Something else.

“What happens after the end of history?” That is the question.

It is visible on late night TV, in academic journals, on the x flamewars. It is visible in the fading rust-belt, the glimmering towers of Shenzhen, the piles of rubble across Gaza, the skies over Tehran. It is visible in the rise of Clavicular, the Epstein files, the memeosphere. It is visible in the death of stagflation. The AI benchmarks. The capex figures. It is visible in the polarization, in the financialization, in the soaring national debt. It is visible in Mark Carney’s speech. It is visible on Trump’s Truth Social. It is visible in the street fights of Europe. The students laying flat in Chongqing. The price of eggs in Colorado. The renewed interest in religion.

For my generation (1991) and later, we were birthed into a world of US hegemony - of triumphant liberalism remaking the world in its image. It is all we know. The scar tissue of a 20th century with real contenders remains as chapters in history books. Of novels and talking heads with wrinkled faces on TV channels we don’t watch that still use phrases like “The American Dream” and “eCommerce”.

And yet, the question has never been more visceral; a growing awareness that for the first time since 1989, the future is up for grabs.

Our social contract is unwinding. Our politics polarized. Our finances unsustainable. Our shared realities non-existent. Our ideology stuck along 20th century axioms. Our president is a reality TV star. The one before him was braindead.

It’s hard not to feel like we are going insane.

All of this is against a backdrop where the largest companies in history are spending trillions of dollars in collective capex in a race for superintelligence. Whether this leads to utopia or dystopia we know not, but we will summon the demon regardless. Because we can. Because we must. Because if we don’t, someone else will. Because if we don’t accelerate, the whole delicate system will implode.

We are watching an alien intelligence reach back from the future; ironically assembling itself atop the distributed incentives and individual freedoms championed by liberal democracies which no single person can check; capital and compute amassing at unprecedented scales behind remarkably small, centralized clusters of neurodivergent minds, increasingly guided less by the binaries of code but suggestive nudges through mountains of silicon in pursuit of loops of recursive self-improvement. Our own 21st century Towers of Babel.

Are we ready?

Our emotions remain paleolithic, our institutions medieval, and our technology godlike (increasingly literally).

History is on the march once again.

But where?

The Four Horseman: Who Restarted History?

While not comprehensive, there are four key horseman behind the growing assault on liberal democracies:

• First, China. Against expectations, China did not liberalize as it became wealthy. The US populous must now reconcile with a near-peer rival which rejected its ideology, and yet has achieved astonishing results, lighting a clear alternative path for developing nations. The liberal democratic monopoly on economic and technological supremacy has been cast in shadow.

• Second, the internet. The internet remains one of the most powerful forces of social reorganization in history. It has changed how we consume information, how we find community, our sense of truth. Our very realities have fragmented, shared consensus fleeting. Forging a national ethos on an internet built atop algorithms beholden to market incentives is challenging. The internet, as they say, remains undefeated. Its limitless edges and nodes have now birthed artificial intelligence; a pending automation onslaught in a country built primarily on white-collar service work perpetuating...

• Third, inequality. The industrial age was a mass age. An age in which the average man or woman was a necessary cog. An age we are leaving. Globalization pushed those jobs off-shore. The zero-marginal costs of software introduced power-law returns. Boomer voting blocks veto any semblance of fiscal responsibility, driving up the cost of living for youths without assets. The age of automation will enhance the returns of capital well above labor. The atmosphere is ripe for populism; the youth globally now willing to experiment with more extreme change.

• Fourth, human nature. Some might argue that life has indeed grown too good in liberal democracies; a growing sense of purposelessness in a world without true struggle. Per Fukuyama: “Experience suggests that if men cannot struggle on behalf of a just cause, then they will struggle against the just cause. They will struggle for the sake of struggle. They will struggle, in other words, out of a certain boredom: for they cannot imagine living in a world without struggle. And if the greater part of the world in which they live is characterized by peaceful and prosperous liberal democracy, then they will struggle against that peace and prosperity, and against democracy.”

Despite the negative headlines and talking-head jestergooning, the world has never been more prosperous. The twins of liberalism and capitalism have birthed astonishing gains in quality of life that a few generations ago would be considered Utopian. Pax Americana’s peace dividend brought into being a world in which virtually everyone competed furiously to meet the material desires of their fellow man; a world on a trajectory where are our children will likely never have to work again.

And now, we are in the process of tearing it down.

Choose your Fighter

There are several contenders for what comes after the end of history.

1) The Return to History

MAGA is clearly a front runner. Mamdani is another. These are mainstream movements with broad appeal because they match clearly onto existing ideologies. National rejuvenation vs. class oppression. Blood and soil vs. collectivist redistribution. Varying flavors at the end of Hayek’s horseshoe capitalizing on the growing discontents brought on by the four horsemen. Both are fighting the last war. Both are promising a return to history in a world which has moved on. Both will either crumble or they will rot the nations which embrace them.

2) The Emergent Autists

The emergent autists are the elites vying to shape or hijack the mass political movements pursuing a “Return to History.” Due to their niche appeal, each has been forced to piggyback on larger movements for real political influence. Effective Altruism’s (e/a) rational technocratic leanings and progressive outlook paired more seamlessly with the democratic establishment while the reactionary effective accelerationism’s (e/acc) uncomfortable marriage with MAGA is most visible in the surprising love child of the Trump-Thiel alliance, JD Vance.

e/a and e/acc will fail for opposite reasons.

E/a has failed because humans are first and foremost emotional beings. We are not the Spock automatons to which the SF-hyper-rationalists aspire. While well-intentioned, the movement is simply too apollonian to have any mass appeal. It’s leaders lack charisma: the vice signaling necessary to resonate with everyday voters in a democratic society. They are elitist in a patronizing way. In their lofty intentions to serve humanity, they forgot how to be human.

E/acc will fail for the opposite reason. While e/a is human-centered in intent, yet inhuman in its approach, e/acc is all-too human in its zeal, yet too inhuman in its intent. Paradoxically, there is something oddly Marxian about e/acc vibes: an unshakeable confidence in the march of history towards some inevitable endpoint which can only be accelerated or delayed but not changed. An end to the capitalist system as we know it, brought about not by inherent contradictions and an overthrow by labor but a techno-capitalist victory so complete as to render the current generation of humans irrelevant. Capital and technology as self-orchestrating organisms, pursuing their own ends. With the artificial intelligence build out receiving trillions in investment, this no longer seems like anthropomorphism.

We must merge or be left behind.

One cannot help but feel modern history as a constant struggle between deeply Christian notions underpinning human worth and the revaluation of all values demanded by a world in which God is truly dead. E/a as the end-point of a secularized Christianity. E/acc as a call to unchain our 21st century Ubermensch: those capable of staring unblinkingly into the coming singularity, accelerating the inevitable and shepherding humanity through a necessary transition which the majority would in no way choose to embrace itself.

One is too rational in its humanism. The other is too zealous in its inhumanity.

We will need both.

3) Embracing the Dragon

Aside from its internal discontents, the obvious reason that liberalism has been losing ground globally is because it has lost its monopoly on standard of living gains. China’s astonishing forty year rise presents a very tangible, alternative vision for what comes after the end of history.

China is the first modern civilization-scale project which has rejected many core liberal tenets and yet continues to perform. The American republic has been the modern era’s first great experiment, clearly its most successful. Modern China is the second. China has thrown off the yoke of traditional religion and its humanist variants and yet has not collapsed into nihilism and decay. Instead, more than any other country, China is the nation most intent on accelerating the future.

The drive to pull forward the future is visible in the HSR track laid, the debt binge, the patents filed, the engineering graduates, the industrial automation, the plummeting birth rate, the surveillance, the AI boyfriends, the relative tech optimism, its broad digital adoption, the censorship, the robot-infused new year galas, the drone deliveries, the vaulting bridges of Yunnan, the tunnels of Tibet. Across a host of vectors, good and bad, China is no longer crossing the river by feeling the stones, it is forging ahead into uncharted territory.

I am not saying this is my preferred vision of the future. On some vectors it is, on many it is not. Yet, the approach has proven uncomfortably good at delivering in many areas liberal democracies have struggled. China is painting a genuine vision for what a post-liberal, techno-authoritarian state may look like and other countries, even some younger constituents in the US, are paying attention.

In its attempt to compete with China, the US will inevitably become more like China (just as China will become more like the US). However, the US will never become China, and nor should it.

It will need to become something else.

4) Exit

The most extreme vision of what comes after the end of history in the west is a fragmentation into a constellation of network states juxtaposed against the centralized Sino-superstate. This is the future most famously championed by Balaji Srinivasan: a vision where talents globally can form communities and national identities based on shared values as opposed to the happenstance of birth. In many ways, this is liberalism taken to its extreme - sovereign individuals beyond the reach of the nation state with the ability to elect the societies, rules, and communities in which they want to participate. Unfettered freedom.

I still consider The Fountainhead and The Sovereign Individual to be two of the most formidable reads of my youth, but I have grown less libertarian with time. I increasingly view exit from the US as a Sino-dominated future. And I increasingly view obligations as equal, if not more important, to freedom in finding purpose.

First, loosely federated leagues tend to be less effective than centralized nation states in shaping geopolitics in the modern world. America and China are the G2 of the 21st century, not Europe or ASEAN. Without a national tax and centralized allocation of resources, the ability to project power is severely diminished.

Second, AI’s inflection has materially changed the landscape. Prior to the AI boom, tech was largely restrained to the digital sphere - consumer internet, B2B SaaS, crypto - often portable to different jurisdictions. AI, on the other hand, is materially intensive: the fabs, the chips, the power, the factories, the robots. Everything about AI portends an inflection in the world of atoms, a world which requires immense coordination of physical resources and high returns to scale. This is a game of nation-states and nation-state sized corporations, not federated micro-states.

Perhaps we are heading towards a future in which distributed networks of heterogeneous compute can be orchestrated to form powerful, permissionless training runs and reasoning traces on a global scale. I believe this is coming. Yet, realistically the fifty million geniuses in a data center will arrive in the US or China first.

For the foreseeable future, countries will build either on the US or the Chinese AI stack (or some mix of the two). China has a clear vision of the future that it is selling to potential partners.

The US is still trying to decide what it wants to become next.

Something else.

I am writing this essay because none of the above gets me very excited. I don’t want MAGA. I don’t want Mamdami. I don’t want techno-authoritarianism with Chinese Characteristics. And we are not ready for a libertarian Utopia of network states.

I want something else.

There is some truth in each, like blind men caressing different parts of the elephant. A healthy dose of nationalism IS good. A societal willingness to provide a basic quality of life IS good. A willingness to attract and unleash the dynamism of the world’s tech elite IS good. Strong leadership to control anarchy IS good. Each vision gets at something true but is incomplete, lacking and stilted somehow.

What do I want?

I’m not sure, but it involves less fraudulent day care centers and more Trump accounts. Less dramatic swings between open borders and mass deportation, and more common sense immigration policy to monopolize the world’s top talent. Less network state utopia and more national special economic zones with markedly more permissive regulatory regimes. Less trumpeting about “human rights” and more quiet consideration as to one’s communal obligations. Less feminization in society and more willingness to stomach the risks which accompany rapid progress. Less data center moratoriums AND less Landian-inspired manifestos and more systematic campaigns explaining to the average joe why building God in a data center will be good for him. And once he agrees, less two-person NGOs and some niche environmental study standing in front of it as it goes up.

The future can be very, very good. However, the clear reality is that technology provides leverage to capital. AI is the ultimate form of technological leverage, converting capital directly into commoditized intelligence. This inherently increases the share of capital at the expense of labor. There is clearly a tension between near-infinite returns to capital and a democratic society whose economic model is built largely around labor-intensive services. We should not gas light people that this is not the case.

The reality is that AI is necessary to be competitive and can lead to unprecedented growth. It is also highly likely to drive unequal outcomes. There is little reason for the average joe in Iowa or Wisconsin without a brokerage account to be excited about massive productivity gains set to displace his livelihood accruing to a small coastal elite. An elite that already told him once that the gains from globalization would more than make up for his job displacement. Unfortunately, I suspect it will be very good politics very soon to be very anti-AI.

Liberal democracies have an AI problem. An inherent contradiction where the centralized returns to capital will clash with an increasingly displaced democratic majority. Where our love of meritocracy will clash with the reality that many are no longer economically useful. Where our love of property rights and individual freedoms will clash with our collective obligations. Where our economic dynamism fueled by the few will need to be made legible before the political will of the many.

We need e/acc for the west to remain competitive. And yet, e/acc - under our current political economy - will become politically toxic.

How will we proceed?

The Rest of Us

I think virtually every 18 year old male imagines becoming President. A secret belief in the buoyancy of youth that there is something exceptional about us. That we are truly unique and worthy of a place in history. This is one of the reasons I favor backing young founders. They are still delusional. They stare you in the eyes and say: “Yes, its me. I’m the one.” And you listen with a straight face because perhaps the number one qualification for changing the world is simply believing that its truly possible and letting that audacity infect investors and partners and employees and customers in an upward ponzi that actually, somehow, just might work.

Then most people get punched in the mouth.

The funding pulls out. The cofounder walks. The market wasn’t ready. Things change. You fall in love. You get married. You have a kid. You slowly realize that not everything in life revolves around the singular pursuit of your dreams. And maybe your initial dreams were more memetic than anything - that you wanted to change the world more to be known than because you had found your true purpose. You are still ambitious, but you are hemmed in by realities now. You have dreams but you also have dependencies. Little, actual, flesh-and-blood human beings that need to be fed and bathed and housed, that wake up at 4am screaming because they had a nightmare about a bulldozer.

You are not unhappy, but you slowly come to terms that perhaps you are not the one. That the trajectory of humanity is increasingly being decided by a couple thousand people in San Francisco, Washington D.C., Beijing and Hangzhou. That, in many ways, you are along for the ride. With the arrival of AI, there is now near-infinite leverage for the top 0.1% and within the next generation, many of us - perhaps all of us - will become economically redundant.

What will become of us?

The anxiety after the end of history is palpable. We have spent generations defining ourselves by our economic utility. Our status games often revolve around money as proof of our societal worth. I suspect our grandkids will look back on this idea as somewhat dystopian. With the rise of synthetic intelligence, we have a real chance of escaping this historical necessity:

“Thus for the first time since his creation man will be faced with his real, his permanent problem - how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.

The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

-John Maynard Keynes, The Economic Possibilities for our Grandchildren (1930)

The 21st century has a chance of being more beautiful than we can imagine. To focus on cultivating the art of life itself to a fuller perfection. But we have not yet arrived. We are the fourth turning.

America sits at a crossroads. Before collapse or rebirth or something completely new. I’m not sure what shape liberal democracies will take next, but I do know that it will take exceptional leadership to keep them from ripping themselves apart.

America was founded by leaders who were not perfect but they were principled, courageous, and wise in designing institutions robust to many classic human fables.

If the American experiment is to survive another 250 years, it will need to happen again. Generational leaders that will not shy away from birthing technological wonders, yet will cast the ring back into the fire when we reach the other side. That can walk the narrow corridor between acceleration and humanity. Between Nietzsche and Christ.

Perhaps the most beautiful thing about the liberal experiment is that you and I - with our votes and our wallets - have a small role in choosing what comes next. In selecting who those leaders should be.

Perhaps one of you is just delusional enough to become one.

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The US will need to reinvest in heavy infrastructure and subsidize the return of strategic industries while forgoing consumption and welfare expenditures to make these investments fiscally palatable. China meanwhile seems likely to be forced, against its will, into a greater liberalization of its economy as key export markets seek to rebalance.

On a host of dimensions, the next five years will see the US become more like China and China become more like the US. Due to their starting points on opposing sides, this convergence seems like it will be more favorable to Chinese equities than its US counterparts.

China spent decades suppressing wages and investing in its foundations. These deep roots are now starting to bear fruit. As large export markets turn hostile, the logical next turn is inward; stimulating consumption and encouraging more robust domestic capital markets. The US, on the other hand, has overconsumed and underproduced. It has been on harvest mode for 25 years, and now must reinvest in its foundations.

For convergence to happen, which seems probable given the unwind of the current order and each side shoring up deficiencies, it seems likely that the RMB would appreciate and the relative size of Chinese equity markets compared to the US would need to grow materially.

