Discover more from Learning by Proxy with Vivek Srinivasan
An asset that everyone owns
Does not exist...
America attacked Afghanistan, left the country in a crisis and withdrew. They froze all of the Afghan money at the Fed.
Russia attacked Ukraine and continues to supply oil to Europe. America freezes all of the Russian money at the Fed as well.
Moral of the story - Finance is the greatest weapon of mass destruction.
The blog I wrote earlier in the week was about a book that questions the source of inequality. Let us continue on that theme.
The economy is how the rich rob the poor. The truest reflection of this is the wealth distribution across the planet.
The pyramid shows that:
half of the world's net wealth belongs to the top 1%,
top 10% of adults hold 85%, while the bottom 90% hold the remaining 15% of the world's total wealth,
top 30% of adults hold 97% of the total wealth.
This does not look good and shows how much disparity exists in the world. But that is the least of the problems. The bigger problem is that when those few people are afflicted by a fallacy of thought, such as - subprime lending is a great idea; they can throw the entire world into a tailspin.
When Bernie Madoff steals from a few, he goes to jail; when the entire system is stealing from everyone we get an $800 billion bailout.
That is precisely what happened in 2008. As the ‘Fuck it’ energy was running high in the aftermath of the economic meltdown, Bitcoin was introduced to the world. At first, nobody cared about it. Bitcoin had a few advantages.
- It did not have an issuing authority. Corrupt politicians therefore could not control the currency.
- It was decentralised so it could not belong to any country or person
- There was no way to manipulate the currency, at least at the beginning.
- The people who own it control it.
In 2017, the world realised that Bitcoin existed and a crazy speculation bubble set in.
Now imagine there is a new concept coming to market. You are not even sure it will work. Say an electric car; who do you think are going to be the first people to buy it. Those who have a lot of cash sitting around and do not care about losing some. That is exactly what happened with Bitcoin. A lot of rich people hoarded the coin and this reduced supply in the market considerably and the price shot up. The more they hoarded, the higher the price went.
Ethereum co-founder Gavin Wood introduced the world to the term Web3 in 2014. Web3 was to encompass all technologies or products built with a decentralised foundation. Andreessen of A16Z co-opted it in 2021. Venture Capitalists are investing in Web3 startups with the hope of cashing in big.
Web3 is being touted as the internet that people will own. Unlike Amazon of the Web1 world and Facebook of the Web2 world; Web3 does not have gatekeepers and it will belong to all. The wealth will be equally distributed and everyone will benefit.
If that really was the case, then why are VCs investing in it?
The NBER study found that the top 10,000 bitcoin investors own a combined 5 million bitcoins, or roughly $230 billion's worth at recent prices. Those figures mean that, even though bitcoin launched in 2009, "participation in bitcoin is still very skewed toward a few top players even at the end of 2020," said finance experts Igor Makarov and Antoinette Schoar, who wrote the study.
Those top players represent a mere 0.01% of all bitcoin holders and yet they control 27% of the digital currency, the Wall Street Journal reported. That compares to the old-fashion dollar, where the top 1% controlled 30% of total U.S. household wealth, according to Federal Reserve data.
Source: CBS News
Web3 although is not about cryptocurrency alone. It is also about all of the other things that you can do on a decentralised blockchain. One of the biggest applications that have emerged over the last 3 years is NFTs or Non-Fungible Tokens. More than a year ago, I had written about NFTs.
Art collections have been accessible to only the super-rich; anyone can access NFTs they said…
Figures from blockchain analysis platform Chainalysis show that between February and November last year, the 2.7 million NFTs in existence were owned by just 360,000 people. This compares to the roughly 300 million people that use cryptocurrency.
Less than 10 per cent of those owners hold 80 per cent of the value of the market, meaning it is dominated by so-called ‘whales’ and mainstream adoption remains a long way off.
“Can we start 2022 by facing the fact that NFTs, which in 2021 attracted copious media coverage and buy-in from top investors and brands, reportedly has less than 400,000 actual owners – less than 40,000 of whom own 80 per cent of all NFTs value,” author and virtual reality commentator Wagner James Au said.
“That’s a niche of a niche of a niche.”
In a blog post detailing the discrepancy between the media attention they receive and their actual popularity, James Au noted that more people own virtual items in the online game Second Life –roughly 500,000 – than the number of people who own NFTs.
Source: The Independent
The VCs have been hoping that baiting more and more people into adopting ‘Web3’ would make them super-rich. They have a well-worn playbook.
Engage in the exercise of “market creation” - Create a solution that does not exist in the market and for which there is no demand either. Then offer it at insane discounts, so insane that it would be stupid not to use it. Kill the alternatives, destroy the existing paradigms and then turn up the prices. Amazon did this to perfection in e-commerce. Uber/ Ola did this well in India where taxi services that had been a niche play forever. Food delivery startups did it to restaurants. Most of the new restaurants opening today are what they call dark restaurants, essentially a kitchen that only caters for Swiggy or Uber Eats or whichever service is popular in your country.
There was a time, I used to be able to walk up to a taxi stand and find a taxi in any city in India. Uber/Ola have destroyed these. To add insult to injury, the drivers seem to have an unpublished route and if your destination is not on it, they will cancel your ride. From being a convenience, these apps have become the greatest source of consternation.
Unfortunately when you are playing with an entire economic system where all the wealth is already concentrated in the hands of a few, the concentration makes itself manifest in other ways.
Iranian-born crypto entrepreneur Sina Estavi purchased the NFT for $2.9 million in March 2021. Last Thursday, he announced on Twitter that he wished to sell the NFT, and pledged 50% of its proceeds (which he thought would exceed $25 million) to charity. The auction closed Wednesday, with just seven total offers ranging from 0.09 ETH ($277 at current prices) to 0.0019 ETH (almost $6).
“The deadline I set was over, but if I get a good offer, I might accept it, I might never sell it,” Estavi told CoinDesk via a WhatsApp message on Wednesday.
When 90% of something is owned by only 10,000 people; you are appealing to a very small market. The demand-supply dynamics play very differently.
I don’t know if this is the end of the beginning OR the beginning of the end.
Would Web3 entrepreneurs and VCs settle down for the long haul and battle hard to bring more people onto their platforms and create a parallel economic system that only serves them OR would VCs start to see the writing on the wall and pull back from investing any further into this?