Nothing is so permanent as a temporary government program. - Milton Friedman
We live in a society in which almost everything is about money. And as with everything, money exists on a quality distribution. That means not every money is created equal. Some money is better than others. We refer to the quality of money as hardness. The best money is therefore the hardest possible asset. In the context of finance, this post intents to explain why hardness matters.
The common medium of exchange today is fiat money. And whether we talk about the US Dollar, the European Euro, or the Argentine Peso, those fiat currencies are all not more than paper bills of almost arbitrary value. The institutions that create and maintain our money have the monopoly of violence within the confines of their respective jurisdictions. And since our economies rely on financial debt in order to grow, our ever increasing household deficits will eventually have to be financed with more paper that the government will print whenever there is enough of a reason to do so. The act of printing more money is called currency debasement. And with enough currency debasement, price inflation will eventually materialize, once the additional money supply has worked its way through the economy. In summary, printing more money makes prices go up. And while prices go up, wages may or may not increase enough to keep up with inflation. A simple thought experiment can be stated like this. Imagine there are 10 marbles in which we measure our wealth. You own 2 marbles of those 10. Your wealth amounts now to 20% of all purchasing power in the world. Now imagine somebody creates another 10 marbles. Just like that. What just happened was to make you poorer, because your wealth in this world got reduced from 20% to 10%. You now own only 2 out of 20 marbles, effectively cutting your purchasing power in half. This thought experiment describes currency debasement in action. There is no hardness to fiat currencies, because they can be exploited and debased at will, with or without your consent. The widening wealth gap in the global financial system is a byproduct of GDP growth. The rich get richer because they are more productive, or because they own the hardest assets on a relative basis. As society evolves and as technology advances, everything gets more expensive for everyone eventually. But the people who own hard assets like gold, crypto, real estate and tech stocks keep their wealth disproportionately to the rest of the people who do not own sufficiently hard assets. In principle, the hardest possible assets cannot be corrupted. They cannot be taken away from you, and they cannot be devalued without your consent. Therefore, the hardest possible assets help to protect your individual wealth over time. And this is why hardness matters.
The laws of physics obtain the property of unbelievable hardness. Based on our current understanding, gravity cannot be diluted, space cannot be exploited and time cannot be manipulated. Nobody is going to take gravity away from you. The consequence of this hardness is that every single one of us can heavily rely upon physics. Time itself is not concerned about the colour of your skin. Every one of us has 24 hours in any given day. No exceptions! The same is true for mathematics. We can build something according to the laws of physics and mathematics and rely upon the predicted behaviours of that application. This is how we harness electricity. This is how we build computers. And this is how we encrypt data. Our ability to develop and use technology has given mankind the defining edge throughout history. On an evolutionary scale, money has been utilized as a form of coordination technology. Money enabled us to allocate capital in order to be better tomorrow. And this is what we did ever since. For the sake of keeping it simple, let us not focus too much on all the complexities involved when determining what money actually is. In fact, money is a lot of things. For our purpose here, let us simply say this much. Money enables us to buy whatever somebody else is willing to sell. So the act of trading one thing for another is facilitated by money, where that one thing must be valuable to both parties involved in the trade. Exchanging value requires us to store and transfer that value over time. And we can say that the hardest asset is the very money that stores the most amount of value over the longest period of time. Time is the ultimate enemy of anything that aims to retain value. Because we are once again competing against the laws of physics. With every passing year, and every passing century, everything in this world may change in unpredictable ways. Because given enough time, entropy will run its course, disintegrating everything eventually. And hardness is the very property that allows any money-like-asset to stand the test of time as far as people are concerned.
On a human time scale we can say that real estate has been a pretty hard asset for many people, with the caveat that real estate is immobile and at times illiquid. Those two unfortunate properties may cause tremendous harm to one's wealth, if the value of one's real estate cannot be made liquid when it is needed the most. War is a pretty devastating thing if your home gets seized or destroyed in the process. And real estate markets become ever less liquid the more likely the prospects of war become in any given area. Gold has been a pretty hard asset over the centuries as well, and many continue to believe in its hardness to this day. The problem with gold is not so much that it can be destroyed like the house you want to live in. The problem with gold is rather that it is difficult to move if you own it yourself in physical form. Owning significant amounts of value in the form of physical gold is highly impractical. And chances are that it gets seized or stolen, if war comes knocking at your door. Only a century ago Executive Order 6102 was signed in the USA, forcing citizens to turn in most of their gold based assets during the Great Depression. Henceforth, americans had been prohibited from owning arbitrary amounts of gold for over 40 years, until the limitation of gold ownership was repealed in 1974. That story says something about the great democracies we live in. And all we can take away from this life is that there is no rule or law, but what you can or cannot do.
It is fair to say that nothing is harder than time itself. Regardless, our approximations under the use of technology start to become closer to the hardest possible assets ever created. This is where we make the case for blockchain networks and their native tokens, most notably BTC and ETH. We have begun the age of digital assets now. They are global by nature. Digital assets are not simply confined by nation state borders. They are always liquid, and if managed properly, almost impossible to seize. Though, digital assets do admittedly only exist for a mere 15 years by the time of writing. And that begs the question how reliable those technologies can in fact be at retaining any amount of value, if their Lindy Effect today is still very limited. In my mind, what we are witnessing here is the purest form of technologically enabled economic compression we have ever seen before.