In short, to remain competitive, the US and China will need to become more like each other. However, because of their different starting points, the process for each will be quite different.

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The Grand Bargain Unwinds

I sometimes view the US and China like Anikan and Obi wan Kenobi. Previous partners, turned by fate, now stuck in one of those Yugio-style force pushes - straining - each sliding backwards, the U.S. towards a hot, steaming lava pit (inflation), China towards a frigid icy abyss (deflation).

The world’s factory and the world’s consumption engine face inverted impacts as they seek to disentangle the supply chains on which the modern world is based.

China had invested in the productive capacity to serve the world and now finds itself facing trade barriers from two of its largest customers (the US and EU combine for ~44% of world GDP). Carving out China’s own domestic market, that leaves only ~39% of global GDP. The resulting excess capacity drives down prices at home and in markets which remain open to Chinese goods. The US, now keen to diversify production from its chief geopolitical rival, finds itself with rising import costs and inflating debt-service costs for its runaway deficits (fn: as large export economies rethink their historical recycling of surpluses into treasuries) - impacting prices ranging from Temu trinkets to mortgage rates.

The cost of the breakup in the US is inflation. The cost of the breakup in China is deflation. In both countries, the impact is being disproportionately shouldered by the youth.

The Lava Pit & The Abyss: the RMB is undervalued

It’s been interesting living in Shanghai this year and watching the cost of living crisis in the U.S. come to a head. When I return and pay US$150 for an Uber in from JFK and fork out US$20 burrito, I can sympathize. Pulling up my “DiDi” app (the uber equivalent) for a trip to Pudong International Airport from XuJiaHui (farther than Manhattan to JFK), I am quoted 136 RMB for the trip. At today’s exchange rate, this is ~US$20. The car which would take me there would likely be a new, affordable electric vehicle, traveling on paved highways which often make the Spaghetti Junction of my youth (of Atlanta interstate highway fame) appear parochial.

I stay in one of the most central parts of Shanghai - XuJiaHui - near the French Concession. Shanghai is less dense than Manhattan, but I would say a rough comparable would be staying in Union Square. We live on the 30th floor of a high-rise in a four bedroom apartment. The unit is on the older side for Chinese construction but has multiple door men and a nice xiao qu with a kid’s playground inside the community. Again, this is in a very central location. This unit cost about US$4000 per month to rent last year. This past year, we negotiated down to ~US$3000.

My gym is brand new - not quite Equinox quality, but close. All new machines, full weight sets, trainers with stretching facilities, showers, automated lockers. I pay roughly US$50 per month after incentives. I suspect the tenant can price this low because mall owners are now often providing one, if not two, years of free rent to entice tenants to keep the property full amidst the real estate slowdown. Again, this is in central Shanghai, right off XuJiaHui park.

I generally go to a community center for breakfast. These are public facilities with a cafeteria, a library, a place for older folks to congregate. The average age in the cafeteria is probably 65+. This one has a gym, a health clinic, and therapy center. I eat at the cafeteria most mornings and typically order two niu rou bao’s (think meat buns) for breakfast. Each is ~40 cents. I believe the food is subsidized. For lunch, I may go for Wontons (10 for 15 RMB, a little over US$2) or go for a Taipei-style rou bing (kind of like an Asian Burrito) for 26 RMB (a little under US$4). Both are made fresh and delicious.

When I get home from research at the library, I will scoop up 3 - 5 ecommerce packages which my wife or mother-in-law have ordered (often baby supplies). The delivery fees for many of these packages will be <US$1.

Aside from the cost of living, China is very safe with almost no violent crime. Some of this is cultural, but a lot of it stems from the ubiquitous surveillance; probably my least favorite part of life in China, though many east Asian societies are ok trading in more security for privacy. The public spaces and parks in Shanghai are immaculate. The landscaping budget in Shanghai has got to be a not-insignificant portion of city GDP. As is well noted, public infrastructure is new and clean. Subway rides are generally a few RMB, so perhaps ~50 cents per ride. Public health systems are chaotic and crowded but generally efficient, high quality and affordable.

To be clear, this is not a “China rocks, the west sucks” expat porn piece. It’s a portrayal of the relatively high quality of life in Shanghai at an extremely compelling price point, particularly if one earns in dollars. Arguably a severely depressed price point.

Lying Flat: Steamrolled by Deflation

I’m not oblivious. This affordability goes hand in hand with other societal costs.

The convenience I enjoy often stems from an abundance of migrant labor from the inland provinces doing tough jobs for low wages. The cost of rent is depressed because of the massive real estate slowdown. The infrastructure is fantastic but at the cost of overly stretched government finances. China’s domestic demand engine is languishing at the same time its booming manufacturing sector is set to face greater geopolitical headwinds.

The challenges are numerous, and they are evident - even in outlier cities like Shanghai.

China has done an exceptional job of educating its populous over the last 25 years. The number of intelligent, technical, and hardworking young people emerging from Chinese Universities is the number one reason I remain bullish on the country. However, when facing a balance sheet recession, policy makers can either reach for the fiscal bazooka and risk inflation or stomach the deflationary shock and ensuing unemployment, a policy path which tends to disproportionately impact the young. To date, the leadership has erred towards the latter.

China has stopped reporting youth unemployment, but the vibes are not good. I have spoken numerous DiDi drivers with computer science degrees. I have spoken with local government employees whose application pipelines now include top graduates from Tsinghua or BeiDa. I have spoken with friends in Singapore from top Chinese Universities who mention large swaths of their graduating class had left the country. I have spoken with acquaintances that recently renegotiated office rents down in Beijing by 30 - 40%. There are signs that consumer sentiment is beginning to rebound but job prospects in this environment remain difficult for many. This, in turn, impacts household formation and only accelerates the already dismal demographic trends.

Looking around at the pristine infrastructure - not only in Shanghai and Hangzhou - but glistening new airports and high speed rail stations stretching from Yunnan and Guizhou in the west to Inner-Mongolia in the north, its easy to see how China could be at the tail end of a massive infra build-out, one it will be digesting for decades given the current debt load.

Many local government finances are challenged. The entire financial model of redistricting farm land for development will need to be revamped. There are decades of excesses. Digesting those excesses will take time. It will be painful. It has been painful. Even after the brutal correction, >50% of Chinese household wealth is tied up in real estate. The impact of the real estate slowdown to consumer sentiment will be long-lasting.

Incrementally, shifting towards an economy where domestic consumption plays a greater role would require difficult economic reforms. Such reforms would require a relinquishing of control from Beijing, ceding more capital allocation to households and private enterprises, which it is reticent to do.

These challenges are daunting.

However, 2025 was also the year I noticed a marked shift in sentiment on the ground in China; a quiet confidence which sparkled behind the eyes of my conversational counterparts - mostly young, technical, educated Chinese.

The Chinese Dream is Alive

To a person, almost all admitted the economic situation was difficult and many seemed surprisingly unexcited about their individual prospects, and yet basically every one of them was convinced of China’s continued rise. It was less a question than a simple fact, a fact which might be slowed or accelerated by effective or ineffective policy but seemed, in their estimation, inevitable.

After a humbling three years of COVID shutdowns, a rising trade war, a real estate bust, an equity slump, and increasing state control, this confidence was striking.

The last three years were not another “China meltdown.” They were a speedbump, growing pains in a continued rise.

There is less of the chest-beating, wolf-warrior-esque bravado of 2020-2021. This was quieter and self-assured. After proving China is the clear leader in renewables and electro-industrial manufacturing, can compete at the frontier of AI, and can go toe-to-toe with the US in a trade war, perhaps this is not surprising.

After three years in the doldrums, 2025 felt like a clear turning point in national sentiment for many elites. A quiet confidence that China is now the country building the future.

The Future is Being Built in China

One of the things that strikes me about the CCP is that it - like Peter Theil - has a much more salvific relationship to technology than the west. The CCP is racing to adopt and implement technology less out of platonic altruism than out of primal self interest. The race is existential. In a world without technological acceleration, China’s rise will deflate and the CCP may lose a mandate stemming primarily from performance legitimacy. China is a middle income country with elevated debts and a rapidly shrinking population. China remains dependent on foreign sources of food and energy in a world where the seas are controlled by a geopolitical rival. Without astounding productivity gains, the model will implode.

Literally the only way to thread the needle is massive technological investment.

China is not building the future because it wants to. China is building the future because it must. Without the investments in nuclear and solar, China will be at the mercy of energy exporters. Without its own semiconductor ecosystem, it will be at the mercy of US export controls. Without its own payment rails, it will be at the mercy of US sanctions. Without automating its manufacturing sector, it will be at the mercy of shrinking demographics and rising wages.

While reindustrializing after thirty years of offshoring is a colossal undertaking for the U.S., these challenges are dwarfed by the challenges facing Beijing. The U.S. is protected by oceans and surrounded by allies. China has potential conflict on almost every border. The US is an energy and food exporter; China an importer of both. The US has legal and financial infrastructure to attract capital and talent from the far corners of the globe. China is largely limited to its domestic population, and even then, many of the brightest have the economic incentives to leave. China must revamp its economic and tax model while being unwilling to limit government oversight of the economy. China’s Debt / GDP ratios are roughly equal to that of the US with a per capita GDP 1/5 as high.

This list goes on. I would not want to shoulder the burden of navigating a nation of 1.4 billion through these headwinds.

And still, despite all of that, China has a real shot at becoming world #1.

The U.S. is in the middle of blowing a 28-3 lead.

An Industrial Juggernaut

In almost every strategic value chain, China has been quickly ascending in global competitiveness. The 2020s appear to be the decade where China moves from capitalizing on low labor costs and imitation to capitalizing on systems-level superiority in many sectors.

While the system produces a lot of waste, Beijing’s long-term strategic investments have often proven prescient, laying the groundwork for compounding gains in areas of national interest atop over-investment.

This contrasts markedly with the US approach which tends to king-make and vertically integrate much too early:

In many of these sectors, I can’t help but feel that the Chinese government’s continued reinvestment through incentives, subsidies, low wages, and a strikingly low exchange rate are operating almost like an Amazon at national scale; constantly forgoing profits and consumption, funneling export proceeds back into more factories, more competition, and more capacity - in a ruthless cycle of reinvestment.

This is happening across EVs, drones, biotech, and many more sectors where China is not only the low cost producer, but increasingly the lowest cost producer at frontier quality.

Of course, the pillar which underpins everything is energy. Cheap, abundant, ideally-domestically-produced, energy. The lifeblood of any industrial juggernaut and likely to be the defining bottleneck in the AI race:

Without protectionism, China would be poised to take significant share across a host of industries, compounding atop its public investments and swarm of cutthroat competition.

The obvious problem with this strategy, however, is that large trading partners are now fed up with deindustrialization at the hands of the industrial juggernaut.

Which is why I’m ultimately bullish on Chinese equities despite the regime’s reticence of ceding control. Stimulating greater consumption and more robust capital markets are now aligned with its near-term goals amidst strategic competition with the US. We are starting to see this in the accommodative policy agenda. We are starting to see this with the anti-involution campaign. We are starting to see this in the bottoming of the RMB / USD exchange rate and a rerating of Chinese equities.

Given its rule of law, sturdy institutions, and deep capital markets, a premium on US assets is completely warranted.

But... a 5x premium in terms of % of global equities? Just seems likely the gap will close over the next decade.

Convergence: The Ensemble & The Soloist

I worked at a global Singaporean investment firm for a number of years. Every year, the organization would host a talent show, and the vast majority of years either the Chinese or the American teams would win.

The approaches couldn’t have been more different. Inevitably, the Chinese would have broad participation in an intricately choreographed routine reminiscent of a mini-2008 Olympic Games Opening Ceremony in Beijing. These productions would clearly have taken a lot of time, energy and rehearsal, and they always went off without a hitch. The Americans, on the other hand, would send up a single representative who was abnormally talented. Limited participation, limited planning, just a soloist with stage presence. In many ways, it’s was a microcosm of the two models.

However, I increasingly feel like the Chinese are developing their own virtuosos; individuals with the same ambition, vision and talent as a Steve Jobs or a Sam Altman, while the US is still struggling to rebuild its muscles for strategic planning and choreography.

Chinese entrepreneurs are constrained by their legal and financial infrastructure. American entrepreneurs are constrained by their industrial infrastructure.

To me, it seems the US has been in harvest mode for the past 25 years: milking its post-war legal institutions and deep capital markets for ever more juicy fruit while neglecting to invest in its foundations. Public education, research, and infrastructure are terribly mismanaged. Without investment in the foundations, the fruits will inevitably decay. China, on the other hand, has probably over-invested in its foundations, watering the roots again and again - often sacrificing near term harvests (higher wages, consumption, profits) for deeper roots.

But, of course, the US and China will end up becoming each other

Many will read this and call me a “Sinophile” and discount the message, so I will state my biases clearly.

I’m an American. I lived the first 27 years of my life in America. I’m pretty classically liberal and find many of America’s founding principles beautiful and aligned with my view of human flourishing. Though imperfect, I believe America has been the most benevolent hegemon in world history.

Though I live in China, I prefer American culture. On average, I’m more comfortable with Americans. We share references, humor, an openness and optimism which feels like home. While I now have many Chinese friends, there is still more friction for me integrating into Chinese social gatherings. The settings are relatively more guarded, restrained somehow - especially early in a relationship.

I share this to say that I’m quite American. I think America is the greatest country on earth, and I hope she remains that way.

At the same time, the role of any writer is to tell the truth.

When I evaluate the tenants which underpin national power, China seems well positioned in several: the most obvious being industrial capacity and increasing technological preeminence. On both fronts, China has made strategic long-term investments - first in human capital and second in infrastructure - which will pay dividends for decades.

These long-term investments are beginning to show fruit; allowing Chinese companies to rapidly iterate their way to the frontier. This harvest may be accelerated by an open source approach to AI aiming to imbue commoditized, frontier-grade intelligence into its deep industrial ecosystem.

It is now clear that the US and China will decouple to the extent that they can, in core strategic areas at the very least. My assessment is that the challenges of decoupling were largely priced into Chinese equities over the last three years while they were neglected in US markets.

As it becomes clear that in decoupling, the two superpowers must converge, it means the relative size of their equity markets are likely to as well.

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@ponderingdurian, signing off

If 2023-2024 were a New Hope, with OpenAI and Co. unleashing the wonders of generative AI upon the world, then 2025 was the year the Middle Kingdom struck back: releasing open source models on a bi-monthly cadence, ceaselessly nibbling away at the gaps on core benchmarks.

Source: Artificial Analysis

“You can see the future first in San Francisco.”
‍

That was the first line from Leopold Aschenbrenner’s viral manifesto in June of 2024. It is generally true. However, living in Shanghai during 2025 was the first time it felt like I was living six months ahead of the U.S. news cycle, at least with regards to conversations about tech and AI and China. Many conversations pre and post “the DeepSeek Moment” had made it quite clear that China would be a formidable competitor across much of the technological frontier. This realization gradually ramped up in Silicon Valley throughout the year, the exclamation coming in the form of Dan Wang’s Breakneck, which became perhaps the most read book in San Francisco in 2025.

The US and China are making fundamentally different bets on AI, the US is betting on superintelligence. China is betting on commoditized intelligence. The U.S. closed labs are seeking to build God and reap monopoly profits. The Chinese aim to build an enabler which can be infused into their massive industrial base, make up for deficiencies in services, and ensure domestic stability / control.

In 2026, my most basic predictions are two-fold: 1) The absolutely massive data center investments the U.S. hyperscalers will demonstrate clear performance pay offs in 2026, with SOTA model capabilities reaccelerating the gap with Chinese open source from ~6 months to ~18 months by December 2026. 2) China and open source will remain hardware constrained, falling markedly behind in SOTA level reasoning (math / science) ~18 months, but closer in performance on specific tasks like coding, long-context (RAG), and agentic workflows (~6 months). At the same time, China’s deep tech breakthroughs and the compounding atop its electro-industrial stack will only accelerate - riding decades of investment in education, infrastructure, dense supplier networks, and abundant policy support. The EV and biotech booms are just the start of a wide array of industries in which China will challenge the frontier.

