Bankless is Layer Zero Technology
Protocols coordinate capital, Bankless coordinates people.
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Dear Bankless Nation,
The world is ready for change.
The institutions have failed. Governments are driving inflation to new levels. Internet corporations are profiting billions off of our information. Banks continue to gouge their customers. There’s coordination failures all around us.
Younger generations are more pessimistic than ever about the future.
In this backdrop…crypto offers hope.
We have new institutions. We have new property rights systems. We have a scalable coordination system for the world. Web 3 is a digital frontier of opportunity and hope.
And Bankless is here to tell crypto’s story.
You’ve heard of layer 1 and layer 2. Both these technologies rest on the most important layer of all—layer zero—the social technology. The hearts and minds of individuals.
Layer zero is people.
Bankless is here to help the world understand how to thrive and prosper in this new frontier and to enshrine values of decentralization so that we can preserve crypto for future generations as a force for freedom and economic opportunity.
Bankless is a layer zero technology.
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Bankless Writer: David Hoffman, Co-Founder of Bankless
Bankless is Layer Zero Technology
As we wrap up the year, I want to take this opportunity to zoom out and refocus.
2021 was an incredible year for crypto. It was the year the crypto community was right about a lot of things:
Inflation has pushed people into alternative forms of scarcity.
Silicon Valley’s business models have people adopting new platforms.
Banks have pushed people to be more bankless.
This year is a huge W for everything crypto and a big fat L for everything incumbent.
What’s happening here?
The world is currently going through a phase change. As old institutions become aged and senile, new institutions are pushing through the growing pains of maturity. The old world in which the young feel excluded is being replaced by a new alternative being built by the previously disenfranchised.
On the other side of this transitionary period is a brighter future with more equitable social systems that treat all users equally.
That last part is no guarantee. The beneficiaries of these newly created crypto-networks could just as easily become the boomers of the next age. Where the baby boomer generation was gifted the post-WWII era, the millennials are gifted the age of the digital era.
Might our children have the same rejection of our social structures as we are having to the generations before us?
The answer to this critical question is up to us.
The Protocol Sink
The Protocol Sink Thesis is a key idea that Ryan and I have relied on since the inception of Bankless. The Protocol Sink thesis states that companies, institutions, individuals, and nation-states will build on credibly neutral decentralized protocols rather than centralized alternatives that can be biased in favor of a third party.
The most decentralized protocols will sink to the base layer of societal trust just as higher-density liquids sink to the bottom of a glass.
Let’s take the example of a startup.
It’s safer for a startup to build on a protocol with unbias rules than it is to trust another company not to screw them. Protocols offer stronger assurances for business models vs centralized alternatives. Since protocols are public goods, it’s easier for startups to adopt the protocols offered, rather than compete with them.
You can build AOL on the internet but you can’t build the internet on AOL.
In February 2020, Ryan wrote “Instead of using their own lending pool, the banks will use Compound”. Just last week, Coinbase announced it will be integrating with Compound to offer yield on DAI. Coinbase is using two credibly neutral DeFi apps, Compound and Maker, to create its yield product.
Now the yield offered by the Compound protocol is a product that is offered by Coinbase. It’s also not exclusive to Coinbase; this same product can also be created by Binance, Kraken, Gemini, or any other institution that wants to earn yield from Compound and pass it along to its customers.
And fortunately, individuals can freely access the yield themselves directly.
This model predicts that protocols are much more scalable than companies. You can build many companies on top of protocols, and these many companies can amplify the offerings of the protocol to a far greater number of individual people than a single entity ever could.
Protocols are capable of reaching far more people than an individual company.
This is why the design of these protocols really matters.
Not only are many companies going to be tapping into the power of DeFi applications, but other DeFi applications are also going to be plugging into each other to create their products.
Money Legos—another Bankless meme.
The deeper down in the protocol sink an application is, the more applications and businesses are built on top of that protocol. Uniswap liquidity is accessed by DeFi apps, DEX aggregators, and companies alike. The design decisions that have been made in the creation of Uniswap impact all that use it. The interest rate algorithms set by Compound impact all companies and individuals downstream of its yield. The risk tolerances of MakerDAO impact each and every one of the $9B outstanding DAI that has been issued.
Because these protocols are so socially scalable, the choices in their design become critically important. The potential downstream consequences of good or bad choices can change the course of humanity.
Don’t Cause Civil Wars
Little did I know that when I signed up for Facebook in high school, that Facebook would be causing civil wars and swaying the world’s most powerful democracy. There was no way to know of the long-term consequences of Facebook’s business model… or all of Web2’s for that matter.
Yet here we are. We have Silicon Valley goliaths that rival nation-state power, and Web2 companies and nation-states consume the same commodity for fuel: people.
The way we design our social systems matters. What may seem like a trivial design decision today might have catastrophic long-term consequences. Even the smallest incentive imbalances can create critical social fissures in future generations.
If we want these structures to work for us, for our kids, and for our kids’ kids, a lot of critical thought must go into how these systems are designed. When social systems are tilted in favor of one group over another, the discrepancy eventually grows large enough to incentivize the losing group to sweep the board and start anew.
