Permissionless Systems

Blockchains are permissionless systems.

They enable app builders to create decentralized applications open to everyone anytime.

These apps are built directly on a blockchain and use its settlement layer to perform functions that would otherwise live in centralized databases and cloud services.

They can be anything from a messaging service to a trading platform.

New Economies

As of late 2021, there were thousands of apps built across dozens of blockchains, and most of their utility and function could be categorized into the DeFi, NFT, or DAO industries.

Some apps hold billions of dollars of user deposits and pay yield on them, while others are built purely to serve as infrastructure, such as bridges between blockchains.

New apps like RabbitHole, an on-chain credentialing service, are gaining popularity, and it will be interesting to see how burgeoning sub-industries like digital fashion and decentralized science movements evolve.

These apps are similar to regular websites but use blockchains, a framework different from the regular internet, so their capabilities differ.

DeFi: Decentralized Finance

DeFi is a movement of software developers and financial engineers who are building permissionless and interoperable economic systems on top of blockchains.

The goal is to increase financial inclusivity while eliminating counterparty risk and barriers to entry.

The engineering culture is open source and inspiring to many, so iteration runs far faster than in traditional finance (TradFi), full of closed-source systems and legacy infrastructure.

Permissionless is a spectrum, though: many of these systems keep admin keys that can upgrade contracts, frontends that can block users, and governance concentrated in a few large token holders.

NFTs: Non-Fungible Tokens

Verifiably unique tokens that represent digital ownership. Tokens that are not NFTs are many.

Tokens that are NFTs are one of a kind. Fungible assets, like Bitcoin, are many. Bitcoin has a maximum supply of 21 million coins. Every BTC is fungible with every other BTC. You can trade 1 BTC for 1 BTC and 6.84 BTC for 6.84 BTC.

NFTs are one-of-one, meaning they each have unique characteristics and different value structures. Some are worthless, some are worth millions.

DAOs: Decentralized Autonomous Organizations

DAOs are an experiment in social governance structures. They intend to offer a more egalitarian and horizontal approach to company formation and community management.

However, that generally doesn't happen.

Each DAO serves different purposes and has its internal processes.

The function of most common DAOs ranges from serious use cases like voting on app updates and new developments (like Uniswap) to comedic and viral concepts like pooling funds to buy an NBA team (KrauseDAO), which I was stupid enough to participate in.

DAOs enable token holders to draft proposals for the community to vote on.

DAOs may vote on how treasury funds are managed, which NFT or tokens are invested into, roles and responsibilities within the DAO, and how to handle any internal conflicts that arise.

Trustlessness

The idea of asking for permission to make a transaction sounds odd, but 99.9% of the world indirectly asks for it whenever they access their bank account.

The other 0.1% participates in DeFi or a barter network.

In a barter network, you act within a P2P (peer-to-peer) framework with no central intermediary.

If I have ten chickens but want one cow, and you have one cow but want ten chickens, and we both value ten chickens per cow, I can trade my chicken to you for your cow, and we'll both be happy.

DeFi enables this same P2P framework but in the context of digital assets.

Challenges and Considerations

Regulatory Uncertainty and Counterparty Risk

In TradFi, your location may restrict you from accessing certain services, like crypto derivatives in the USA. US crypto traders are given a different opportunity than non-US crypto traders, and the reasons behind that are nuanced.

Long story short, US agencies like the SEC are not transparent with their opinions.

As a result, crypto exchanges want to avoid getting in trouble in the future, so they generally don't offer derivatives or as many token listings in the US as they do internationally.

This regulatory framework hurts US investors, as they are left with a small selection of tokens to choose from and disingenuous public market instruments like an ETF of futures contracts following BTC's price.

The regulatory uncertainty also impacts the country's economy as a whole, as developers and other human resources gravitate towards and generate economic value in regions with favorable regulations.

This concept, jurisdictional arbitrage, is a growing trend in this digital age.

It's an example of a second-order effect of slow and backward policies.

Reserve Currencies

The global monetary system is inconsistent. Evidence suggests that new international reserve currencies emerge every few centuries.

Billionaire investor and Bitcoin advocate Ray Dalio, among others, theorizes that the USD's current reserve status is declining and that other currencies will rise in global prominence.

While compelling, this theory conflicts with other geopolitical commentators, such as Peter Zeihan, who argues that falling populations and supply chain issues will halt the advancements of many emerging markets over the next century.

Peter argues that the global macroeconomic environment has moved into unprecedented territory and that the previous framework won't accommodate what will happen.

Also compelling.

Where This Leaves Things

People and companies can now take custody of their financial affairs in ways that weren't possible a decade ago.

NFTs and DAOs are related to DeFi but are breeding grounds for different experiments: by late 2021 that meant artists selling directly to collectors, games issuing tradable items, and internet groups pooling capital under shared rules. Whether those experiments displace the incumbent versions of art markets, gaming, and governance is still an open question.