Good evening.

Last week an old classmate from Teddy Hall said to me in a group chat:

In ten years all remote workers will be paid in crypto.

Unconvinced, I requested elaboration. Back came a passionate mix of how crypto might be used, why governments were inept, and a variant of “imagine living like a king” thanks to newfound wealth à la bitcoin. This exchange being on text, after a few unsuccessful volleys I opted to simply offer my gratitude for his willingness to engage, and wished him happy new year and fine fettle.

Lest readers take me for a crypto luddite, though I am skeptical I’ve also long been curious. When I attended a blockchain program at the Saïd School in 2019 I had hoped to be put through the rigor of Hegelian dialectic: what are the case for crypto, the case against it, and a well-reasoned, if not definitive, resolution that improves the quality of one’s overall understanding. Alas such curiosity was unrequited, as the course mostly consisted of lessons on the mechanics of blockchain and a litany of aspirational use cases.

In my subsequent search to understand crypto, I’ve found that since it’s a fintech innovation, a fine framework may as well be the innovator’s dilemma by the late Harvard Business School professor Clayton Christensen.

For readers unfamiliar with the framework, let’s first set up two concepts: jobs to be done and disruptive innovation. The jobs to be done concept posits that innovation happens when the customer’s underlying need, “the job to be done,” is correctly identified and innovators create a better offer. In Christensen’s telling, he discovered this concept while consulting for a fast food company. Realizing that customers of the company’s milk shakes didn’t so much have a need for nutrition but distraction during long commutes, Christensen correctly advised his client to grow the milk shake business by offering more interesting milk shakes, such as those with a fruit chunk, rather than making the shakes more nutritious per se.

Christensen’s second concept is disruptive innovation, in which he distinguishes sustaining and disruptive technologies. Christensen explains in his 1997 book:

Most new technologies foster improved product performance. I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies have in common is that they improve the performance of established products… An important finding revealed in this book is that rarely have even the most radically difficult sustaining technologies precipitated the failure of leading firms.

Occasionally, however, disruptive technologies emerge: innovations that result in worse product performance, at least in the near-term. Ironically, in each of the instances studied in this book, it was disruptive technology that preciptated the leading firms’ failure.

Disruptive technologies bring to a market a very different value proposition than had been available previously… Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently, more convenient to use.

Combining the concepts of jobs to be done and disruptive technology, the innovator’s dilemma is the paradoxical failure of a leading firm that provides the best product performance on the market but is overtaken by an ostensibly inferior, yet “good enough,” product. Over time, this inferior product evolves to be best in class and its maker the new leading firm.

Now, applying the innovator’s dilemma framework to our subject matter, if crypto is the disruptor, what are the encumbents? There would seem to be two. First, government-issued fiat currencies fulfill the role of money as we traditionally understand it. Second, there is gold, or rather, any alternative asset class that provides diversification.

In the first instance, it’s not a fringe act today to note the problems of fiat currency. Monetary policy-induced overleveraging and rising geopolitical risks are just two examples most frequently mentioned in recent news. But these shortcomings just prove that, unlike the innovator’s dilemma, government fiat currencies are far from “over-serving” the market. On the other hand, crypto, atypical of a disruptive technology candidate, is not simpler nor more convenient to use. Perhaps no one makes this intuitive point more poignantly than the comedian John Oliver, when he called bitcoin “everything you don’t understand about money combined with everything you don’t understand about computers.”

The second instance of crypto as an alternative asset class is more promising. With the stock market at all time highs yet still flush with cash, in recent weeks investors have directed significant sums into crypto. To put this in perspective, as of last week the entire crypto market was about $850 billion, according to Binance, smaller than the latest round of U.S. stimulus package. But, it is growing fast and many institutional players such as Blackrock have moved in.

Coincidentally while crypto was breaking price records daily, we saw a cratering in the precious metals market last Friday. From longtime gold trader and thought-leader Jonathan Mergott on January 9:

Yesterday was bloody in precious metals. Silver tanked 10% at the worst point of the day and many miners were down 10% or more. Gold bulls on twitter suddenly got quite as virtually everyone was analyzing the market, their portfolio, and trying to see "what went wrong."

While Mergott went on to chalk up the crash mostly to momentum-chasing algorithms and a temporary market confidence boost due to the economic relief package, when viewed in parallel, it’s hard not to wonder if the surge in crypto was at least partially funded by exits from the precious metals market, whose size is about $200 billion. Relative to precious metals, which require familiarity with financial securities and fintech, crypto still may not be simpler, but it may not be much harder.

To sum it up, while it’s yet unclear if crypto is a disruptive technology to government fiat currencies, there may be something there for it to be a new alternative asset class. Nick Maggiuli of Ritholtz Wealth Management lays out a similar viewpoint as mine, but more eloquently with an additional thought on government intervention:

The biggest risk I see to owning Bitcoin going forward isn’t a price crash (which is inevitable), but the possibility of a government ban on ownership. This might seem outlandish, but in April 1933 the U.S. government banned the ownership of gold bullion / coinage for all U.S. citizens. The reasons for that ban are very different from a Bitcoin ban that could happen today, but with the recent SEC complaint against Ripple (another cryptocurrency) I wouldn’t rule it out completely.

So how else can we analyze crypto’s possible future?

At this point, I would recommend a four-part series on emergent layers by Alex Danco of Shopify Money and one of the best public writers on money-as-a-technology. The core concept of emergent layers is that by abstracting a scarce resource (analogous to Christensen’s jobs to be done, but from the standpoint of the resource), humans have unlocked the key to make that resource abundant by understanding its essence rather than its particular vehicle, and subsequently created new value with the newfound abundance.

In Danco’s own words:

Going way back, we can see how humans have created new value through abstraction since the very beginning of time:

-Basic safety and food requirements became abstracted into the communal tribe, allowing us to do more new things.

-Communication with one another became abstracted into language, allowing us to do more new things.

-Assisting and trading with one another became abstracted into currency, allowing us to do more new things.

-Human and animal muscle became abstracted into steam, gas and electric power, allowing us to do more new things.

-Our daily cognitive work (and much more) became abstracted into a network of intelligent machines, allowing us to do more new things.

More recently, within the modern day technology stack:

-Computing power became abstracted into the programmable chip, making it abundantly available (and Intel a lot of money)

-PC hardware became abstracted into software, making it abundantly available (and Microsoft a lot of money)

-Network participation became abstracted into all-purpose gear & protocols, making it abundantly available (and Cisco a lot of money)

-Indexed comprehension of the contents of the internet was abstracted into PageRank, making it abundantly available (and Google a lot of money)

-Humans connecting to one another was abstracted into the social graph, making it abundantly available (and Facebook a lot of money)

Danco visualizes the above process in the following chart:

He then cuts to the chase on what animates this theory:

Why does this work? What makes column i and column j fit together to the extent that they do? The most important mental leap to make, I believe, is grasping the connection between scarcity and being overserved.

Said another way, the key to grasping crypto’s future is understanding what...