April 01, 2024 | Read Online

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"Money is a matter of belief, even faith."

- Niall Ferguson

Memecoins Can Be Money, Too

When Ireland's banking system repeatedly closed for months on end in the 1960s and 70s, people responded to the ensuing shortages of money by creating their own — writing out IOUs on whatever piece of paper was to hand.

"The insides of cigarette packets suddenly became bills of exchange" and Ireland's pubs became "the principal clearing houses" for this impromptu form of money.

In response to the Great Financial Crisis of 2008, a non-profit organization in the London borough of Brixton invented another sort of money — "Brixton Pounds" — in hopes of shoring up the local economy.

Hundreds of shops soon accepted the currency in physical form (featuring a colorful portrait of Brixton-born David Bowie) or by text message.

It proved a lasting success. A decade later, 500,000 Brixton Pounds were in circulation, with physical notes available at dedicated ATMs and a tokenized version available on a blockchain.

Most recently, the Argentine region of La Rioja voted to issue its own currency, the "bocade," which will be used in the first instance to pay public-sector employees.

The bocade will also be accepted as payment by the local government for taxes, by utility companies for water and electricity bills, and, with luck, by local businesses in return for goods and services.

If so, it'll be the latest illustration that money doesn't have to be sovereign — it's not the imprint of a king's profile that turns coins into money or the picture of a US president that turns paper into money.

Money is whatever we believe it to be.

This weekend, a lot of people started to believe in the memecoin Degen.

How to find purpose in life

The Degen token is up 50-fold over the past month, but that's not any more unusual than its $2 billion fully diluted value — if a mooning price and inexplicable valuation were the defining characteristics of money, we'd have dozens of new ones by now.

What is unusual is that the Degen memecoin has become the unit of account and means of exchange on a new, eponymous layer-3 blockchain — and that does qualify it as money.

A memecoin being accepted on a blockchain built for memecoins may seem like no great accomplishment to you — the equivalent perhaps of cigarette-pack IOUs being accepted in Irish pubs or Brixton Pounds in south London coffee shops.

But, unlike those quirky examples of local monies, Degen might be indicative of something bigger — it might be evidence that crypto has reversed the logical order of money creation.

US dollars, for example, first had value because people needed them to pay taxes — then, because they were accepted for taxes, they became accepted for everything else, too.

Similarly, ETH and SOL first had value because they were needed to pay gas fees on the Ethereum and Solana blockchains, respectively, where they then became the unit of account and means of exchange for the NFTs and tokens traded there.

Degen, however, has done this process in reverse.

Degen first acquired value (perhaps inexplicably) as a memecoin and then invented its utility by becoming the native token of its own layer-3 blockchain where it's now accepted as money — it's the unit of account and means of exchange for the 1,500+ memecoins already on offer there.

This may not prove to be a lasting advantage — it's not yet clear that the Degen blockchain serves any real purpose.

But that, too, is part of crypto's new order of operations: Attention comes first, followed by utility, and then — maybe — purpose.

For example, layer-3 blockchains promise 1) much lower transaction fees than the layer-2s they're built on and 2) a potential solution to the liquidity fragmentation issue inherent to layer-2 chains.

In the case of Degen, however, neither of these benefits solves any current or even currently imaginable need.

For now, the only thing the Degen blockchain is being used for is to trade memecoins, and memecoin traders were not clamoring for lower fees — if you think you're going to make 100x in a coin, you won't care whether it costs $0.01 or $0.50 to buy it.

The Degen chain does not solve for liquidity fragmentation, either — on its own, Degen has only made the issue worse by fragmenting liquidity away from Base (which has fragmented it away from Ethereum).

But the Degen chain could solve liquidity fragmentation if it became one of a larger ecosystem of layer-3s that all shared liquidity (in a way that layer-2s cannot).

That ecosystem of low-cost layer-3s might then enable some as-yet unimaginable use case.

If so, the typical order of operations for money creation will have been successfully reversed.

Instead of starting with a purpose (funding government, say, or building a new blockchain), then establishing utility (paying taxes or fees), which then creates belief (money), we start with belief (memecoin), give it utility (fees), and then find it a purpose (TBD).

This may be the new model for crypto: belief > utility > purpose.

Money has always been a matter of belief, as Niall Ferguson explains, and the belief in memecoins has now turned at least one of them into money.

― Byron Gilliam

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Daily Insights

Liz Young @LizYoungStrat

Hard to imagine IG credit spreads narrowing further but given that dealers expect bond issuance to fall in April, we might see them make a push toward their mid-2021 lows if economic data keeps behaving.

Apr 1, 2024

20 Likes 7 Retweets 0 Replies

Sreeram Kannan @sreeramkannan

Do we need L3s?
————-
Direct L2 to L2 interaction can happen in many ways.

@cemozer_ is pointing out you can have direct fraud or zk proofs across L2, which is true. One downside with fraud proofs is that you are still waiting for the fraud proof window. With zk proofs you are… twitter.com/i/web/status/1…

Cem Özer @cemozer_

The concept of L3s settling to L2s primarily exists because in the existing rollup world, the only way for a rollup to be securely connected to other rollups is to prove its state to the Ethereum L1. There is no way for a rollup to securely prove its state to all the other… twitter.com/i/web/status/1…x.com/musalbas/statu…

Apr 1, 2024

14 Likes 4 Retweets 3 Replies

Dan Rasmussen @verdadcap

There is no empirical evidence that a company's market share predicts its profitability. But that hasn't stopped academics, business school curricula, and management consulting firms from promulgating the idea for decades. The below chart shows industry leaders vs. industry… twitter.com/i/web/status/1…