Why is cryptocurrency going to succeed?

When it comes to an AI world, it is the only form of money that can keep pace. If we are looking at a world which is outpacing Moore's Law, eventually leading to what I think will be another economic singularity, we are talking about a lot of dollars.

Most involved with crypto are well aware that our present financial system is full of gatekeepers. This places friction throughout the entire system. Even in its embryotic state, we can see how crypto systems operate with a great deal more efficiency.

For most of the world (roughly 80%), the money supply is expanded through commercial bank lending. This is known as fractional reserve banking. Of course, there is a process that banks go through before approving loans. Computerization has sped this up but it is still not an instantaneous process.

So how do we keep pace in a world where the foundation is making Moore's Law look like the turtle instead of the hare? Also, what is needed if we have a global economy that is growing at 30% per year?

We take a look at this.

Image generated by Ideogram

Cryptocurrency: The Only Money That Can Keep Up With AI

Before digging into the monetary aspect, lets see how things are advancing. Moore's Law has a double of transistors roughly every 2 years. On a cost per performance basis, that equates to 50% deflation annually.

The California Learning Network, a contract within the California Department of Education, states in just the last decade alone, AI has improved by 40,000 times, according to a study by IARPA, the Intelligence Advanced Research Projects Activity. Source

To contrast, Moore's Law does a 32x in the same period.

This can be seen from a study by McKinsey and Co. They concluded that:

Prior to 2012, AI results closely tracked Moore’s Law, with compute doubling every two years.,” the report said. “Post-2012, compute has been doubling every 3.4 months.”

Source

We also see the total amount of AI compute follow the same pattern. This is doubling roughly every 3.5 months. Source

Economic Singularity

In my view, the result of this transition means we enter another singularity. Since the start of the Industrial Revolution, the global growth rate is roughly 3%. This has waned a bit over the last couple decades, indicating we need a breakthrough. AI is likely to provide that.

It is important to note that the Industrial Revolution took the growth rate from the previous .3% we realized under the agricultural age. That was a 10x.

This is why I define the next singularity (economic) as a 30% annual growth rate.

Here is where the problem enters: to achieve that, a lot of money is required and it has to move fast. There is no way the present money supply mechanism can keep up. In fact, I make the case this was true for the last 80 years (Post World War 2). That is why we see the Eurodollar System emerge. This is how the overwhelming majority of global trade is funded.

Yet, even that is slamming into a wall. We often hear the phase "balance sheet constrained". This means the international banking system lacks the assets to drive the volume of money to keep pace with what is required. It could be one of the main factors why global growth rates have not kept pace.

The Eurodollar System operates much quicker than the commercial banks. There we see swaps conducted to the tune of almost $5 trillion per day. This is how the international banking system evolved.

The Speed Of Cryptocurrency

Cryptocurrency is actually emerging in a similar manner. To start, what gets overlooked is the fact we are dealing a ledger based system. Actually, that is what all monetary systems are to a large degree. They are a combination of accounting and communications with some form of settlement.

It is precisely what cryptocurrency does.

There is, however, one major difference. Monetary units can come from anywhere. The Eurodollar System uses assets such as sovereign debt, commercial paper, or asset backed securities. It is run (and controlled) by the international banking system.

Crypto is open to anyone. Also, since it is entirely in the digital realm, value is derived in a different manner. When we look at the underlying assets, at least those created thus far, they are dependent upon network effects. This is much different than an interest rate swap.

Of course, mirrors of traditional assets is likely to occur. This will, unfortunately, fall under the umbrella of the same traditional financial institutions. It might provide some increase in the pace of expansion but not nearly enough to fund 30% annual growth.

Memecoins show how rapidly money can be created. Naturally, there is flaw in the design since these are really nothing more than speculative trades based upon sentiment. That said, the process is valid.

When this is coupled with underlying economic productivity in some form, especially if driven by AI, we can see how things change. Instead of hype, the asset has value due to economic conditions that are generated. From this point, an assortment of products could result that address payments, funding, or collateralization.

Speed is the key and the existing system is simply to slow in a world where the numbers mentioned above are occurring. An annual growth rate of 30% is something that most cannot even comprehend. Well, a couple decades ago, the idea of total compute doubling every 3.5 months was outlandish yet it is the place we find ourselves in.