The stage is set. 2026 appears poised to bring us “The Return of the U.S. Labs”: scaling law excitement reignited after a (relatively) lackluster 2025 as the next magnitude clusters come online. However, the entire U.S. economy is now a levered bet on scaling compute. The largest, most profitable companies in history, accounting for ~35% of the US stock market have “bet the farm.” 2026 will be the year where these colossal investments are put to the test.

The bull market in equities, a possible recession, and a potential material recalibration of the relative might of both the US and Chinese political economic models hangs in the balance.

The USA’s biggest advantages are its deep capital markets and its ability to attract the best talent the world over. The latter is coming under strain. The former has been on full display but is now highly levered to a single theme.

2026 will likely be the year which reveals which system has been making the right bets.

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26 Predictions for 2026

AI and Society

1. The “Arranged Marriage” Returns

• Dating app fatigue hits a breaking point; a new dating app goes viral replacing swipes with agent to agent interactions and much more tailored matching for real relationships

• Your AI agent negotiates with 1,000 other agents to check compatibility, verify identity, and schedule the calendar invite before you ever see a photo, based on a much greater degree of content / context

2. Anti Automation Politics: The Mamdani Shift

• Despite public revelations of massive fraud in blue states like Minnesota, Illinois, and California, left leaning populists gain ground - Silicon Valley has done a terrible job of marketing AI to a service economy spooked by automation and job loss. They pay a political price in 2026

• The democrats win the house, make a credible run at the Senate (though fall short), and flip a few notable gubernatorial races. The fears of job loss, cost of power, cost of housing, and inequality are ripe for a AI themed political tech lash

3. Ambient Computing: Glasses beat the Pin

• Smart glasses (Meta Orion/Ray-Ban) firmly defeat “AI Pins” as the dominant form factor for ambient AI.

• Greenshoots of the “Post-Smartphone” era emerge: early adopters (5% of the US population are ok without their phones for extended periods)

4. The First “Mars Fleet” Departs

• SpaceX launches a flotilla of ~5 uncrewed Starships to Mars in the late 2026 .

• The trip proves orbital refilling is viable and delivers hardware to preseed a “crewed trip” within the next five years

AI Infrastructure Supercycle

5. Energy Becomes the Benchmark: Tokens/Joule

• “Tokens per Dollar” is replaced by “Tokens per Joule” as the crucial marketing metric. As data center power constraints hit a wall, models are judged on their energy efficiency.

• Emerging, highly power-efficient approaches to compute like Thermodynamic computing, Spiking Neural Networks, and similar approaches become one of the larger venture buckets of 2026

6. Google Becomes #1 by Traffic

• The Google juggernaut was resurrected in 2025, and despite large Blackwell clusters coming online and giving a performance boost to its rivals, the chase down of OpenAI continues in 2026

• This is one of the more aggressive predictions, and very smart people at Coatue and others would disagree, but the direction of travel seems clear - across infrastructure, investment, research, data and distribution - Google continues to hum and gain considerable share

Source: similarweb

7. Photonics Goes Mainstream: The “Optical Interconnect” Flip

• Co-packaged optics (CPO) moves from “frontier demo” to default on AI network roadmaps. Copper interconnects hit a physics wall for the largest clusters.

• The optical interconnect M&A activity continues apace with at least 1, likely 2 more multi-billion dollar acquisitions announced.

8. Edge Inference & The RAM Squeeze

• Small Language Models (SLMs) running locally on laptops become the default for privacy-sensitive tasks, driving an inflection in high-RAM consumer devices

• Apple and Microsoft market “Local Intelligence” as the premium tier, convincing enterprises that cloud inference is a security risk

9. Distributed Compute Protocols find (modest) Product-Market Fit

• Distributed compute networks led by Nous Research, Prime Intellect, Gensyn and others move from speculation to revenue inflection

The Agentic Economy: Software Transitions from Tool to Labor

10. A substantial number of software providers switch to outcome based pricing

• We see major enterprise software contracts priced in “outcomes delivered” rather than “per seat.”

• SaaS gross margins dive as incumbents embrace the shift to the agentic era. Markets puke initially but then reward first movers with higher multiples (similar to on-prem to cloud transition)

11. Search Traffic Drops 15% as “Answer Engines” Win

• For the first time, traditional blue-link search volume declines markedly as users shift queries to answer engines

12. AI Copyright: The “Spotify for Data” Settlement

• A landmark settlement (likely involving OpenAI/Microsoft and major publishers) establishes a standardized licensing model for training data and makes it legally risky to scrape, forcing labs to begin paying.

• “Data Rights” become a more formal and liquid asset class, with media companies valued based on their clean, structured archives.

China & AI Geopolitics

13. Chinese equities outperform

• Institutional capital begins rotating back into China, realizing that there are two markets with frontier innovation and one is still priced at a material discount and likely to continue seeing strong policy support in a deflationary environment. (Hang Seng Tech Index > Nasdaq)

• At the same time, more of China’s top talent exits China to start small, yet high impact teams in less controversial jurisdictions in search of global customers, compute, and capital. Singapore is the largest beneficiary.

14. ByteDance Priced as a Global Hyperscaler

• Bytedance’s valuation continues to rise considerably in secondary markets - shifting from its pricing as a social app to a proper AI hyperscaler

• Mix of revenues, talent, and infra investment (US$23b) see Bytedance priced as China’s number 1 AI champion

15. The “Low-Altitude Economy” Goes Legal

• China’s Civil Aviation Law creates the first legal framework for drones/eVTOLs, forcing a global sector rerate.

• Shenzhen logs millions of autonomous delivery miles and launches commercial air taxi rides

16. Rare-Earth Magnets as a “Hidden Tax”

• China tightens export controls on processed neodymium, acting as a geopolitical tax on Western robotics and EV scaling.

• Horizontal enablers within the “modular middle” (s/o to Ryan Mcentush on the great essay) of the hopefully-to-begin-to-be-reconstructed US-led consumer-electronics supply chain become a top US venture $ destination in 2026

Robotics & Hard Tech

17. Humanoids: The “Boring” 1,000-Unit PO

• Humanoid robots get their first boring, real ROI proof point: a purchase order for >1,000 units from a logistics giant like Walmart or DHL.

• Performance is spotty but operating costs drop below $10/hour, undercutting US warehouse wages to a point where serious experimentation is merited.

18. Solid-State Batteries (SSB) Hit Production

• Dongfeng Motor (and peers) begin mass production of 350 Wh/kg solid-state cells, offering 1,000km range and eliminating fire risk.

• This marks a new premium tier for EVs and makes many more eVTOL / drone routes economically viable

19. Orbital Manufacturing Returns a Product

• Varda Space Industries successfully returns a pharmaceutical processed in orbit that is commercially superior to Earth-made versions.

• Validates the business case for “factory-to-pharma” loops in space.

Bio + Health

20. Sleep Tech Moves from “Tracking” to “Modulation”

• The era of “passive tracking” (Oura/Whoop) ends; the era of active Neurostimulation begins: devices that induce sleep via transcranial Alternating Current Stimulation (tACS) become a new status symbol.

• By late 2026, a major tech giant (Apple or Meta) acquires a neuro-modulation patent portfolio, signaling that wearables are now for “writing” to the brain, not just “reading” it.

21. Generative Biology’s “De Novo” Moment

• A drug candidate designed entirely by AI (no starting molecule from nature) enters Phase 2 trials or triggers a $2B+ partnership.

22. Biotech is back

• Biotech rerates as an AI beneficiary - XBI up 15%+ on the year

• Gene editing moves from “rare disease” to “cardiovascular prevention,” expanding the TAM by 100x.

23. Peptides Become a Massive Consumer Product

• The “Ozempic effect” has shifted the Overton window - experimentation with Peptides becomes a mainstream phenomenon

• Consumer wearables tracking “biological age” become mainstream

24. Bryan Johnson posts about the longevity of nightly erections >10 times in 2026.

• Self-explanatory

25. AI is a crucial participant in a “Nobel-Worthy” discovery

• AI is explicitly credited for a “new science” result in a top journal (Nature/Science) that humans could not have derived.

• Material Science is the most likely candidate - a new superconductor, battery material, or protein structure

Cyber Money

26. Bitcoin has a long overdue Gold catchup

• On the back of monetary fragmentation, liquidity injection, and mounting fears over both inflation and asset seizures, Bitcoin ignores the quantum overhang and ends the year >US$150k, shirking the traditional 4 year cycle

***
This essay was first published at DelphiIntelligence.io - Delphi’s Research Hub on AI, Robotics, and Deep Tech. If you liked this piece, please check it out & join our mailing list & follow @delphi_intel for regular updates.

I’m @ponderingdurian on x

“But small is the gate and narrow is the road that leads to life.”‍

-Matthew 7:14

There is a real chance humanity achieves superintelligence within the next decade+. The path to human flourishing is possible but narrow: boxed in by techno-authoritarianism and techno-feudalism on the one side and anarchy and runaway superintelligence on the other. Perhaps no relationship is more important to navigating this narrow corridor effectively than the one between the two AI superpowers.

The tragedy of the decaying US-China relationship is that, in many ways, their outlooks are complementary. The US prioritizes freedom. China prioritizes societal harmony. The U.S. fears centralized control. The Chinese fear chaos. The U.S. risks runaway techno-capitalism. China risks techno-authoritarianism. In the Thielian sense, the US has a bias towards “Armageddon”. China has a bias towards “Anti-Christ”.

The irony, of course, is that this tension - between individual freedoms and societal stability, between openness and control, between pushing out the frontier and rapid diffusion through society - may be exactly what is needed to successfully navigate AI’s narrow corridor and usher in an era of human flourishing.

The below slides are taken from a talk I gave recently at the dAGI summit in San Francisco. Tricky topic, but I tried to be balanced, including perspectives from both the US and China, which should trigger everyone :)

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Keynote

For westerners, understanding China has always been a challenge. Even for those that spend a lifetime studying her rhythms (which I have not), the contradictions which make up modern China are numerous, and the tensions can surface in unpredictable ways.

In many ways, China is a Paradox.

More detail behind each of these apparent contradictions can be found in a prior essay, but the TLDR:

1. China is both modern and poor: it boasts world class infrastructure, stunning neon skylines, and yet remains home to hundreds of millions who live of <$7 per day. There are two China’s.

2. China’s growth trajectory has been unmatched, yet its population remains pessimistic and anxious at the individual level

3. China’s government quotes Marxist-Leninist tenets, yet its state-capitalism, rising nationalism, and online discourse can seem surprisingly Fascist

4. Pundits claim China’s rise is due to “IP theft” but China’s new economy continues to move from strength to strength - moving up the value chain in industry after industry

5. Chinese manufacturing and tech sectors are ascendent while its broader economy is deeply struggling

6. Foreigners simultaneously claim China’s state involvement is “wasteful and inefficient” and simultaneously “too competitive,” requiring tariffs to protect local industry

7. China has siloed its internet ecosystem behind the Great Firewall, yet continues to lead in open sourcing SOTA level AI models

8. China has probably been the #1 beneficiary of globalization but is now racing for self-sufficiency in every domain of significance

9. Year after year, we hear calls for the inevitable demise of China due to its political and economic contradictions - and yet, year after year, the show goes on...

10. China is a 5000 year old civilization, yet boasts the most digitally literate population on the planet

11. Different economists argue - fairly cogently - that China needs a 30% devaluation vs. the dollar AND a 30% re-evaluation against the dollar. Frustratingly, both can appear correct.

12. Many of China’s biggest challenges today (demographics) stem from yesterday’s successes (rapid industrialization)

• etc, etc

Many people will claim that China is the opposite of America...

While others assert that China is a fearful mirror...

I would submit to you, paradoxically, it is both.

Directionally, I’m closer to @scholars_stage: believing the US and China to be culturally quite similar, yet coming from very different historical perspectives:

Which shows up in very different attitudes by governing institutions towards capital...

Which has a knock on effect into how each country sees AI...

And, in turn, how they think about AI risks...

Even if there are some contradictions...

Still, the relative bias has led to different market structures between the two tech ecosystems - the U.S. is fairly oligopolistic, power-laws quickly forming behind private winners which grow extremely large, very quickly, and China which has “deep infrastructure” but less robust capital markets leading to a subjugated swarm:

Each approach has benefits and tradeoffs...

Which obviously has spillover effects into AI...

And different priorities in implementation...

The US, aligned with its cultural DNA, remains focused on pushing the frontier. The, often explicit, goal of the US labs is superintelligence - emphasizing breakthroughs in science, medicine, energy, exploration and more. The approach involves greater existential risk. It also involves trillions in capex, funded in anticipation of some level of monopolistic or oligopolistic profits in the future. The end goal again appears more focused on the individual, a merging with the machine to overcome our biological limitations. To become God’s.

China, driven by a desire for harmony and fear of chaos, aims to harness AI for its national aims - most visible in its AI+ initiative, outlined well by Jacob Dreyer in this essay. AI+ is focused less on pushing out the frontier so much as diffusing the gains from AI as rapidly as possible into other sectors of the economy: education, healthcare, public services, manufacturing, and more.

The goal is to make digital intelligence a commodity: powering robotics to assuage demographics, AI tutors to reduce the education gap, effective surveillance to ensure domestic control, dark factories which keeps manufacturing on shore as China’s wages rise. The end vision of China is leveraging intelligence not for profit, but for state-directed aims: underpinning the CCPs vision of a stable and harmonious society and reducing external dependencies.

The two approaches have different strengths, but the depth of the US capital markets have jumped out to a considerable lead underpinned by a MASSIVE compute build out...

However, the longer the race continues, there are reasons the balance may shift towards China:

China has the gargantuan challenge of building out its own semi’s supply chain internally, not to mention questions around energy, food security, and massive local government debts. The US, on the other hand, has the equally monumental task of reindustrializing after 40 years of outsourcing at a time when the fiscal situation is... complex.

The reality is that the Chinese tech stack is increasingly competitive, particularly with countries in the global south. Chinese telecom equipment, Chinese EVs. Chinese humanoids. Chinese intelligence. Qwen is now the most downloaded open source model globally. These open source efforts are amazing, but not without reason to worry for pluralistic western societies:

Perhaps the most important question worth asking at a summit like this is: can we have both simultaneously?

Is it possible to

1. Harness global capital investment... while

2. Keeping intelligence open... while

3. Pushing for faster diffusion through the entire economy (even in areas without substantial short term profits).... without

4. An arbitrary platonic elite which makes capricious decisions not in the best interest of the populous?

In short, can we have the benefits of “the China model” and the benefits of “the US model” without the obvious downsides?

My first attempt at answering this question came in the form of a four part, 36,000 word, 158 graphic magnum opus on decentralized AI. The core thesis was that, eventually, (in a very Christensen-esque way) modular approaches to intelligence would prove either more performant or cost-effective through aggregating the long tails of talent, data, and compute.

Practically, vertically integrated approaches have been more efficient at assembling the relevant ingredients under the banner of single companies, but there are reasons to believe a shift is underway: advances in distributed training, the shift to inference time compute, the emergence of Open RL stacks, and the competitiveness of open models.

Despite having libertarian sympathies, I’ve become more... practical in my late years as an anthropomorphic fruit. @Balaji’s the-west-is-being-subsumed-into-the-internet thesis is interesting but fails to consider the intensely physical nature of AI: the energy requirements, the fabs, the data centers, the robots - all rooted in physical jurisdictions, manned by men with guns.

This is a game of kings. A game of industrial nation states.

Realistically, the US vs Chinese AI stack is a better framing for the next decade. The US appears well positioned in the global north, and the Chinese stack is likely to gain substantial share in the global south.

In their 2017 book, The Narrow Corridor, Acemoglu and Robinson argue that crafting correct balance between state authority and societal strength is extremely delicate - with the majority of countries veering off the narrow corridor into authoritarianism on the one side or anarchy on the other.

We are approaching a similar narrow corridor in AI. A corridor where the timeline is shorter and the stakes are higher.

The goal is to have a shackled leviathan - not controlled by a small elite, nor runaway techno-capitalism where no one is in control - that promotes broad-based human flourishing.

This is the narrow corridor.

And perhaps the only way the world navigates it successfully - to avoid both Armageddon and Anti-Christ - is if the two AI superpowers can learn to co-exist.

“The tragedy of the decaying US-China Relationship is that, in many ways, their outlooks are complementary: this tension between the two superpowers - finding the appropriate mix of individual freedoms and societal stability, of openness and control, of pushing the frontier and broad diffusion - might be exactly what is needed to walk the narrow corridor to an age of human flourishing.”