“Wiping the slate clean” is an act that is deeply ingrained in human culture. We, as a species, can’t seem to get away from the need to cancel the debts and start anew.
We have a word for it: a jubilee.
Debt jubilees are where insurmountable social debts are forgiven, and the indebted class are released from their shackles and allowed a new life. Religious jubilee’s come in many forms but generally deal with the mass forgiveness of sin (and if you believe David Graeber, debt and sin are similar social constructs).
At some point, social structures get too entrenched and undemocratic. Society feels as if it has progressed into a dead-end, and the only way forward is by taking a few steps backward.
Ledgers are erased. Capital is destroyed.
The playing field is leveled, and humanity starts anew.
This is what the Protestant Reformation, the French Revolution, the Communist Revolution, the Cuban Revolution, and many many other wars were fought over. The masses grew intolerant of the elite and wiped the ledgers clean.
When society becomes too unequal, the disadvantaged refuse to move forward with the elites. They revolt. They force the elites to distribute their wealth until things are fair enough to move forward as a collective society again.
The social structures on which society operates determine how quickly or slowly humanity reaches this state. Severely imbalanced social structures quickly tilts towards social upheaval, while balanced social structures keep things stable for much longer periods of time.
Nowhere will you ever hear about TCP/IP or SMTP causing civil wars. Facebook on the other hand, almost has two under its belt.
The Goal is to Not Take Steps Back
Society makes small steps forward every single day. We all get up in the morning, drink coffee, and ‘work’. That work adds just a little bit of progress and innovation to the global collective every single day.
Societal progress is expensive. Moving the entire weight of society requires the social machine to move at a snail’s pace; in first gear. Even the smallest innovations have mountains of collective labor behind them.
And it can all be undone with a single revolution. Society is always in constant threat of unwinding. If enough of society feels that we’re making progress in the wrong direction, it can be very hard to course-correct enough to retain the progress that has already been laid. If enough of society feels that we’re marching towards a dead-end, we’ll start to split into groups…often violently.
The progress of humanity is a story of going two steps forward, and one step back. Sometimes if we’re lucky we can take 3 steps forward. If we’re unlucky, we take three steps back. If we really mess up, we could accidentally trigger a total reset (Great Filter Theory).
Protocols are Footholds for Progress
Steve Jobs once said: “computers are a bicycle for the mind”. The tools that we create allow us to do more things at less cost. This metaphor scales up to society at large; where humans use tools, society uses protocols.
Protocols are a tool for social organization. With the creation of good protocols that all of society can agree on, we have ways of ‘locking-in’ progress. We can rely on protocols to always be there, even if the things we build on top of them come and go.
The internet is a fantastic example. All of society agrees: the internet is good. Now that we have it, we have new ways of coordinating global resources in ways we never had before. Importantly, we can never lose the internet. It doesn’t go down. It can’t turn off.
Protocols help scale human progress because we’re all on the same playing field. Globally adopted protocols allow humans to ‘all be on the same page’. When we abide by the same rules, we can all make progress more efficiently.
If you want to go fast, go alone; if you want to go far, go together.
Those who chant ‘WAGMI’ know this; at least implicitly.
Scaling Trust Via Protocols
Looking at the progress of the human story from a macro-view, the scaling of trust, coordination, and commerce across larger groups of people could be viewed as the prime objective of the human species so far.
If someone were to ask us: What are you doing here?, humans could answer We’re trying to get coordinated! Or perhaps instead, humans first need to “get coordinated” so they can begin to formulate an answer to the question “What is our collective purpose?”.
Either way, our prime objective as a species is to create social coordination protocols that can help coordinate humanity on a large enough scale so that we can begin to work collectively towards a commonly shared goal.
We exist to slay Moloch 🔪.
Religion, Monarchies, Nation States, and now Crypto Networks are all advances in social coordination technologies. Crypto-Networks, as the newest and most advanced social coordination technology, has the capability to create mass social coordination beyond anything we’ve ever seen before.
That is why we’re all here. This is ‘the point of it all’.
Humans are Good, but our Systems are Flawed
Humans are extremely attuned to fairness. Morality is built into our DNA. We have a highly specialized radar for sensing when someone is ‘out of alignment’ with the rest of the group.
During the millennia before abundant resources, it was extremely important for us to be able to identify who else among us doesn’t have our backs. Being able to do this well was a matter of life or death.
We have survived as a species because we all are constantly checking for anyone who might be ‘free-riding’ or consuming more than their fair share.
But this is a laborious exercise. Individuals checking on individuals doesn’t scale well. Instead, we must produce systems of governance and coordination in order to scale fairness and equity. Religions promote altruism and goodness. Monarchies provide for their people. Governments tax the consumption of public resources.
While each system generally produces more positive outcomes than the previous ones, each one also brings its own failures and shortcomings. No system is perfect, but humans still strive to find systems with fewer flaws. Humans are born good, but we must then conform to the social structures that coordinate us. The flaws we see in collective society are not because humans are inherently flawed, but because our social structures project their flaws onto our behavior.
