September 17, 2024 | Read Online

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"We show that only quick, aggressive attacks can stave off the doomsday scenario: the collapse of society as zombies overtake us all."

— When zombies attack: Mathematical modelling of an outbreak of zombie infection

Crypto needs more creative destruction

In 2014, Amazon began paying employees to quit.

Once a year, employees at Amazon's fulfillment centers would receive an email titled "Please Don't Take This Offer" in which they'd be offered up to $5,000 to quit their job.

"The goal is to encourage folks to take a moment and think about what they really want," Jeff Bezos explained in his annual letter to shareholders that year.

"In the long-run, an employee staying somewhere they don't want to be isn't healthy for the employee or the company."

Crypto might need something similar.

Travis Kling, who caught the zeitgeist at the start of the year with his thesis that financial nihilism had come to crypto, may have done it again with his new thesis that crypto is now beset by "quiet quitting."

"A meaningful swath of the crypto community is simply much less engaged than in prior years," he explained. "People have left crypto in droves. But a meaningful portion have stayed and are just WAY less motivated, way less enthused, way less of a believer."

I'm not sure how to square that view with the evident enthusiasm on display in Singapore this week, but I take the frenzy of activity there mostly as encouraging evidence that the crypto industry still has plenty of resources at its disposal.

The question is how good it is at allocating it.

Kling's thesis suggests crypto's resources are being misallocated at the individual level and you can imagine why that might be the case: Unscientifically, low-participation DAOs allocating magic-bean money to work-from-home employees feels like a toxic mix of unproductivity.

Normally, you wouldn't expect that state of affairs to persist for long — economic theory predicts that the protocols allocating money inefficiently should die out in a Darwinian battle of survival of the fittest.

Real-world crypto practice, however, suggests otherwise because big crypto protocols rarely seem to die.

Like the notorious zombie firms of Japan that stagger along on government support and free money, many big crypto protocols with no obvious purpose seem to stagger along on the support of indiscriminate crypto markets.

This might be a problem.

The walking dead

The economist Tyler Cowen recently made a counterintuitive case against import tariffs, arguing that allowing foreign competitors to put inefficient domestic firms out of business is a net benefit to the US economy: "An efficient economy is one that is better at putting less competent firms out of business."

Imposing tariffs on imports is counterproductive because it reduces the competitive pressures that helpfully put less competent firms out of business.

Some degree of economic incompetence is inevitable: "Parts of an economy may remain relatively unaffected by competitive pressures," Cowen writes. "Nonprofits, for example, often do not face direct profit and loss constraints, and many of them may hold substantial endowments or receive regular donations from supporters who do not monitor quality closely."

Replace "nonprofits" with "crypto protocols" (few of which seem to be for profit) and I think the above statement would be equally valid.

This is perhaps unexpected because crypto has been spiritually aligned with the Austrian school of economics that preaches "creative destruction."

In reality, however, the industry seems to practice something more akin to "stagnating preservation."

That is bad news, and not only for the crypto investors investing in zombie tokens.

It's bad news for investors in the good tokens too, because zombie protocols compete with productive protocols for the limited pool of crypto resources.

Would the crypto industry be better off, for example, if the developers still working on, say, Polkadot or Fantom were released back into the pool of available developers so they could be hired by more productive projects?

These may be bad examples — there still seem to be a lot of believers in Fantom and Polkadot and they could well turn out to be right, I don't know.

But it doesn't feel like crypto markets are being ruthless enough in culling protocols that don't immediately find product-market fit.

In its eighth year of existence, Fantom is doing $77,000 of annualized revenue against a market capitalization of $1.6 billion.

In its fifth year of existence, Polkadot is doing $232,000 of annualized revenue against a market capitalization of $6 billion.

As long as crypto investors continue to assign billion-dollar valuations to projects that can't seem to find a market for their services, zombie protocols will continue to roam.

— Byron Gilliam

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The State of Solana DeFi

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Nick Timiraos @NickTimiraos

The Fed faces a finely balanced set of considerations over whether to cut by 25 or 50 basis points at its meeting that begins today.

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John Paul Koning @jp_koning

It's not my favorite option, but holding DeFi users—and not creators—liable for laundering dirty funds is one way to slowly pull DeFi into compliance with anti-money laundering laws.

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