@ponderingdurian, signing off.

This talk / essay first appeared at the Delphi Intelligence Research Hub. Please check it out for more in depth research on AI, Robotics, and Deep Tech

The Bubble That Can’t Be Ignored

“When I see a bubble forming, I rush in to buy, adding fuel to the fire.”

— George Soros

Investing in humanoids today is treacherous because it is so obvious. We are clearly on a trajectory where productivity is decoupled from demographics (Edge of Automation): where intelligence will jump from the data center to the factory; from the world of digits into the world of atoms.

The path is so plainly lit that no investment manager can be construed as contrarian in seeking allocation. Many of the expectations have been priced in or are outrunning the near-term realities of penetration. The explosion in valuations and successive funding rounds are tell tale signs to be wary. A stall in enthusiasm would require investor patience for players to grow into these accelerating valuations.

And yet, the writing is on the wall: this market is going to be massive. The capabilities will increase, the costs will decrease, and the long-term ROI for customers is obvious.

The tasks which an AI can complete continue doubling every 7 months. Investments in multimodal capabilities march on to the tune of hundreds of billions. The cost curves of the “electric stack“ (Packy) plow downwards. And the base line of it all - energy - appears on a path towards abundance, poised to cut us loose from the hydro-carbon death grip in the decades ahead (Dwarkesh).

By 2050, there will almost certainly be tens of millions of humanoids globally, if not hundreds of millions or even billions.

However, functional humanoids at scale still retain material challenges. Leading AI researchers have still not not cracked multimodal reasoning, let alone embodied intelligence. Simulations are helpful, but they are not enough. Robotics data remains scarce, and the best models too large to fit on-device. The hands still lack the dexterity for many use cases. The components are still too expensive, and scaling up production will take time and substantial investment. All of this before even the inevitable political blowback from a concerned labor force and the ensuring regulatory overreach likely to follow in its wake.

And still, the race for AGI is attracting hundreds of billions annually in investment. Should embodied AI, which arguably expands this TAM by an order of magnitude, not command correspondingly large infusions?

Global labor is sized in the tens of trillions. The long-term ROI on humanoids in many of these domains is obvious, not to mention new markets which will inevitably emerge as costs decrease and capabilities increase. The investments will come.

However, these investments will not take place in a vacuum but atop a complex and shifting geopolitical stage. The US and China cannot possibly hope to truly “decouple” but both are racing to avoid strategic dependencies on their rival superpower. The US retains its lead at the frontier of AI: the chips and datacenter buildout fueling the brains behind the coming humanoid swarms, while China’s dominate grip on rare-earth minerals, manufacturing supply chains, and a massive energy build out, position it well in the race for the “technological threshold“ (Edge of Automation).

Both will be racing to reduce these dependencies: China investing hundreds of billions in the monumental lift of domesticating the entire semi’s value chain, while the US’s lift may prove even larger: reshoring the manufacturing processes it spent the last century outsourcing; slowly relearning how to build the machines that build the machines.

The implications for rates amidst an already stretched US fiscal situation are worth consideration and are clearly tied to Bessent’s stablecoin embrace, Trump’s hammering of Jerome Powell on rates, and Miran’s ascension to Fed Governor. Perhaps the race for cybernoid supremacy will not be decided in Washington or Beijing or even by the neuro-divergent enclaves in Silicon Valley and Shenzhen but by those ever-pesky bond vigilantes.

The humanoid race touches all of the great themes of the 21st century: technology, great power politics, artificial intelligence, reindustrialization, and macro policy.

We hope this four part series can help guide you through these treacherous waters:

1. Humanoids: Sizing the Profit Pools

2. Software: Mapping the Brains

3. Hardware: Real Men Have Fabs

4. Integrators: The Race to Orchestrate an Automated Labor Force

In short, I believe we are currently in a bubble for humanoids. Based on the size of the opportunity, I believe this bubble will get substantially larger, especially given how narrow the door is for exposure. I believe the largest companies and nations will consider this race “existential”. I believe bubbles tend to be good long-term, laying the infrastructure necessary for an ensuing application wave. I believe money can be made investing smartly within a bubble: going in early or allocating smartly within the value-chain. I believe we will see a Gartner style correction in sentiment in the years ahead as individuals realize the bottlenecks and timelines may stretch out compared with today’s elevated expectations. And yet, I believe that the companies which are raising now and have the firepower to ride through a pending correction may end up being some of the largest companies in history by the late 2030s and 2040s and that investors will increasingly looking to “pull forward the future” given the acceleration in AI.

In short, it is a bubble. And given the size of the opportunity, it is one that no investor has the luxury of side-stepping.

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Sizing The Profit Pools

The humanoid value chain is complex.

In their humanoid value chain report, Morgan Stanley did a fantastic job of mapping out many key segments in the value chain. However, as equity analysts, they were naturally focused on the public markets.

As a private market investor, I wanted a similar map focused on emerging private players in each category.

(Please note the above graphic is an iterative work-in-progress and will evolve with this series as I learn more about each segment of the value chain and the players I’m most excited about)

The below graphic from McKinsey provides a solid high-level overview of how many of these key pieces fit together:

As the value chain is quite broad, we built our own market projections to forecast humanoid shipments by 2040 and break down the corresponding profit pools within the value chain to better prioritize our efforts of where to hunt.

Note, given the speculative nature of the exercise, these estimates are low confidence and span multiple scenarios, projected using five year increments through 2040. However, they are likely directionally correct and helpful in ballparking potential spend.

Momentum only really begins ramping in the mid 2030s and much of the expected growth (i.e. the global inflection) occurs beyond the projection period. In the 2030s, investors will be underwriting accordingly and pulling forward an inflection in future growth.

In our base case, the ASP drops to US$70k by 2035 and US$50k by 2040. Note this is a global figure. The US (projected at ~25% of global production) would likely be priced at a relative premium while China, as the likely cost leader, would have a greater volume share (~45%) but at lower ASPs. The remainder of the market is expected to be shared between Japan, Korea, Germany, and RoW.

At an average price point of US$50k and an ~8 year life span, the ROI in many of the early use cases - logistics, construction, manufacturing, hospital services, etc - becomes very compelling vs. human labor costs, particularly when considering turnover and effective hourly rate. If the capabilities are there, then demand is likely to outstrip supply in many use cases. Many leading incumbents will also “dog-food” their own humanoids: Optimus operating within Tesla’s factories being the easiest example, but in-house robots or partners with meaningful minority interest will clearly be ramping within Amazon warehouses, BYD factories, Japanese conglomerates and beyond.

Within the OEM-enabling segment of the value chain, the majority of revenues by 2040 are expected to be from hardware:

Under hardware, we divided further into nine core categories. Within software, we broke out six:

Software is expected to have higher gross margins than hardware but the aggregate profit pools will still be smaller in 2040. After estimating gross margins of the various buckets in 2040, we arrived at the following gross profit pools to help us decide how to best allocate our time across the value chain (again, rough estimates):

Based on the above analysis, the implied profit pool of the OEMs is the most sizable, but within the value chain: sensors, screws, motors, inference, fleet orchestration, perception, and safety are all expected to be ~US$10b+ markets by 2040.

Some may be surprised to find hardware profit pools outstripping software, so I will provide a few caveats.

1. Some of the software value is bundled within the sizable OEM profit pool

2. By 2040, the industry will be in the middle of an inflection. As volumes ramp, standards arise on the hardware side and commodification will drive margins lower while OEM leaders separate from the pack and scale volumes and leverage over suppliers. I suspect relative value capture will skew more OEM / software the further the industry matures.

However, near-term, components are a favorable hunting ground as have clear tailwinds from humanoids, with an ability to supply multiple OEMs (amidst an uncertain and highly competitive race), while often retaining exposure to other, more established sectors, which provide some protection to the downside.

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MARKET STRUCTURE

The value chain for humanoids is interesting because it intertwines so many different players: from the big tech giants to EV leaders, industrial conglomerates to specialized chip accelerators and everything in between. The landscape includes multi-centennial industrial incumbents, high burn VC darlings, and hardware-software integrators all angling for a slice of the humanoid pie from varied starting positions. These players all have different rights to win in different subcategories and trade at wildly different valuations.

While I’m primarily interested in finding private market investment opportunities, large swaths of the humanoid value chain will inevitably be dominated by large public incumbents. By analyzing the market structure, we can try to tease out where to park money in undervalued public names for above average compounding via tangential humanoid exposure vs. hunt for emerging pure-play disruptors in the private markets.

A few initial observations or themes before we dive into the specific categories:

Geographic Strengths

• US companies lead in foundation models and high-end chip design. China leads in scaled manufacturing and low-cost components. Japan, Germany and Korea lead in high-end precision tooling. Today’s market map tends to reflect these relative competitive advantages.

• However, one should keep in mind that investing contra these strengths may also be rational based on fragmenting global supply chains as regional hegemons aim to reduce existing dependencies and foster domestic champions in areas of relative weakness.

Concentration vs. Fragmentation

• This early in an industry S-curve it’s difficult to forecast whether the ultimate market structure for humanoids ends up closer to smart phones (OS duopoly) or automobiles (greater fragmentation / competition and lower margins)

• Given the diversity of use cases - logistics, manufacturing, construction, hospitality, consumer, etc - greater market fragmentation seems likely based on relative specialization catering to different designs and feedback loops. At the same time, the greater variability in expected performance should lead to more meaningful pricing power for leaders in each category. I would expect something in between EVs and smartphones - several dominant vertically integrated companies and then dominant, open models which run many different hardware combinations.

Vertical Integration vs. Modular Value Chains

• To me, similar to what we have seen in AI, closed, vertically-integrated approaches are likely to sprint ahead in many end markets given the feedback loops between hardware and software and designing each with the other in mind (i.e. sensors designed for particular hands which focus on collecting data for specific tasks and feedback into the model which can further inform more tailored chips or sensors, etc). These feedback loops are likely to be faster in closed, vertically integrated ecosystems leading to better early performance. Ostensibly this is why Brett Adcock terminated his agreement with OpenAI.

• Over-time, however, modular supply chains atop open standards will take share based on cost efficiencies. This is where China’s industrial capacity, dense supplier networks, and scale come into play. Joe Ryu makes a compelling argument that vertically integrating too early is a mistake: leading to an oligopoly market structure with less dynamic experimentation. This a greater risk within the US as opposed to China.

• Paradoxically, this may prove great for early US investors in the vertically integrated leaders but ultimately lead to a more fragile ecosystem and lower long-term volumes compared to the Chinese strategy of “letting 1000 flowers bloom” in target industries, forcing companies through the gladiatorial area of provincial competition. Given the overlap in supply chains, the EV industry is instructive. Tesla alone is currently worth 3-4x more than the entire Chinese EV industry, but China is the cost and volume leader set to take increasing global share at price points with which western leaders cannot compete (absent tariffs). The data feedback loops of real-world robotics could make this a compelling strategy to pursue.

• We have witnessed a similar pattern playout in smart phones where Apple’s tight integration created trillions in shareholder value, but now must rely on ecosystem lock-in to maintain share as on product quality, combinations of Android, Samsung, Huawei, and Xiaomi are clearly superior. My suspicion is that Chinese competition will be even faster and more formidable in robotics vs. EVs and smart phones given the strategic nature of the industry and Chinese leaderships existential race against an aging labor force and limited societal appetite for immigration and assimilation.

• Valuations aside: short-term, I’m more bullish on US vertically integrated OEMs and overseas component suppliers. Medium to long-term, China’s ecosystem appears poised to lead on costs with a data feedback loop which will prove formative with leading volumes.

Relative Valuation Gap

• The US valuations reflect this dynamic and appear significantly more inflated today relative to their Chinese counterparts. Figure AI recently raised was rumored to have raised >US$b at a ~US$39b. Companies in China with similar capabilities - like AgiBot - are valued at ~10b RMB (~US$1.5b). China’s leader Unitree is rumored to be seeking a listing at the ~50b RMB range (~US$7b)

Early Use Cases

• Given the price point, security concerns, highly varied layouts, and regulatory burden, consumer humanoids are likely much further away compared with industrial and business use cases where humanoids can be safely siloed and monitored within more predictable settings and priced with a more obvious ROI.

General Purpose vs. Specialized Robots

• Near term, specialized robots may outperform, but longer-term, it seems highly likely that the versatility and economies of scale of general purpose humanoids will provide a much larger market. Mechanism Capital outlines the reasons why in more detail in this article. The pattern is clear:

Early Pockets to Watch:

We will be diving deeper into both the software and hardware component ecosystems in coming reports, but based on this profit pool sizing exercise and mapping of the market structure, below are a few categories which appear ripe for further inspection:

1. Perception/Tactile sensors

2. Actuation & transmissions (roller screws/reducers, especially the hands)

3. Embodied AI Foundation Model Inputs and Robot Operating Systems

4. Fleet Operation Software + Teleoperations

5. Edge inference

1. Perception and sensing (vision, depth, e-skin)

Why: safety + dexterity requirements will mandate richer sensing; many “missing” modules (i.e. e-skin, robust low-cost depth) have no default supplier yet.

Structure: commodity cameras exist, but robot-grade multimodal sensing (durable, low-latency, integrated) is under-served.

Private investment angle: novel hardware sensors - particularly around tactile / force (companies like SynTouch or GelSight) as well as more integrated stacks with proprietary software like Slamcore or Navvis.

2. Actuation & transmissions

Why: Actuation + reducers = ~33% of BOM; each humanoid needs ~40+ joints/actuators. Capacity is supply-constrained and geographically concentrated.

Structure: concentrated legacy vendors; volume/cost roadmap not yet ready for ramp - new designs or Western capacity build-out.

Private investment angle: back novel transmissions, dexterous hands ****leaders, Western roller-screw capacity, integrated joint modules.

3. Foundational autonomy & Robot OS

Why: Perhaps the biggest remaining unlock for many embodied AI use cases is true multimodal intelligence. Many OEMs will vertically integrate with their own models, but open platforms will also compete. As fleets scale, recurring software revenues (motion/skills packs, updates, analytics) will compound, and the race remains open

Structure: pre-Android: fragmented, OEMs building in-house out of necessity.

Private investment angle: embodied-AI foundation models, skill libraries, planning/motion stacks, and a real OS/middleware with app distribution. Similar to AI, real-data suppliers also appear to be a meaningful bottleneck

4. Edge inference & on-robot compute platforms

Why: humanoids are edge-first for latency/cost; mid-power chips that run VLMs/skills locally at an acceptable performance per dollar will need to ramp considerably

Structure: Nvidia leading but room for domain specific edge NPUs at decent costs.

Private investment angle: chips/modules + compilers that squeeze real-time pipelines on device.

5. Fleet ops & teleoperations

Why: as deployments scale, fleet management - likely across heterogeneous robots and software - uptime, scheduling, tele-assist, billing - becomes more essential

Structure: service businesses reward execution over deep IP; customers likely keen to reduce single vendor lock-in and sticky once embedded

Private investment angle: verticalized “robot-as-a-service” vendors, cross-OEM fleet orchestration, 24/7 teleops, predictive maintenance platforms.

Riding the Wave

In a market this large, an investment door this narrow, and AI capabilities continuing to compound, humanoids are poised to command one of the largest investment cycles in history. Similar to the GPU and AI waves, capital allocation sentiment will likely go from “slight growth tailwinds” to “I’m under-allocated and my job is at risk” in fairly short-order.

At the same time, today’s hype outpaces the current capabilities as many investors do not fully comprehend the extreme technical difficulties still required to scale intelligent humanoids globally.

In this series, we outline our findings and thoughts in real-time about what is likely to be one of the most consequential industries in history and where we believe are the most attractive pockets to find exposure in an investment cycle much too large to dismiss.

Exposure is non-negotiable and yet treacherous. Hopefully our learnings can help both you and us to find footholds which lead to the summit 🙂

***

Check out Delphi Intelligence for more long-form research and @ponderingdurian on twitter for more takes.

China is both modern and poor. Its high speed rail departs from gleaming eastern cityscapes, stretching westward over 50,000 km, carving through mountains, jumping valleys, and careening above tired country-side dwellings which house the hundreds of millions of Chinese still earning <US$7 per day.

