistically help large amounts of people, but the narrative that DeFi protocols can improve our global financial system is likely to persist.
“Blockchains will Enhance Legacy Systems”
The centralized incumbents that open blockchains were designed to disintermediate are updating their legacy systems by reverse-engineering public protocols, ensuring that they remain competitive in the era of natively digital assets.
- JP Morgan is running an Interbank network with over 300 members on their permissioned fork of Ethereum, and developing "JPM coin." Their research demonstrates the firm's belief in the long term potential of blockchain technology and a keen awareness of the challenges that must be overcome to reach mainstream adoption.
- Facebook has launched Libra, a digital currency initiative. The Libra blockchain and digital currency will be managed by Facebook and its partners which include Uber, Lyft, Spotify and Shopify. If the project is successful, billions of Facebook and Whatsapp users will have access to seamless, instant digital payments using Libra. European Union finance ministers have stated they will not allow private digital currencies like Libra to operate within the EU until “the risks they pose are clearly addressed.”
- The People's Bank Of China is rolling out a new digital currency and President Xi Jinping called for China to "accelerate the development of blockchain technology as the core for innovation."
- The United Nations' secretary general believes the organization must "embrace technologies like blockchain that can help accelerate the achievement of Sustainable Development Goals."
- U.S. Federal Reserve Chairman Jerome Powell and San Francisco Fed Governor Lael Brainard have revealed that the Fed feels "it’s very much incumbent on us and other central banks to understand the costs and benefits and tradeoffs associated with a possible digital currency,” and the Fed is "conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC."
- Visa has filed a patent application to create central bank digital currencies using blockchain technology.
- Citi’s Global Head of Commodity Trade Finance explains how some of the world’s largest institutions are coming together to build Komgo, an Ethereum-inspired end-to-end blockchain solution for commodities trade financing.
Source: Komgo Case StudyEstablished institutions are well positioned to hijack the narrative of improving global finance and stifle competition from decentralized protocols. “Blockchain (but not bitcoin!!!)” has become a mantra for many defenders of the existing financial establishment.
The Power of Narratives
A grueling battle for market dominance between government digital currencies, corporate digital currencies, and decentralized digital currencies will take place over the coming decades. Public blockchains will compete and co-exist with various forms of permissioned chains. Anyone attempting to forecast long term trends in crypto or encourage mass adoption should focus not only on technical milestones, but also on the narratives that influence the average person's perception of what's happening. The stories that people tell themselves and others about the past, present, and future are important.
In the 1930’s as the world was in the grips of global economic depression, English economist John Maynard Keynes published The General Theory of Employment, Interest, and Money. The book kicked off the Keynesian Revolution and a dominant narrative that emerged as a result of Keynes’ work was that public officials needed to deepen their involvement in steering markets to reduce suffering.
This narrative proved to be much more popular and comforting than the alternative narrative offered by adherents of the rival Austrian School of Economics, who cautioned against trying to centrally plan macroeconomic activity and emphasized the need to let bad businesses fail during recessions. Keynesianism went on to dominate the world of economics and still holds a pervasive influence on mainstream economic thinking. The Austrian school is often dismissed by mainstream economists and rarely given much credence in college economics programs.
History suggests that it may be the most skilled and persuasive storytellers and not the brightest engineers or most knowledgeable economists who will determine long-term winners and losers in crypto. As humanity navigates the most severe economic crisis since the Great Depression, it would be wise for idealistic entrepreneurs to keep the importance of narratives in their mind while building.