Economic compression is a protocol for harnessing the sudden release of accumulated action potential. It so happens that somewhere in the economy, this action potential increases over time. And approached at the right moment, it can be taken advantage of in order to gain a distinct productivity increase. The goal is to realize more value in less time by compressing progress. For instance, working in a startup compresses the experience of a career. Investing in digital assets compresses the understanding of money. Adding weight during sports compresses the effects of training, and so on. Economic compression reduces multi decade efforts down into a couple of years time, or even a moment's notice, resulting in productivity increases that are sometimes extraordinary. In my mind, that is what we are doing with blockchain networks today. We are compressing the network effects of innovation and increase our abilities to capture its value. And we do it better and faster than ever before, because blockchain networks are permissionless open-source ecosystems that anyone can build and rely upon. This is the case for the hardest possible asset. BTC and ETH are the most liquid, most durable and least corruptible assets, which makes those assets the hardest fucking thing in our day and age.
Let us look at those three dimensions, liquidity, durability and corruption. Liquidity is important because you need to be able to exchange value for what you prefer in any given moment. Making real estate liquid takes a fair amount of time, if there is even a market for your real estate when you need it. There might not be any sufficient buyer for your real estate when you want to sell it. Making reasonable amounts of gold liquid does only work if you are not owning the physical yourself. And in that case all you really own is a receipt from the issuing custodian that promises to give you the money for your gold when you ask for it. Most of the time this promise should be sufficient, but one might ask why to "own" gold if all you rely on is a promise after all. Digital assets are always liquid internet money. As long as you have access to your private keys you should be able to sell your digital assets 24/7 for anything that trades against it. We could argue that another form of liquidity is portability. You cannot just move your house or your gold bars across borders. You may not even be able to redeem your gold shares if you end up in the wrong jurisdiction. What you can always do is to backup and move your private keys, wherever you go. And that can be done with only pen and paper. Or, you can memorize a list of words if you really have to. And all you need to access the network is then a normal internet connection.
The next dimension to look at would be durability. Real estate is not very durable in the grand scheme of things. Every house needs a new roof every once in a while. Real estate has to be maintained over time, which might as well end up being a real headache if you run out of luck. Gold is a precious metal and most durable by nature. So gold gets a 20/20 on durability, but only if you own the physical yourself. Blockchain networks are not as lindy as gold. In fact, cryptography has to prove itself time and time again as technology progresses. Though on that note, it would probably be hubris to bet against technological progress. And that should be especially true, given that most of the world economy does already rely on the respective cryptographic primitives. The very nature of cryptography being attacked and challenged in the open, every waking moment, is the very reason why it is so profoundly reliable. In short, blockchain networks are antifragile. Further, your private keys are not more than bits and bytes that can be remembered forever. The economic value stored in association with your private keys fluctuates heavily based on today's liquidity cycles. But the more important secular trend inherent to blockchain networks is their technological adoption over time. Adoption of blockchain networks has, and continues to increase rapidly, making their native tokens ever more valuable as described by Metcalfe's law. Digital assets underpin their own digital economies, and that makes them extremely valuable, arguably adding to their durability, simply because digital assets are very likely one of the defining technologies of our future.
Our third dimension to consider here is corruption, most notoriously known and experienced by every single human being ever. If you want to test a man’s character, give him power. And so, real estate has been seized, gold has been banned, and to this day it remains uncertain how blockchain networks are going to be corrupted from without and from within. We might argue that nation states start to outlaw blockchain networks, which the most autoritarian regimes would certainly wish to do. But, just as removing machine learning from your toolbox represents the lack of competitive advantage that no nation state can do without anymore on the geopolitical stage, I argue, the same is just as true for blockchain networks. I argue that nation states cannot simply ban crypto anymore. If they do, they fall behind, because the time has come that we can vote with our money now. If you are against us, you are without our money. One day career politicians assemble an anti crypto army. And the next day they want to work with us because they realized that over 52 million Americans own crypto. It has never been clearer to anyone who is willing to listen that we, crypto as an industry, won the game. And yet, if you talk to anyone outside of this industry, you are still met with straight out hatred and utter disbelieve. The opportunities in front of us are barely understood by anyone and if you talk about our collective future vision, you are still perceived as a delusional fool. The more they ignore us, the more time we have to get embedded into the system. And from within we will shape those systems for a more equitable future. I think that we already crossed an existential tipping point for this industry, which gave crypto a cultural and systemically critical relevance. We showed the world how to build systems that cannot be easily corrupted anymore by the human condition. And if we only keep building these systems, we can only keep winning to everyone's benefit.
If time is the ultimate end boss, we could say that future proof assets obtain an inherent hardness. And if we believe that software is eating the world, then we have to realize that the economy will become ever more digital without exception. I believe the world economy will eventually run entirely on blockchain networks for a myriad of reasons. Crypto does already get the adoption bid. Crypto does also already get the liquidity bid today. And if our theory is true, then crypto will eventually get the demand bid from a future in which the world economy will run entirely on blockchain networks. For these reasons and all of the above, I argue that digital assets represent the hardest fucking thing in our day and age. And you don't want to miss that.