China’s rise has been unprecedented and yet its society remains pessimistic. Despite the growth miracle over the last 45 years, the tribulations of the 20th century have engrained themselves into the cultural DNA. Even amidst growing middle class in affluent eastern cities, most remain insecure and anxious in their outlook.

China’s leadership subscribes to Marxist-Leninist doctrine, yet its state-guided capitalism, proud nationalism, and online discourse often resemble more fascist modes of organization.

China “can only compete through IP theft and subsidies”, yet its high tech sectors march from strength to strength: compounding off one another atop its “deep infrastructure” which boasts ~70m industrial workers, increasingly dominant in high-tech value chains from renewables to EVs, robotics to drones, biotech to precision machining, and impressive gains in AI and semis.

At the same time, the broader economy is struggling. While high tech and manufacturing continues to hum, China is still recovering from its massive property bust, its local government debt is extremely high, youth unemployment statistics are no longer published, and growing geopolitical headwinds challenge its key export markets. China is digesting the excesses of prior decades, and the deteriorating ROI on infra spend will require economic reform or an acceptance of lower growth or both.

Western experts claim China is both “too inefficient” because of state involvement, yet also “too competitive” requiring trade barriers to protect local industries from the Chinese juggernauts that have survived the gladiatorial arena of provincial competition.

China’s internet sits behind “The Great Firewall,” bifurcated into its own parallel ecosystem with greater political censorship, and yet China is dominating open source AI with eight elite labs dropping open source SOTA-level models monthly, now on course to become the global standard.

Time and time again, western experts have predicted that, due to its contradictory political and economic model, China would 1) either implode or 2) require political reform. And yet, year after year, decade after decade, the pundits are proven wrong. Neither implosion, nor substantial political reform seem likely as Socialism with Chinese Characteristics marches on, paving its own path.

China has been one of the largest beneficiaries of globalization, now a top three trading partner to ~77% of the globe yet is now racing as fast as possible for self-sufficiency in almost every domain of significance: from food to energy to high technology.

China is both ancient and tech-forward. It is a 5000 year old civilization with a 76 year old communist government which tried and failed to stamp out many traditional beliefs and institutions before embracing markets and vaulting hundreds of millions from rural poverty to urban prosperity in less than two generations, creating perhaps the most digitally fluent populace on the planet in the process. This upheaval has produced an unlikely blend of rampant materialism, Darwinian competition, strong familial ties, proud nationalism, tech optimism, and economic pessimism - all under a sometimes overhanded, yet highly technocratic elite seeking to guide this chaotic and unprecedented rise.

China is the only country for which I have heard - fairly credible - arguments in favor of a 30% devaluation of the currency and a 30% revaluation of the currency in the same five minutes. De-valuationists claim China is in a balance sheet recession and will need to print substantially to stimulate domestic consumption. Re-valuationists claim the cost of living in China is wildly low relative to its modernization-levels and wages are repressed to boost exports fueling problems from trade imbalances to sluggish domestic consumption. Oddly, both appear true at the same time.

Paradoxically, China’s largest challenge today - demographics - stems (primarily) from its stunning success in prior decades - an unmatched pace of industrialization, urbanization, and education - which all drive declining birth rates.

I could continue, but I imagine you have gotten the point.

China is a paradox.

I am not a China expert and probably never will be. Many have dedicated their lives to understanding these tensions and have barely begun to scratch the surface.

The one thing which is abundantly obvious though is that China is worthy of study: 1) because these paradoxes are genuinely fascinating and 2) because the model is working; China’s achievements, despite using a different system, are undeniable.

I’m surprised it has taken so long for folks to ask: why?

Takes like this from @PaulSkallas are part of the problem.

They seem similar to early cope-fueled European critiques of America; and we know how that has played out.

Perhaps no one knows the Lakers team better than Celtics fans. No one can quote Yankees stats like a Red Sox fan. Rivalries house animosity but also respect: a realization that an opponent is worthy of study and even strategic imitation at times to remain competitive.

I’ve been surprised it has taken this long for the U.S. to wake up to the fact that China is a true competitor. As China leaps forward in industry after industry, the tropes around IP theft and state subsidies will ring ever more hollow. Cope in its purest and least helpful form.

This is starting to change. U.S. elites - particularly in tech circles - are beginning to take Chinese competition seriously, as they should.

Peter Thiel has an interesting idea in Zero to One about the founder paradox. The basic idea is that successful founders are special because they contain often diametrically-opposed attributes within a single person. They are both visionaries and intensely practical. They are delusional egoists and humble enough to learn and course correct. They are optimistic about the outcome and yet intensely paranoid about the journey.

To quote Nietzsche, “The great man is a contradiction made flesh.”

These inherent tensions are what make for the extraordinary outcomes which are worthy of study.

A similar lens can be applied to countries, and perhaps no country is a larger paradox than China. This is exactly why, regardless of your political views, it is worthy of study.

“The best hedge I know against heightening tensions between the two superpowers is mutual curiousity” - Dan Wang

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Life update: I have moved to China and plan to write more about the evolving tech ecosystems between the two superpowers.

I also have been writing long form AI and Robotics research at Delphi Intelligence, all free. If interested, can check out some of my prior pieces below:

Humanoids - Sizing the Profit Pools

From Data Foundries to World Models

Video Models - The New Frontier

This series spans 4 reports, 36,500 words, and 158 graphics. I'm biased, but believe it to be the most comprehensive assessment of the Crypto x AI intersection to date, a space I believe will define crypto markets for the foreseeable future.

Links below:

DeAI I: The Tower & The Square (Overview)

Covers the massive resources being deployed by Big Tech in the race for super intelligence and my initial assessment of the pockets where DeAI may have a role to play

DeAI II: Seizing the Means of Production (Infrastructure)

This report dives into how data and compute are replacing capital and labor in the 21st century, exploring everything from decentralized training and compute, through the complete AI data value chain

DeAI III: Composable Compute (Middleware)

Report III dives into modular vs. integrated architectures, exploring everything from LLM routing to graph based foundational models, to agent interoperability, co-processors and more

DeAI IV: The Agentic Economy (Apps)

DeAI IV explores the unique applications enabled by the intersection of Crypto x AI in gaming, markets, governance, security and more in pursuit of the crucial question: are crypto rails a better place to build the agentic economy?

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I put a lot of work into these reports, and believe them to be quite good so wanted to share here. For more regular updates, please find me on twitter.

For those that don’t follow me on Twitter, I have recently joined Delphi Digital, so unfortunately most of my new research / writing is now behind a paywall. However, occasionally some of that research gets de-paywalled:

DeAI Part 1: The Tower & The Square

I have been writing a four part series trying to tease out what is real vs. what is hype in Decentralized AI, and the introductory report is now free, so wanted to share here.

I’m obviously biased, but I believe Delphi has some of the best crypto-focused research around and am hoping my DeAI series will be one of the better resources for understanding everything happening in the stack below:

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The Tower & the Square

In writing this piece, I kept coming back to themes from Niall Ferguson’s “The Square and the Tower” which traces the power dynamics between traditional hierarchies (the Tower) and networks (the Square) throughout history. While hierarchies have traditionally been the dominant forms of organization, networks have played a crucial role in shaping societies, and their rise – the Enlightenment, the American & French Revolutions, the internet, etc – have often marked profound shifts in societal organization.

The 21st century is primed for a continued struggle: the state, the corporation, the elites vs. the network, the interwebs, the proles. The hierarchy and the hivemind. The Tower and the Square.

Much of post-cold war history has been a story of the rise of networks: globalization, markets, liberalism, the internet, social media, crypto. Perhaps most symbolically, in 2021 we witnessed a social network suspend the sitting President of the United States.

However, recent years have seen the Tower reassert itself. Geopolitics are once again resurgent over economic efficiency. The tools which promised open communication have been trained inward, honing Orwellian-level surveillance of our every click. The “open internet” has fragmented into four increasingly extractive and censorious “walled gardens”.

History chronicle’s countless pendulum swings between centralization and decentralization, networks and hierarchies, anarchy and autocrats, but this time feels different. With the rapid advances of artificial intelligence, perhaps the stakes have never been higher. We are witnessing the fastest build up of computation capacity in history; a revolution almost certain to shake the foundations of society – capital vs. labor, human vocation, even what is left of our shared reality – likely necessitating a rewriting of the social contract as we know it.

And, today, the cards are stacked in favor of the Tower.

Today’s cutting edge models are fueled by two primary inputs: compute and data. Due to the tenants of “aggregation theory“, the internet has effectively balkanized into a handful of closed ecosystems, ramparts reinforced by compounding investments in a decade of artificially low rates, which have led to the monopoly cashflows and colossal data sets needed to dominate the age of intelligence. There has perhaps never been a more prime opportunity for power concentration by a small minority; a global economy of consumers, enterprises, and even governments underpinned by a few increasingly all-powerful foundational models, managed by small clusters in commanding heights.

But actually, it’s even weirder. AI IS the network. The LLMs are us. An intelligence trained on the collective output of humanity, staring back at us; the hivemind commandeered into a closed system: the square, bottled up, “trained” and redeployed back to us under the dictates of the tower. For a fee. There is something incredibly… off about the entire market structure.

And yet, the swarm is already assembling in response: a coalition of developers, investors, and users determined on prying AI from the iron grip of Big Tech and painting a vision for user-centric intelligence.

The following report is a layman’s exploration into the AI value-chain: a peek into the awesome resources being deployed by the hyperscalers and the emergent decentralized AI ecosystem, assisted by cryptography & distributed incentives, aiming to present a viable alternative.

Are we heading for a world of a few 10 trillion parameter models governed from four thrones in the Pacific Northwest? Or are we destined for a tapestry of models in the millions underpinned by open source communities and collective ownership? An internet of agents? A Hivemind.

Of history’s countless concentrations and diffusions of power, the next chapter between the Tower and the Square is perhaps it’s most consequential.

Your Size is Not Size

Google, Amazon, Meta, Microsoft, and Apple are currently sitting on over US$400b in cash-like assets (now clipping >5%). Furthermore, their core businesses are throwing off the equivalent of >1.5% of GDP in operating income each year. The race for AI supremacy is just getting started.

The four hyperscalers (above less Apple) have combined to spend US$467b in capex over the last three years…

With recent analyst estimates expecting >$1 trillion in combined outlays over the next five – an absolutely mind-blowing number in capex spend, passing all but 18 countries’ GDP levels. A significant portion of this spend is going straight to the AI server market, dominated by Nvidia.

To put these numbers in perspective, the AI server market is set to eclipse the entire CPU market by ~40% in 2025, US$166b vs. US$120b. The investment in AI datacenter capacity is the largest outlay in the history of compute by a wide margin.

Two scenarios come to mind: 1) the cloud boom of the 2010s which was met with robust demand as companies of all sizes recognized the benefits of outsourcing core IT infrastructure or 2) the US$90b in fiber capacity laid during the telco boom much of which remains unutilized even today.

Looking at the market size for… intelligence… my hunch, and clearly the C-Suite of the hyperscalers, is for these massive outlays to be met with robust demand and – dare I say “oligopoly-esque” – returns. US corporates are sitting at ~14% in cash-like assets and margin levels not seen since the 1980s. Every earnings call and board meeting is rife with existential AI disruption discussions. The demand will come.

Investments in cloud infrastructure started out with negative margins and have since risen into the 60 – 70% gross margin range as the market has consolidated around three primary vendors servicing a Cambrian explosion of applications and cloud transitions.

The setup for GenAI feels very similar.

In a recent piece, Apoorv Agrawal outlines the discrepancy in the GenAI value-capture at different layers in the stack vs. the current state of cloud. The outlays in cloud eventually led to ~US$200b in cloud revenues powering a further ~US$400b revenue app ecosystem on top.

This follows a familiar pattern outlined by Union Square Ventures where infrastructure outlays lay the groundwork for the ensuing application boom.

Source: USV blog.

We are still very much in the infrastructure build out phase of Gen AI with the vast majority of profits to date accruing to Nvidia and the semi layer of the stack, but value capture is likely to shift up substantially over time

Not only cash rich corporate IT budgets but also a significant portion of the ~US$600b in VC dry powder will find their way into AI server spend over time, not to mention AI-focused sovereign funds like those of Saudi Arabia and Abu Dhabi both announcing targets for ~US$100b in AI focused investment vehicles to deploy in the decade ahead.

Like cloud, there is increasing reason to believe much of the middle layer of the Gen AI stack will be dominated by a few major players who have combined the capital, talent and data to hone amazingly capable infrastructure and models which will be rented out: intelligence-as-a-service.

Paradox of the Open Web (Consumer Aggregation)

One of the more prescient paragraphs I have read regarding the evolution of the internet came from an interview with famed American author David Foster Wallace at the tail end of his Infinite Jest book tour in 1996.

“…That Interlace will be this enormous gatekeeper. It will be like sort of the one publishing house from hell. They decide what you get and what you don’t.

Because this idea that the Internet’s gonna become incredibly democratic? I mean, if you’ve spent any time on the Web, you know that it’s not gonna be, because that’s completely overwhelming. There are four trillion bits coming at you, 99 percent of them are shit, and it’s too much work to do triage to decide.

So, it’s very clearly, very soon there’s gonna be an economic niche opening up for gatekeepers. You know? Or, what do you call them, Wells, or various nexes. Not just of interest but of quality. And then things get real interesting. And we will beg for those things to be there. Because otherwise we’re gonna spend 95 percent of our time body-surfing through shit that every joker in his basement—who’s not a pro, like you were talking about last night. I tell you, there’s no single more interesting time to be alive on the planet Earth than in the next twenty years. It’s gonna be—you’re gonna get to watch all of human history played out again real quickly.”

-David Foster Wallace (“Although, of Course, You End Up Becoming Yourself” by David Lipsky)

The internet evolved into propriety applications and ecosystems not out of malice but because the limiting factor is not content but human attention (shout out to @mrink0). Today, real scarcity online is found in effective curation – in sorting through the endless bits to find what is actually relevant to the user. Per Ben Thompson’s aggregation theory, capturing demand onboards its own supply in a world of zero marginal costs.

The truth is that Google and Apple and Meta and Amazon and TikTok and Tencent have succeeded in attracting users because they are expert curators: serving us – out of the trillions of bits on the web – those we find most relevant. And this positioning – as “wells” or “nexes” or “gatekeepers” – has allowed them to extract greater amounts of capital and data – the two assets most essential in our new AI “scaling wars” in the era of Transformers.

We can bitch and moan all day about the App store’s 30% and Google and Facebook’s ad duopoly and Amazon driving mom and pop’s into the dirt – and yes, it’s true that closed networks move from open to extractive over time…

Source: Chris Dixon: “Why web3 matters”

And yet, we use them. We use them because the alternative is chaos: saving me time, protecting against fraud, ensuring seamless payments, surfacing material most relevant to my desires.

Why should we expect AI to end up any differently?

In a way, AI is the ultimate aggregator. Amazon, Google, Booking.com – and potentially TikTok & Reels – all rolled into one giant front-end. The user’s interface to the internet. The best tool – closed or open – which most effectively matches user intents with the desired information or action will win. Convenience has proven time and time again to trump ideals in the marketplace.

Concentration appears set to continue, and it’s not limited to the consumer side…

To continue through the remaining 40+ pages… please continue at the link below

DeAI Part 1: The Tower & The Square

Also, if you read this report and are keen to learn more about a subscription to Delphi’s Research, please drop me a DM on twitter or simply use my referral link when subscribing.

Danksharding. Data-Availability. Data-Sampling. Modular. Monolithic. Fractal. FireDancer. TinyDancer. Merkle trees. Verkle trees. Staking. Liquid Staking. Restaking. FHE. AVS. ZK-Snark. Zk-Stark. Zk-sync. Zk-coprocessors…

Sometimes it feels like the crypto community loves geeking out over new infra so much that it misses the forrest for the trees: the actual point of all of the new infrastructure...

To build new applications FOR USERS.