Humans can only be as good as our structures allow for. We are constantly looking for more balanced systems, because the more balanced the system the more total global fairness can be achieved.
More total global fairness produces a long-term sustainable equilibrium for society to build upon. It allows us to take many collective steps forward before the micro-deviations in individual starting positions produce meaningfully different outcomes for all of society.
The Crypto Renaissance
One of our favorite Bankless episodes is The Crypto Renaissance.
Because it’s not about code. It’s not about money. It’s about people.
The Crypto Renaissance tells a story that is as old as time. Entrenched, hierarchical social structures are oppressive to the individual. Corruption and capture turn these systems senile and ouroboric. New systems are created out of a necessity to escape the control of the old systems. These new systems are inherently decentralized and permissionless; like a virus, they escape the clutches of the previous elite.
A new world is created. A brighter future is created for everyone to share.
And then the wheel turns. This new future grows in size and hierarchy. Its innovation slows as it becomes ingrained in its ways. It becomes large and difficult to transcend. It shifts from a meritocracy to a plutocracy and disenfranchises those who arrive too late.
The younger generations can only take this oppression for so long, and eventually, they find a way out, using tools that enable decentralization and permissionlessness.
A Small Window of Opportunity
We were born too late to explore the globe, and too early to explore space. But we are fortunate to be alive right at the perfect time to explore the digital frontier.
Crypto networks are going to unseat old systems of power. For better or for worse. Crypto will replace old power structures with newer, fresher ones, and there is no guarantee that they will be ‘better’.
That is up to us.
Whether or not crypto burns its candle hot and fast, or instead more sustainably over more generations, will be decided by the choices of the first generations that build these structures.
As we build these new power structures, do we design them in such a way that protects only our interests? Well, why shouldn’t we? We built them…and isn’t that what the baby boomers did with their institutions?
Do we model these systems only to benefit us?
Or… do we design these structures in ways that leave room for future generations? What about the future unborn generations that will eventually need to become included in our fancy new social structures? If we do not make room for them now, then they will revolt just as we are doing now versus the current incumbents.
And from the investment perspective, this should be the profit-maximalist approach. We can pump our bags for longer and harder if we can find ways to include future generations in the upside.
The longer we can go as a society without triggering a jubilee, the more total wealth can be created. The goal is not to have to do a jubilee, and we need to be considering this now before the crypto-networks that we are building calcify into their final form.
The window of opportunity is small, and it is up to us to adapt and tune these systems to maximize long-term equilibrium for as many generations as possible.
Bankless is Layer Zero Technology
Bankless is here to tell this story.
Religions. Nation States. Crypto Networks.
The common denominator between all of these is people. People make up religions. People elect their representatives. People download specific node software and operate specific chains.
It’s the people of the world that uphold the social structures we create.
L1 blockchains support L2 rollups in the same way that people support L1 blockchains. Where L1 blockchains sync via the internet, people sync via stories.
Humans run on stories. That’s how we operate. Stories are the tools we use to generate shared understanding across wide groups of people, and it’s through stories that the world will come to adopt disruptive new technologies. Give me a scientific explanation or a technical argument, and maybe you convince me. But tell me a story that I can empathize with, and I’m far more likely to be convinced.
Bankless tells stories.
The reason the Bankless movement has 150,000 subscribers, 1.5 million monthly downloads, and thousands working to spread the Bankless message isn’t because we provide good technical details and valuation metrics. It’s because we do those things while showing how crypto is making this world a better place.
Meaning. Significance. Purpose.
Like everything that exists in our social universe, Bankless is a narrative. It embodies a particular set of beliefs about the future and envisions a story about how we get there.
Bankless is the story that we tell in order to spread knowledge and awareness about these grand new social structures that we have discovered, and what we must do to protect them.
Inflation. Incumbency. Polarization. Digital Scarcity. Rent-seeking. Banks. DeFi. Web3. Transparency. Facebook → Meta. The Metaverse. NFTs. Self-Sovereignty. Long-term thinking.
These are all parts of a grander story, and we think Bankless can tell it.
The more people that have this story downloaded into their brain, and then willingly take on the responsibility of stewarding goodness into the protocols we use, the more successful and wealthy we can all become.
Bankless is here to make you wealthy, but not at the cost of future generations. We want you to be wealthy now, and in the future, and your kid’s future. Bankless is here to promote social structures that are fair and balanced and to help improve the ones that still need some work.
Bankless is here to scale the crypto rabbit hole. While the developers of the industry are digging the rabbit hole deeper, Bankless is digging it wider so more people can understand the significance of why they’re going down it in the first place. The sooner we can get more people to adopt crypto protocols, the faster we can find equitable and balanced protocols that enable long-term equilibria for future generations.
When you adopt crypto protocols, you adopt crypto values. It’s up to us to ensure that crypto-values are long-term aligned with the people that are adopting them.
Don’t believe the short-termists and nihilism.
Decentralization matters and we plan to fight for it.
We’re headed west. This is the frontier. It’s not for everyone.
But thanks for joining us on the Bankless journey.
Reflect on the Bankless Legacy
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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.