An engine in a traditional sense is a device that converts potential energy of any form to mechanical energy – power to motion. In the digital age this definition has expanded and become a little more ambiguous. For example graphics engines turn the data about a scene into a pretty picture for you. Valve’s Steam engine is an digital distribution platform. Neither is literally or digitally creating motion, but they are what “powers” the respective software. So a more modern definition of an engine is ‘that which powers’. Taken this way I view blockchains as a new form of capital engine. In the future, blockchains will be ‘that which powers’ capital.
Capital, in its least corrupt implementation, is essentially a claim upon the effort of others. We tend to think of credit cards and our mortgage as debt but actually all capital, even cash in your pocket, represents a debt from society to you that you can settle by claiming various services from others. Capital in that sense is like potential energy and the conversion of that potential energy to mechanical action is the action of a capital engine.
As with energy, capital can take many forms – we denominate our net worth in many things. There’s the balance of our bank account, equities, property, etc. Some of these forms of capital are more liquid than others but all of them store value in the same way heat or an electric field can both store energy. Converting between these forms of energy is also the action of a capital engine. The first capital engines were merely used for payments. All land was owned by the king and there was not a legal entity for a bakery or pub down the road. As society has progressed we have expanded and codified property rights to many more things which has accelerated innovation by enabling fund raising from a wider audience and speculation/arbitrage to create fairer access to goods and services. We created ledgers of ownership for these companies and various debt instruments such as mortgages. We created market tools where the ownership these things could change hands.
In any engine, conversion from one type of energy to another takes a toll. Every time you touch energy you tend to lose some due to entropy. Every bit of noise and heat radiating from your combustion engine is energy loss. Of course, some engines are more efficient than others and are suitable for different purposes. In the past 100 years the capital engines we have been using have greatly expanded the number of users, equivalent to making many more motors, but the efficiency of those engines has not particularly improved.
With the invention of blockchains, we have finally invented a fundamentally new form of capital engine. This new class of engine is simply more energy efficient than the engines we use today. It converts capital from one form to another with fewer fees, in less time, and amongst many more forms than its predecessor. Sending fiat overseas on Tradfi rails can take weeks and take fees of several percent. Sending a stablecoin on a blockchain can be sub-second and take negligible fees. Trading from one form of equity to another will take at least two full business days on Tradfi brokerages. On blockchains this can be done instantly. This difference in efficiency will be transformative for how people store their wealth.
In particular, the settlement time difference enables people to keep their wealth in a productive form at all times. When you can instantly exchange capital of any form for money in your local denomination there’s no need to keep half a month’s expenses in a checking account. Minimum balances, yearly fees, and overdraft charges are no longer a thing. That alone already makes this technology a boon to billions of the worlds poorest people but it also democratizes access to every financial instrument at the same time. We now have the legal and technical solutions to tokenize everything from a mortgage line of credit to equities to government bonds and to make those tokens accessible to the world. This new engine enables everyone to store their capital in whatever form supports the causes they believe in. This offers the world an unprecedented degree of economic freedom.
The lower friction of capital conversion works to the benefit of both sides of every transaction. Every payee can designate what forms of capital they are willing to accept. Every payer can convert from any form of capital they have to a form the payee accepts. We can even extract taxes in transit. Bitcoin maxi’s need to believe Bitcoin is going to be the new reserve currency of the world. What I find more likely is that smart contracts are going to enable everyone to make independent decisions on what their personal reserve currency is. Yes, they could use Bitcoin but they could alternatively use T-bills, Microsoft stock, or their house. My argument is that it is ultimately their choice and that is a fundamentally good thing.
At this point adoption is as inevitable as any revolutionary engine would be. There’s no denying the physics here, regardless of the will of incumbents. Financial institutions are now racing to adopt this faster than their competitors rather than just hoping to suppress it. We are officially upgrading Wall Street. The news of this is everywhere: in the words of largest asset management firms, in the speeches from the SEC and CFTC, in the legislation being passed, and in the investor notes for every financial institution. Every serious financial company has a stablecoin strategy. There are at least 4 competing solutions for tokenized equities. There are at least 3 competing solutions for tokenized mortgages. No one serious is talking anymore about whether this is going to happen but instead they are talking about how to position themselves in a new world where blockchains dominate financial infrastructure. How do you position yourself for a world where there are $4T in stablecoins? How do you position yourself for a world where anyone can use their house as their credit line? How do you position yourself for a world that doesn’t need intermediaries where so many of these companies sit comfortably today? These are the questions we should be discussing, not what the next 10x memecoin is.
During the Cypherpunk days there was a clear philosophical movement of building technologies that would empower people and remove friction and corruption. By 2021 it felt like we had shed most of those ideals and replaced them with NFT grifts and memecoins. Our focus had shifted to inventing new casinos and maximizing value extraction from a shrinking ecosystem. I hope the web3 ecosystem can reinvigorate those early ideals and dare to dream big again. The moment to realize those early ambitions is now upon us. We need those dreamers again now.