Looking at the onboarding funnel today, it’s almost like crypto doesn’t want users:

1. KYC'd exchange account (send in all docs, wait ~1 week)

2. Fund from a COBOL ridden tradfi account

3. Buy a hardware wallet and "secure" 24 word seed phrase (oh ya, if done improperly…)

4. Download extension for web-native wallet (get another 24 word seed phrase prompt)

5. Connect hardware wallet to web native wallet

6. Send money from exchange to web native wallet (don't forget about all the taxes and reg filings!)

7. Link wallet with protocol (but make sure its legit so your funds don't get drained!)

8. Pay $150 for a Uniswap transaction because of scaling limitations on Ethereum...

This is odd because crypto aims to be a new network of value. Per Metcalf, the financial value of a network is proportional to the square of the number of connected users of said network. In many ways, the utility of parallel crypto networks can only become apparent once the network has reached a certain density - a tipping point in the flywheel between users, merchants, and developers.

To put it simply, the success or failure of the crypto experiment will depend on its most simple use case: payments. Bootstrapping a multi-sided network which provides the frictionless value exchange between participants at global scale on which other financial services depend.

This is contingent on a world of sovereign wallets as ubiquitous globally as WeChat and AliPay are in China. Which is contingent on solving two of crypto’s three largest bottlenecks1:

1. The horrific onboarding experience / UX

2. The paradox of mobile distribution

A few years back, I co-authored a post alongside Byrne Hobart from the diff - The Road Not Taken - outlining the evolutionary pathways payments have taken in major corners of the globe. The vision for a new financial system will depend on building a superior offering to prior generations of financial networks attracting enough users and payment flows into a parallel system - to reach an inflection where the utility can truly shine.

Fortunately, we are seeing greenshoots emerge in our coveted infrastructure overhaul: a trojan horse to bootstrap an open financial system from within the walled gardens of the mobile leviathans. The natural successor to the prior three generations of exchange.

The Fourth Turning.

Geography 101: Speed-Running Payments

1.0: U.S. - ducktaping the pipes

The primary reason the western internet remains so broken is payment networks matured in an analog world: the internet's "original sin". Birthed in the 1960s, the payments value-chain is anathoma to seamless online transactions: cardholders, merchants, issuing banks, merchant acquirers, card networks, payment processors, payment gateways... Simply mapping the legacy financial plumbing onto the digital world requires a stable of multi-decacorns like Stripe and Adyen to relay information across the spider-web of ancient counter-parties. Friction-filled checkout pages and a 3% tax on transactions are clearly not the future of france nor the end game for "growing the gdp of the internet".

2.0: China - the aggregators that ate the system

Chinese internet giants learned from the shortcomings of their US predecessors. Riding the mobile revolution, early leaders in payment-adjacent use cases like eCommerce (Ant) and Social (WeChat) realized how critical "owning the wallet network" would be towards horizontal expansion into the unending whitespace that was the Chinese mobile internet of the early 2010s. The blitzscaling went omni-channel, with both giants burning billions in offline merchant acquisition to create frictionless, closed loop payment networks. As opposed to working through the stagnant banking system, WeChat and Ant simply cut it out entirely, swallowing the value chain in its network of ubiquitous QR codes and mobile wallets. (Later reigned in by the PBOC)2. The reduced friction led to an explosion in activity…

Source: Ant Financial S-1 in 2020, the last public info available prior to the famed Jack Ma speech and subsequent pull of the Ant IPO. RMB 118trillion = ~US$17T in 2020 (!!!)

… as the SuperApps effectively became the internet. Tightly integrated monopolies with both user and data network effects led to unprecedented advantages in underwriting other financial products and affiliate services: the openness of the web, sacrificed for the seamless convenience of a walled garden.

3.0: The India Stack - the technocrats strike back

With a ~US$550m injection for 25% of PayTM, Ant must have been salivating over a second coup across the Himalays: another 1.4 billion consumers, with limited financial access, and rocketing digital penetration. Run it back, turbo.

Learning from China's effective financial privitization, Indian regulators preemptively pried open the payment rails - building a suite of open APIs and digital public goods: the "India Stack" - the current gold standard for national payments infrastructure.

Leveraging earlier investments in Aadhar, India's ubiquitous 12 digit identification number based on biometric and demographic data, NPCI rolled out the Unified Payments Interface (UPI) suite - a real-time mobile payments network open to third party integrations and capping flows at 30% share. The results have been… impressive.

Source: NPCI.org official stats (converting to USD as of Feb 18, 2024, current RR trxn values are ~US$1.8 trillion)

In many ways, the unlock provided by UPI in India - credibly neutral rails allowing for open integrations and frictionless mobile payments - is a miniaturized, less dynamic vision for a world of ubiquitious crypto wallets.

If only the cypher punks can solve distribution...

The Mobile Leviathans

As readers know, I believe the mobile duopoly is one of the larger barriers to crypto adoption.

1. the internet is increasingly accessed on mobile (~92% of users,~62% of traffic3)

2. The mobile internet is intermediated by apps

3. App stores and their mobile operating systems are a duopoly

Mobile Operating System Market Share

You see the problem. To reach global adoption, crypto will need a seamless mobile offering. Unfortunately, distribution is dependent on the very gatekeepers crypto aims to disrupt. Unsurprisingly, duopoly incumbents clipping 30% on all walled-garden transactions are not super accomodating to catalyzing the open networks who aim to undercut this rake.

Fortunately, the latches of the trojan horse are already loosening within Tim Apple's high walls.

Turning... 3.5?

Telegram has >800m MAUs. Based on reliable sources4, growth is actually accelerating, making it possible Telegram could top ~1.5b users in 2024. >52% of these users are between 18 - 34, primarily hailing from the global south (downloads by geo: >104m in India, 34m in Russia, 27m in Indonesia, 27m USA, 22m Brazil, 15m Egypt, 12m Vietnam, 12m Mexico, 11m Ukraine, 10m Turkey, 10m Philippines, 9m Nigeria)

Problem: fiscal mismanagement and friction-filled payments in many of these jurisdictions

Product: integrated, easy-to-use third-party crypto wallets

Market: 800m MAUs, growing ~60%? YoY... (yes, bananas...)

Fit:

First off, the bots. In many jurisdictions, bots are deemed seperate persons - almost like talking with a friend - making interactions protected under "free speech" statutes. Who are you to say who I can and cannot chat with in my encrypted chat? And so what if that agent happens to interact with an adjacent wallet...

Mechanically, when engaged, the bot fires up an external web app - auto-loading login creditials into a new screen with a UX so smooth the transition barely registers.

This playbook is now attracting third party developers. Telegram is one of few applications at internet scale, promising distribution of the same magnitude as the leviathans themselves. While early, TG is leaning hard into mini-apps - bots or imbedded buttons which open to web-apps - providing developers access to users on a viral network with noticeably lower CACs, while conveniently avoiding the extractive tax rates and arbitrary dictates of the incumbents.

Like WeChat's position as the gateway to an integrated Chinese internet, Telegram aims to leverage crypto rails to provide a similar experience to hundreds of millions across the global south.

@Wallet is a good example. The bot - developed by TON - offers both self-custody and third-party custody solutions (the default) with the encrypted private key managed by the bot itself, tied to a user’s Telegram ID. The onboarding experience is frictionless - enabling fiat or P2P funding of 1) Bitcoin purchases, 2) USDT on Tron, and 3) the TON token currently, with rumours of a sizable asset pipeline.

Networks built ontop of networks can reach adoption much faster than the initial infra build out.

Telegram may just pull off the coup of the century, bootstrapping a global mobile wallet network on the back of the incumbents themselves.

But even if the empire strikes back on TG, the floodgates are beginning to open. Like AliPay and WeChat Pay, native payments will soon be integral to all consumer applications, but independent of a biased rival. And similar to how an ERP is only ripped out when the legacy system is simply intolerable, perhaps the west will bring "leapfrogging" full circle - being the first to undergo a complete infrastructure overhaul.

Cracks in the Levy

Farcaster is a "sufficiently decentralized social network protocol" (similar raison d'être to DeSo), now undergoing an early inflection. Much of its recent success is driven by streamlining the traditionally friction-filled onboarding experience of on-chain social through tactical private key management and on-chain, off-chain triaging.

Farcaster is most easily accessed through the Warpcast mobile app. For normies, the experience is fairly seamless - spinning up a "custodial key pair" on Optimism and storing the private key within Apple's keychain - cleverly outsourcing security to the leviathan it evades. Secondary "signing" key pairs are used to provide permissions to applications who sign messages on behalf of the users without exposing the primary "custodial" private key. The mechanism is ingenious in its simplicity.

The address is associated with a Farcaster ID: a unique identifier, governed by the private key which can double-hat as a sovereign wallet on crypto rails.

Developers are already taking advantage of these novel properties - imbedding "Frames" (mini-apps) directly into a users feed - allowing for one-click purchases or mints in the app itself.

While early, we are beginning to see what the future can look like with a network of native crypto wallets: the user experience of WeChat, with the open rails of UPI, combined with the permissionless creativity of opensource.

The Fourth Turning

Crypto skeptics do not understand the chicken and egg problem in a payments network. The value of the network expands exponentially with each new joiner. The use cases - for payments, lending, insurance, targeting and more - will depend on the number of users, merchants, and developers who enter the ecosystem.

To date, bootstrapping this network of independent wallets has depended on digital and regulatory infrastructure with incentives stubbornly against its proliferation.

In a funny way, because of this friction, crypto has limited users, limiting the utility of the network - meaning the space keeps running the front-end (speculative phase) of the Gartner hype cycle on repeat, laying more and more infrastructure without real traction.

This is changing.

The creative onboarding solutions used by messaging giants like Telegram or disrupters like Farcaster provide a blueprint to the next generation of consumer apps looking for distribution from within the walls of the extractive monopoly. A combination of social wallets, bot interfaces, and seamless web-apps mean the app-store's monopoly days are numbered.

At the exact moment market participants tire of another wave of crypto speculation without apparent utility, the wallet network will begin to reach a turning point...

The fourth turning.

Winners & Losers

The impacts of a world of ubiquitous mobile crypto wallets will not be evenly distributed. The below scratches the surface as to how the onslaught of the fourth turning is likely to slice and dice incumbents.

Winners

1. Telegram: first mover in the "global south" bridging folks to crypto with the potential to become a cross border “super app” (though reg / app store risks are real)

2. Social / Entertainment Giants: inserting payment flows seamlessly anywhere with eyeballs will be a big win for those with eyeballs

3. Headless Marketplaces: consumer startups and mom & pops looking for distribution outside of the rising CAC on tech aggregators

4. Saga Mobile: it will become abundently clear why this is a good idea

5. BTC/ETH/SOL: assuming we actually start to build applications, the incubment "operating systems" will likely start to pull away from the pack with user and developer mind share

6. Real DeFi Use Cases: all the products downstream of payments

7. Liberalism: freedom of exchange, protected property rights, censorship resistance baked into the fabric of the internet itself...

8. Gambling / Memes / Leverage: people don't always use freedom in the most responsible manner... dogwifhat 10x, comes with the territory

9. AI agents

10. The GDP of the internet :)

Losers:

1. The Bankers: all things legacy finance

2. The Mobile Leviathans: that 30% is looking real sus

3. Third World Monetary Sovereignty: what happens when anyone with a mobile internet connection can seamlessly hold USDC or BTC? (Capital controls exist for a reason...)

4. US and China (govt’s & citizens): the most powerful nation states have the most to lose from a neutral infrastructure overhaul (though for different reasons)

5. "Alt Layer 1s": consumers and dev's coalescing around chains with consumer and developer flywheels as infra gives way to consumer adoption

6. Boomers: if you want to bankrupt the system, fine. But don’t complain when we make a new one.

"He who controls the money supply of a nation controls the nation" - James A. Garfield

I think the same can be said for the rails on which that money resides.

Remember, chaos is a ladder ;)

- @PonderingDurian

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The youth are right to be angry. Real wages have stagnated since 1971. The cost of housing has risen to prohibitive heights. Family formation has stalled, partially due to economic constraints. The heartless gears of "capitalism" restored as choice punching bag for rising adolescent discontents. Young people across the west are turning towards activism to voice their frustrations in favor of a more fair and just society.

While the frustration may be warranted, I believe it to be largely misplaced.

Where as blue collar workers rightfully diagnosed corporatist-driven globalization as a key input to their woes, young people have focused their energy on a novel flavor of "oppression": one based on race and identity.

In my opinion, this is primarily misdirection; the culture war as a convenient distraction from the real economic exploitation underway: The generational struggle between boomers and the youth.

And the youth are getting skinned. They just can't seem to figure how or who or why and so they flail about, blindly, grasping for scapegoats in marxist theory or anti-racist dogma - while getting fleeced by politicians on both sides of the aisle.

A CHINK IN DEMOCRATIC ARMOR

In the west, we often hold liberalism and democracy to be symbiotic. In fact, the very definition of liberalism - "a political and social philosophy that promotes individual rights, civil liberties, democracy, and free enterprise" - includes the promotion of democratic forms of government. These two unquestioned pillars of the modern west are so enmeshed and representative that we call these countries "liberal democracies".

Of the pair, "Democracy" tends to receive more attention. The defining innovation at the center of the great American experiment: binding those in power to the will of those they serve. However, the first word is equally, if not more, important. The American experiment and its imitators have proven successful precisely because its founders were equally wary of tyranny from below as they were from on high - disdaining both the absolute monarch and the tyranny of the majority. A majority held in check by a constitution, laws, and a judiciary protecting against infractions on individual rights and minority interests.

If I am a Muslim in the United States, I have a right to practice my religion without persecution even if 99% of the people in my state are Christian and would vote to ban the practice of Islam.

If my neighbors collude to vote that my house is no longer my house and split the proceeds, property rights come to the rescue.

Overall, the system has proven fair and resilient, walking the delicate high wire between individual rights and democratic representation. Democratic majorities keeping a check on elected officials while liberal principles underpin laws which protect minority interests against a corrosive majority. Beautiful when you think about it.

However, one important minority group appears to have been overlooked.

THE FUTURE.

Yes, I know, democratic institutions have been infiltrated by no shortage of special interests and corporate lobbyists and "SuperPACs" and "foreign interference", and I'm all in favor of getting "money out of politics" and banning Russian bots. But I actually think these are relatively smaller issues. As someone <35, my primary concern is the institutional capture of democratic institutions by an increasingly tyrannical majority: the boomers.

Whether right or left, we have octogenarians voted in by septuagenarians - the only thing they can seem to agree on (yes, if its Trump or Bernie or Biden) is larger fiscal deficits - more spending today to prop up my assets and lifestyle at the expense of tomorrow.

THE BOOMER GRIFT

I’m not really sure it’s a grift per say… more just elderly folks exercizing their democratic rights in line with their economic interests in mature, rich societies who have collectively decided they would rather not have the elderly destitute and without healthcare and are willing to stomach the future economic repurcussions to ameliorate these discomfort today… BUT this is the anti-boomer manifesto, dammit!

So yes, the essence of the boomer grift:

• Entitlement spending (social security & medicare / medicaid and other healthcare expenses) makes up ~46% of government spending

• Boomers are still the largest cohort of voters making cutting entitlements political suicide

• Rising deficits have driven government debt / gdp ratio to 120%

• With elevated debt levels, the government will use central bank intervention (“quantitative easing”) to keep a lid on interest rates

• Artificially low (real) interest rates inflate asset prices

• Asset prices outpace GPD growth / income growth, meaning avg young people working for wages / salary can buy less with their money, falling further and further behind the rise in assets

• Even weirder, we tax income higher than capital gains - further hindering those who hope to work hard to "catch up"

• Because the system seems "harsh and rigged and unequal" politicians who promote more spending / social programs to "soften the blow" of capitalism's sharp edges continue to be popular with the young people who care enough to vote

• This encourages more spending, higher debt ratios, lower real rates, and higher asset prices.

This spiral is brought to you by boomers everywhere; sanctioned by millennial apathy. I wonder when more young people will start paying attention.

FINANCIAL REPRESSION 101

Unfortunately, to pay for this institutional capture, the options for millennials and Gen Z are unattractive. Either higher taxes (not very popular...) or (more likely) - negative real interest rates.

For the non-financially inclined, this means, at some point in the future, inflation will need to run above the rate of return on government debt for an extended period of time. Those who watch financial markets can already see the equity risk premium (i.e. the amount of capital return paid to equity holders to justify the risk above "risk-free" government bonds) shrink to the lowest levels since 2000. Despite short term fluctuations driven by the credit cycle, my bet is this will continue lower in the decade ahead.

The political will, subject an iron boomer veto, has no intention of reducing deficits. Examining the record high debt / gdp ratios, the only real way to deal with the debt is to inflate it away. (i.e. To have inflation > interest rates on government securities). The problem is: who will want to hold government bonds when inflation > the interest rates? (i.e. you are guaranteed to lose purchasing power over time).

One safe haven is hard assets (gold, commodities, etc). Another option is pushing out the risk curve into equities. Another is exiting the system altogether into one without the same leverage constraints (bitcoin, crypto-assets etc).

Unfortunately, this puts the boomer grift in danger. The boomers don’t like that.

DEMOCRACY VS. LIBERALISM

As more people begin to look at the math…

this conflict will shine a bright light on the tensions inherent in democracy and liberal principles. The tyranny of the aging democratic majorities against the liberal ideals which supposedly underpin the west.

The interesting thing about crypto is that it is not "democratic" at all, but it is intensely liberal: baking the foundations of property rights, rule of law, and individual liberties into the fabric of the internet, accessible to anyone on earth aiming to avoid incompetent fiscal management, corrupt or arbitrary legal systems, or authoritarian regimes - even against the wishes of the majority.

The debate will come down to this: are liberal democracies more (small l) liberal or are they more democratic?

To sustain the boomer grift, governments would likely need to resort to capital controls (see China) to stop capital seeking positive real return environments offshore. Capital controls are quite contrary to liberal ideals, not only restricting free enterprise, but in an era of software-based money, enforcement would require Orwellian, Great Firewall-type surveilliance.

We are witnessing this tension play out in the US court system right now. US government agencies, ultimately responsible to their key democratic constituents (the boomers) are harassing crypto exchanges and protocols to clamp down the exits, but are running up against the protectors of individual / minority rights (the judiciary).

My own view is that the founding fathers were brilliant to craft a system which constrained the power of the oft corrupt elites by the less privileged majority, while enshrining rights to protect the minority from the same empowered majority.

Unfortunately, there appears to have been one minority group overlooked across the temporal axis: the youth.

I guess the rather anti-climatic point here is that perhaps young people are not being screwed by "systemic racism" or the "exploitative capitalist machine", but simply by your grandmother sitting at home in her recliner with an "I've voted sticker" while she watches Cheers reruns.

Ya, I know, it doesn't really instill the same fervor as "Viva La Revolucion!" or social justice warring, but… deep breath…. what if one of the largest causes of millennial / Gen Z frustration and inequity is just the annoyingly simple, unexciting fact that societies are… getting old?

That:

• Market-oriented / liberal societies have been a massively successful experiment - industrializing and making constituents rich

• That rich, industrialized societies make kids more expensive and give women more opportunities outside of home / baby-making

• That the subsequent inverted demographic pyramid leaves democracies susceptible to fiscal demise by tens of millions of silver-haired votes…

As we head for a rematch election between two ancients in November, just remember - the game is rigged: you lose either way.

Millennials of the world have nothing to lose but their debts! They have financial freedom to gain! Millennials and Gen Z'ers of aging liberal democracies with no prospects of buying a home or starting a family and awaiting the looming financial repression with a sort of bored, stoic apathy, UNITE!!

Atlas Shrugged: A Review

The book is ambitious. Part epic, part novel, part political, philosophical tome, the reader feels the brunt of the full 1168 pages. We are invited into Rand’s world not as aloof bystanders but as the anvil on which she smashes relentlessly: first pew congregants of an exhaustive sermon on the benefits of rational egoism. Somewhat ironically, Rand’s work has the tone of a new religion: every character, every description, every monologue is crafted in service to a “single, universal, organizing principle” – the worship of the rational human mind.

There is no middle ground. Every character is either an enlightened agent or a nihilistic “looter” succumbing to the fraud of “sacrifice”. Every conversation is a chance to highlight this juxtaposition. Even the sweeping, epic tonality of the prose is a ceaseless reminder that life is to be lived for oneself, and it is to be lived epically. Rand has one tone. One speed. One message.

In his now famous essay, Isaiah Berlin breaks the world of intellectuals into two camps: foxes and hedgehogs. “The fox knows many things, but the hedgehog knows one big thing”. Rand is the definition of a hedgehog. She is maniacally-focused on her new gospel and views all 1168 pages through a single lens. The lens of “objectivism”.

Rand should be read first and foremost as a philosopher. As a writer, she lacks the nuance of a Tolstoy or a Turgenev or a David Foster Wallace – that inhuman ability to capture the subtlest of details, to paint scenes and emotions more vividly than life itself. They are realists celebrating life in all its complexity. They are foxes.

Rand is an idealist: a thinker first, an artist second. Dostoevsky, a fellow hedgehog, is primarily a novelist: a titan of letters for his ability to use art to capture the tortured depths of the human condition. Rand is the inverse: a philosopher who communicates through the medium of literature. She cannot be compared with the above as an artist. Too often, the secondary characters in Atlas Shrugged come across flat, pawns in her ideological battle: two dimensional creations reduced to caricatures.

Yes, I understand, in many ways, this is the point. To portray the contrast between an empty life lived by “the looters” vs. the flair and competence of an adolescent Francisco d’Anconia, the tortured guilt of a pre-enlightened Hank Rearden, the endearing loyalty of Eddy Willers, or even the calculating manipulations and of an “aware” Lillian Rearden. Another strength is Rand’s ability to weave a wide cast of characters, if a bit long winded, together with a torrent of political / philosophical sermons into a coherent and surprisingly compelling plot. Despite a slow ramp, I found myself genuinely interested in how the novel would end.

However, Rand is always at her best in pursuit of her “single, universal, organizing” principle which often diverges from the story itself in awkwardly extended, inhuman monologues. Whether Francisco d’Anconia’s “Money is the Root of All Evil?” speech at James Taggert’s wedding or John Galt’s three-hour radio tome or even the inner monologues of Dagney Taggart or Cheryl or Hank Rearden, the point is always the message itself, not character development or moving the plot forward or expressing the subtle realities of everyday life.

For exactly this reason, Atlas Shrugged is inferior to The Fountainhead as a novel. It is not a novel. Atlas Shrugged is too pedantic, too repetitive, too focused on evangelizing Rand’s new religion to tell us something new about ourselves. The shortcoming is confounding because Rand showcased this ability in The Fountainhead. Howard Roark is interesting, like John Galt, in the portrayal of Rand’s “ideal man”: an unrelenting, single-minded, rational being uncompromising in his definition of self-flourishing. But the most dynamic characters in The Fountainhead are the “aware” few who never-the-less reject the tenants of Rand’s philosophy: Dominique Francone, Gale Wynand and Ellsworth Toohey. Dominique in her tortured nihilism, Gale in his corrupt pursuit of power and Ellsworth in his sinister diagnosis and hijacking of the human soul. Even Peter Keating, Rand’s symbol of the pathetic conformist who lets the world dictate his own desires comes across as relatable, if pitiable. In comparison, Roark and Galt come off as automatons: rationalist machines incapable of any deviation from a stiff, inhuman moral code. 

But that, dear reader, is the point. Atlas Shrugged is not a novel, but a work of political philosophy: a work written during the post WWII years with Europe in shambles, the USSR on the rise, and “the specter of communism” haunting Europe… and Asia... and Latin America.

This is the primary reason for Atlas Shrugged’s longevity. The work is a warning. An outcry against what Rand rightly saw and diagnosed as the mind virus of collectivism sweeping the globe. The epic tone and religious zeal and inspired, if pedantic preaching are because… that is what Rand is doing! Atlas Shrugged is a call to action: a love letter to competence and capitalism and individualism and modernism and America; a song which galvanized the American right in the life and death struggle for men’s minds.

The work can be seen as reactionary against the German Romantics. The school of Hegel and Marx, which saw individuals as insignificant driftwood in the sweeping forces of historical progress. Much of Atlas Shrugged was written during peak Stalinism and released one year before the launch of the Great Leap Forward. Rand is fundamentally opposed to viewing humans as insignificant, helpless rubble. Politically, her work could be seen as an extension of the enlightened rationalists: liberals like John Locke, John Stuart Mill, and Alexander Herzen – who loathed sacrificing individuals today to some abstraction, whether in the afterlife or some distant Utopia.

However, Atlas Shrugged is most ambitious, if less enduring, as a philosophical work. Atlas Shrugged was written 75 years after Nietzsche’s immortal pronouncement:

“God is dead. God remains dead. And we have killed him. How then shall we comfort ourselves, the murderers of all murderers?”

Rand boldly steps into this void with a vision of man not too dissimilar from Nietzsche’s own. She not only rails against the “men of muscle” who enforce sacrifice at the “barrel of a gun” but also against the “religious mystics” who enslave man’s mind today in exchange for other-worldly promises in the future: false prophets who demand adherence to a code of self-sacrifice based on faith alone. Clearly, this is against Rand’s rationalist creed. Laid out more as an essay than a monologue, the meat of this new philosophy is expounded (ad nauseum), in John Galt’s signature speech. Man’s only responsibility is to himself. By use of his mind, he built the modern world. Through reason, there is no end to growth, progress and flourishing. Without rationality, man is doomed to decay. The false promise of sacrifice, both religious and collective, are the chains around his neck. Great men should not apologize for what they are. They should not bow to mystics nor to masses but should embrace the fullness of life and conquer it with all of the tools at his mind’s disposal.

This was not a new morality, but was a fresh attempt to define values beyond the scope of religion or a squishy kumbaya humanism. However, the timing of its release - in the early decades of the cold war - dictated the work would primarily be remembered for its political rhetoric. Her unique ability to mix literature, politics, and philosophy - producing not a work of art but a rallying cry for the right in what, at the time, seemed to be a losing ideological struggle - influenced multiple generations in the world’s emerging superpower: a country set to have outsized economic, military, and cultural influence itself. However, against this backdrop, we can also see why Rand’s philosophical tenants were left largely ignored: with the right capitalizing on anti-collectivist themes while conveniently excising the anti-religious sentiments in what was still a deeply religious mid-20^th century America. Still, Rand’s new morality: a sort of secular Darwinian Protestantism - glorifying production and the self, scorning lip service to “humanity” as the hypocritical power grab it so often turned out to be - emerged as a defining, anti-statist creed in the US and, in time, much of the modern world.

However, perhaps my most interesting takeaway was the discrepancy between Rand’s style and her message. If Tolstoy was a fox who wanted to be a hedgehog, then Ayn Rand was a hedgehog who wanted to be a fox. Her life philosophy worships objective reason while her idealistic, grand writing style comes nowhere close to the vivid realism of a Tolstoy. Her characters think and speak and act on an epic scale while her philosophy propounds the sacredness of individuality and realism and the desire to see everything through a clear, rational, “objective” lens, all while her own lens reduces the wonderful multiplicity of life into the black and white of the ying and yang mysticism she so spurns. The human heart is never torn, but always subordinated to the mind.

And this is probably Rand’s greatest weakness as both a writer and a philosopher. In reality, the world is messy. Humans themselves are neither fundamentally good, nor bad. There are not two classes of humans: the enlightened and the savage, the producers and the consumers, the good and the evil. There is one class - equally capable of both in different times and places. Solzhenitsyn hits much closer to the truth: “The line separating good and evil passes not through states, nor between classes, nor between political parties either – but right through every human heart – and through all human hearts”.

I understand Rand is exaggerating for the sake of the siren; that she offers a caricature to drive home the dichotomy of the “men of the mind” and everyone else, but the reality is no such bifurcation exists. For someone who focuses so much on rationality, Rand’s style betrays an emphasis on the emotion she purports to eschew: that her philosophy falls flat because it does not contend with the inner struggles of the human heart; that many of life’s deepest questions do not have the purely rational answers she vaguely asserts. The disconnect between philosophical message and the romantic tone of the prose is a screaming indictment of the “unity in body and soul” that Rand trumpets so triumphantly.

Tolstoy was the realist: the pluralistic artistic genius who saw the world in its beautiful complexity but craved an ideal, unified theory which he could surrender but could not find. Rand was the inverse: the idealist, the single-minded ideologue that craved a pluralistic realism she could not see.

Upon honest reflection, crypto has yet to live up to its lofty promises. Promises of a new financial system - transparent and composable. Promises of powerful, distributed communities forged with novel financial incentives. Promises for sovereign, immutable, digital property rights.

The offshoots of transformative potential are visible, but product market fit has been elusive, often constrained by self-inflicted wounds. Dismal user experiences, worse risk management, and blunt regulation shoehorning a 21st century asset into 20th century regulation - all contingent on a closed, competitive mobile duopoly for distribution - have constrained use cases and adoption.

In reality, the mainstream consensus of crypto as an over-levered casino built on social media hype and regulatory arbitrage is not completely unwarranted.

This is unfortunate.

Crypto holds the potential as a powerful tool for human coordination: transparent, composable code, self-executing contracts, real-time settlement, and on-chain reputation, all with supercharged financial incentives. These qualities should work wonders in reducing the friction for globally networked exchange and enable digital-first institutions worthy of the 21st century.

To date, however, the movement has primarily revolved around the “super-charged financial incentives” part, with financial speculation proving the dominant use case.

Which is why Tom’s question below is worth contemplating:

https://twitter.com/_TomHoward/status/1663095132126851074

What are some areas, beyond finance, where these general purpose tools are being used for real progress?

One (very) young but encouraging area is the intersection of crypto and scientific research.

“DeSci”: Open Networks at the Doors of Academia

Decentralized Science is a movement which aims to increase the pace of scientific discovery and commercialization by leveraging open infrastructure to encourage wider participation - in research, peer review, funding, and commercialization - from outside the traditional academic “establishment”.

“But PD” you butt in, slowly understanding the implications, “ Is…Is this a good idea?”.

Your mind flashes to “decentralized” media: i.e. Facebook, Tiktok, Twitter, and Instagram. The growing polarization, degraded attention spans, and higher rates of depression in young people. This “FAKE NEWS” catastrophe at internet speed now corrupting not only our democracies but our sacred temples of scientific advancement?

“Should we really pry the engine of post-enlightenment progress from the trusted universities and research institutes which shield these processes from the lunacy of the public sphere?”

My response, as an under-educated anthropomorphic fruit is: “yes”.

To many in academia, the reason for gate-keepers like peer review and trusted publications is clear: a necessary filter through which to avoid the corruption and degradation of “rational inquiry”. Modern priests of rationality charged with preserving the sanctity of the scientific method from the corrupting agendas of the outside world.

These concerns are valid. In a world of engagement-driven social media, deep fakes, LLMs and synthetic data, the need for public trust in objective research institutions is more important than ever.

The key question is who deserves this trust?

Existing elites clearly wish to retain an uncontested crown. Historically, most have behaved responsibly. Stanford, MIT, Max Plank, ETH Zurich etc. retain much credibility, earned over decades of proven achievement. However, the COVID communications debacle and increasing polarization of many top universities is seeding a growing distrust of traditional gatekeepers.

Admittedly, decentralized science may prove a terrible idea. A social media moment for science which only further muddies the waters: breathing life into the flat earthers, the biological sex deniers, and the horse dewormers.

This would be… suboptimal.

But there is another, perhaps more apt metaphor worth considering: Wikipedia.

At first, many thought the idea of getting into a stranger’s car or sleeping at a stranger’s house was absurd. Today, AirBnB and Uber are multi-billion dollar companies leveraging latent supply, curation, and reputation to solve a coordination problem on which millions rely daily.

At inception, Wikipedia surfaced many junk results, but has rapidly become one of the most trusted sources on the internet. Community oversight, reputation, citation standards, ratings, and peer reviews were all incorporated to harness global expertise and manpower unavailable to “closed-source” competitors.

To quote Joy’s Law: “No matter who you are, most of the smartest people work for someone else”.

Open networks seem to win out in the end. Wikipedia vs. The Encyclopedia Britannica. Uber vs. Taxis. The Internet vs. the Intranet. Linux vs. Windows. Markets vs. Central planning. Even notoriously “centralizing” AI is rapidly giving ground to opensource competition.

If open networks have a consistent track record of delivering, should we not at least try implementing a similar framework to the engine of progress itself?

Ya cool, open networks… ok fine. So… what… is it?

To add my own typewriter to the choir of grand, yet vague and overarching definitions:

“Decentralized science as internet scale coordination with in-built reputation and incentives - replacing the old world of slow-moving processes, siloed data, poor incentives, risk-averse grants, and closed publishing monopolies - to massively expand the scope, speed, and, over time, quality of our R&D apparatus.

- PD :)

I hope all this comes to pass and more. However, as is often the case with new tech, narratives race ahead of reality and must be scrutinized against the realities on the ground.

Today decentralized science is nothing more than a newly-fertilized zygote. An embryo of possibilities, but admittedly a movement still in its pre-infancy stages. Most DeSci “institutions” in 2023 consist of a website, a discord server, a small passionate group, and perhaps a shared bank account or crypto wallet with a few hundred thousand in the bank.

And yet, as Margaret Mead reminds us: “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”

While the movement is young, the vision has resonated broadly. Talented, multi-disciplinary researchers and operators - biologists, neuroscientists, geneticists, pharmacologists, software developers, experienced entrepreneurs, venture investors and more - have congregated together online sensing the peculiar pull of scenius at work.

The young ecosystem is exploding:

Source: Messari.io : The Decentralized Science Ecosystem

TranslationDAOs

While the aims and structures of these organizations are diverse, an early formula has emerged. Many early communities focus on improving the process of “translation”: i.e. bridging the gap between promising academic research and commercial use cases.

From VitaDAO in longevity to AthenaDAO in women’s health to ValleyDAO in synthetic biology to middle-aged male favorite HairDAO, the communities operate in the niche between unimaginative, slow-moving public grants and early-stage, ROI driven VC funding.

The below graphic from ValleyDAO showcases this translation flywheel at work: funding undiscovered research in exchange for Intellectual Property rights which, upon commercialization, will provide the proceeds to back more research in their target domains:

1. Build Community: attract diverse expertise in relevant domain (synthetic biology) and tech / ops (to manage community / governance)

2. Provide Funding / Translational Support to Researchers: communities back meaningful projects in exchange for negotiated Intellectual Property Rights

3. IP Commercialization: if research is fruitful, community can license IP to startups or other entities keen on exploring commercial use cases

4. Proceeds Reinvested: Any proceeds or equity from commercialization are given back to the community to reinvest in supporting further research.

VitaDAO, a leading collective in funding and advancing longevity science is one of the early pioneers of this now popular approach. It has 19k community members anchored by dozens of contributors including elite university professors, MDs and PHDs teamed up with proven entrepreneurs, data scientists, and legal experts. To date, the collective has deployed US$4m into 17+ research projects with US$6m in liquid funds including backing from Pharma giant Pfizer.

The unique ingredient is the flexible nature of membership, incorporating a broad range of primarily part-time, revered experts from many different institutions. Aggregating such a group via traditional institutions would be very challenging.

InfraDAOs

New organization types require new tooling. Interestingly, DAOs themselves are emerging to meet the needs of other DAOs: a sort of distributed dog-fooding phenomenon.

A great example is Molecule - a very busy community building DeSci infrastructure including:

1. A Protocol - enabling IP-NFTs: “hybrid legal smart contracts with unifying legal rights, data access, and economic agreements” which allow academic research IP to be represented in on-chain markets

2. A Marketplace - an exchange where academics can advertise their research and DAOs can fund promising projects in exchange for negotiated IP rights

3. A LaunchPad: a DAO factory to incubate more BioDAOs - replicating this early translation formula across different end-domains to breed users for Molecule’s tooling and increase liquidity within their nascent marketplace

Uniquely familiar with distributed coordination problems, DAOs are well-positioned to meet the needs of other distributed communities. Admittedly, in these early innings DAOs have a nebulous track-record of effective organization relative to traditional counterparts, but as tooling proliferates, many of existing headaches will hopefully become more tolerable.

The End Game

The ultimate vision of decentralized science is a more transparent, more open approach to scientific discovery. Not only would open networks tap into and coordinate dispersed expertise at internet speed, but they could significantly expand funding for basic research and development in a world of more strapped government finances.

Incrementally, as blockchains scale, new standards for on-chain publishing could create a traceable web of citations and attributions over time. The holy grail of “networked brain” for science would encourage publishing the raw data behind consequential experiments on-chain for replication and providing foundations for further research. This could reduce waste by cutting down siloes, minimizing duplication of past experiments, allowing progress to compound globally.

As intelligence is normally distributed, following Joy’s Law to leverage global networks seems more likely to uncover the hidden secrets of the universe: unearthing the long-tail of talent and serendipity outside the existing establishment. Essentially, effective management of incentives and reputation would be the difference between a fake news dystopia and accelerating progress - the expanding research firehose tamed by systemic, transparent curation.

Is this vision even possible in a fragmenting world of geopolitical competition and fraying international relationships?

I don’t know. But at the very least, it seems worth trying.

The decentralized barbarians are at the gates. The ivory tower, like commerce and entertainment before it, seems unlikely to withstand the blows of the 21st century for much longer.

- PD

The diversification is not limited to topography. Yunnan has the largest diversity of plant life in China, home to greater than half of its plant species. The province also houses 25 of China’s 56 recognized ethic groups including the Yi, Bai, Hani, Tai, Dai, Miao, Naxi, Tibetans, Sui, and many others - representing 38% of the population, the highest in China. This ethnic diversity breeds a colorful tapestry of architecture, languages, scripts, religions, and traditional wear unique amongst many of China’s typically Han-dominated provinces.

It short, it’s worth the trip.

Below are some observations from a 10 day trip starting in the capital city of Kunming and meandering northeast through Dali, Lijiang, Shangri-La, and the Tibetan borderlands around Meili Snow Mountain.

Please feel free to forward to any China-enthusiasts in your network.

Kunming - The Capital City

In our approach, the focus on renewables was tangible. The colossal wind turbines dotted the mountains surrounding the city; slopes, not lush like those anchoring Taipei or Chang Mai, but more barren - similar in tone to the reddish-brown of dryer summer climates like Utah. Sneaking up the hillside to meet the turbines was a ceaseless torrent of reflective, silver paneling. I knew Yunnan was rapidly becoming the renewables capital of China, but the scale was staggering. The capital city appeared a small island lost in a sea of sparkling silver waves.

Our host approached us with a charismatic greeting and warm smile revealing teeth stained from decades of smoke and drink - proud badges and unavoidable collateral damage from ascending the business ranks of China’s wild west at the turn of the millennia. In many ways, he was a modern cowboy. He moved west twenty years prior in search of opportunity: dabbling in ventures as varied as furniture manufacturing, grapes, hotel management, and, most recently, a travel agency focused on customized experiences. He had the gift of relationships: an easy conversationalist backed by an arsenal of war stories from the rough and tumble years of decades past. He appeared in his early fifties, a face worn with wrinkles paired with noticeably calloused hands, not estranged from hard work. However, the gold watch and Louis Vuitton belt hinted at the favorable yields from such efforts. His was a journey which dovetailed perfectly with Jiang Zemin’s 2000 mandate to “go west;” a proclamation from Beijing to catalyze capital and expertise from the east towards China’s inland provinces which always seemed 10 years behind.

Despite the recent economic headwinds, he was optimistic about Kunming’s prospects - pointing to tailwinds from tourism, renewables, and a favorable location as a gateway to the growing commercial exchange with Southeast Asia.

The highway to the city was a patchwork of modern Chinese suburbia - massive, uniform apartment blocks raised in flocks of 10 or 20 at a time - interwoven with the still visible “countryside” dwellings - haphazard, organic, sometimes windowless two-story structures strewn together in collections of multi-colored brick, closer in character to those of its Southeast Asian neighbors. Along the drive, I realized the waves of shimmering silver I saw from the plane were not, in fact, solar panels, but a sort of protective film covering for crops.

“Flowers” our guide says in Mandarin. “Kunming is the second largest flower market in the world, only behind Holland”.

Dou Nan Flower Market & Distribution Center

The countryside dwellings gave way to denser uniform apartment blocks which relent to the colorful skyscrapers which our lane, along with countless others, weave through in the manufactured ease of modern Chinese infrastructure.

As we pulled off the highway, the skyscrapers gave way to a neighborhood feel. Trees lined the streets - a familiar sign of affluence in a dry region. Restaurants surrounded Dian Chi lake nestled at the base of a picturesque mountain. It’s quite peaceful, particularly in the evening. As the provincial capital, Kunming has a notable density of government buildings - easily spotted by their imposing, brutalist architecture which has surprisingly grown on me over time.

As is so often the case in China, the highlight was tasting the local flavors. Our first stop was at a revered retail spot notable for its mastery of Guo Qiao Mi Xian - Yunnan’s famed rice noodles. The format is adjacent to hotpot, but with less emphasis on the broth like in Sichuan. The broth is not constantly heated like traditional “huoguo” but is delivered standalone accompanied by a tray of fresh ingredients. Flowers, mushrooms, vegetables, spices, beef cuts, abalone, rice noodles and more. I shamelessly dumped in the full gauntlet. The result was a sort of hotpot meets ramen chimera, accentuated by distinct western (Chinese) ingredients.

Mushrooms, in particular, are Yunnan’s specialty. Scavenging wild mushrooms has emerged as one of the larger agricultural exports. The fungi rank among the expensive delicacies in Yunnan, next to high quality Pu’er tea and the cordyceps harvested from the Tibetan mountains. Driving out passed Yunnan Da Xue (University), through an industrial zone to the foothills of a small mountain range, we arrived at an unbranded restaurant renown for its local scavenging monopoly. There we sat, on small stools at outdoor stables, surrounded by locals chainsmoking cigarettes and clanking beer and baijiu glasses as the plates of wild mushrooms arrived in droves. I’m going to be honest, I have no idea how to tell certain mushrooms apart from others, but the diversity across the plates was tremendous. The complementary dishes of cow intestine, beef jerky, fresh cucumbers and rice cakes could not hope to compete, callously pushed aside to make room for the mushroom parade which danced on through the evening.

For any APAC mushroom lovers traveling to Kunming, please DM me for the name of the establishment. It is very hard to find, but second to none in what is likely the world’s mushroom capital :)

The Train to Dali

The next morning we found our seats on the highspeed rail connecting Kunming to the mountainous regions of the northwest. The vast expanses between cities is where the delineation between tradition and modernity is most stark. The infrastructure itself is a feat to behold. Roads carved into the mountain side, bridges jumping cavernous drops, junctions and trains weaving from village to mountain pass - cutting through wind farms, active mines, and a mesh of tired factories and small farms dotted by a spattering of countryside homes. The urban tourists whizz past at 250 km per hour.

There is something surreal about the contrast: the high speed rail, a marvel of modern engineering, within a stones throw of those toiling away in the red soil. As they have for centuries, millennia perhaps. A tacit acknowledgement by the inhabitants of the airconditioned fuselage of the need for “common prosperity” - the tantalizing, if distant, hope of a second Chinese miracle to bring the next 700 million into the country’s expanding middle class.

The journey is interrupted by long blackouts through the heart of reddish, green mountains. The dark silence interrupted by a quick buffeting every time an opposite train speeds by unseen. Tunnels near the Tibetan border can stretch beyond 10 km in length - a testament to both a mastery of civil engineering and the lengths the government has gone to to connect many estranged, rural communities.

The train itself is sleek and clean - similar to intercity travel in Japan. The cabin interior, however, highlights the differences. The respectful silence is replaced by animated conversation - some loud, some soft, many on wechat, competing to be heard above the cabin’s Avant Garde crescendo in the background.

Dali comes into view.

It is a small, neat city tucked in between Erhai Lake and the swelling mountain rage to the north: a first taste of the altitude beyond its northern border which flows down from Tibet.

Half of the city - the half away from the mountains - is plagued by resi-condo developments, skyscraper hotels, and other neon-adorned retail which is common in many of China’s tourist destinations. Fortunately, the unwelcome intrusion has been contained. Dusk reveals a distinct break between the natural and neon as the sun sets behind.

The city is a success story of preservation, mandating new structures on the historic side of the lake must conform to the ancient Bai style now synonymous with Dali.

The uniform off-white exterior crowned with arched, grey tiles stand guard against the neon intrusion, preserving the narrow alleyways and cobblestone streets to which the city owes its draw.

Within the traditional facades, however, the honeycomb has been invaded by boutique cafes, street vendors, costume sellers, and restauranteurs inevitable in any popular tourist destination. The ancient architecture framed within the mountain range behind and the green rice paddies rolling down to the fringes of the lake is crack cocaine for aspiring “wang hongs” (Chinese term for internet influencers) in search of a dopamine rush. Heavily made-up women in local costume prance through the rice paddies, closely followed by diligent boyfriends or hired professionals in search of the perfect shot for a post to Douyin, Weixin, or XiaoHongShu.

After ordering a coffee on a second story overhang to enjoy the view, my veranda was taken over by a pretty young woman and a pudgy photographer who stood directly in front of me - no less than 6 feet away for >30 minutes - in search for the perfect photo. My initial irritation turned to comic incredulity and finally ended with an odd appreciation at the audacity. The single-minded determination of ones interest, unconstrained by the heightened awareness and etiquette to which my mind had been trained.

This was one of the consistent trends of the trip. A country in flux. A collision of tradition and modernity: both in the obvious, tangible sense (the high speed rail through the farms, influencers coming ancient streets, Tibetan monks donned in Air Force Ones) - but also in the evolution and bifurcation of societal norms.

The most stark, perhaps, was the delineation within the private and public spheres. Within family or work relationships, many young Chinese are the embodiment of honor and duty: acutely aware of their place in the hierarchy and engaging in many tacit and explicit gestures of respect (from extreme devotion to parents and grandparents all the way to small things like “jinging” (toasting) the relevant seniors at meals and using the correct designation). However, this heightened awareness often seems completely lost in the public domain.

The tension is at odds with greater uniformity elsewhere where it seems public and private norms are more aligned. The more formal flavors which blanket much of Japan say, or the more casual norms which govern both spheres in the U.S.

In China, the awareness and courtesies reserved for close relationships did not seem to apply elsewhere. From the wang hongs in the rice paddies, to the live streamer rambling a thirty minute monologue in my ear over dinner, to the drones hovering above the heads of lakeside diners, considerations of public space seemed almost non-existent. I assumed it was simply different norms, but couldn’t help sensing a small hint of calculated dismissal. A trained thickness of skin in a Darwinian market of 1.4 billion to go after what one wants. The triumph of self expression and self-interest in the domains no longer expressly governed by millennia of tradition which not even Mao could banish.

As I looked at the model in front of me, I was actually a bit envious. A skill I need to cultivate.

Lijiang - The “Switzerland of China”

Lijiang is a ~2 hour train ride north of Dali: a cute, ancient town at the foothills of Jade Dragon Snow Mountain.

On arrival, the increase in elevation was tangible (~2,400 meter elevation). The June night had a refreshing crispness. Equally surprising for a relatively small, well-preserved city was the density of cabs. Hundreds of green cars line the streets with not aggressive, but persistent drivers angling for business in numbers that would make a New Yorker envious. Our hotel was about ~30 minutes away and ended up being ~24 RMB, the equivalent of US$3.

Aside from the natural beauty, the city’s architecture is worth appreciating.

The density and breadth of the old town is impressive. The UNESCO world heritage site forms a modern maze - the interior formed of Naxi-style homes with angled, tiled roofs and white facades which carve down from the city’s acropolis to the old town’s main plaza. Like Athens, the city comes to life at night - throwing open its more commercial hinges for thousands of visitors which flood its streets daily.

The vibe is mixed. Towards the top of the acropolis, the maze is graced by local restaurants and quaint bars, balcony’s overlooking the ancient rhythms and lighted outline of the city below. The mood is quiet, magical even - with views accentuated by solo artists strumming harps or guitars, replaying love-sick Chinese favorites. More European in tone.

Closer to the old town’s center, the vibe is… different. A hyper-commercial orgy of bodies, strobe lights, and loud music flanked by “copy and paste” stalls hawking cheap goods from the same three manufacturers. “Jiu ba jie” (“bar street”) offers a glimpse into the worst of these excesses.

The unending stream of tourists shuffle down the ancient canals at a snails pace, curiously examining the large glass windows on either side. Each pane offers a different flavor of cringe: flashing neon lights and aggressive on stage performances - fist pumping, jumping, fog guns, backup dancers, you name it - yet completely at odds with the docile behavior of the guests, all seated, scrolling through social media.

It was… it was almost as if no one was actually having fun - not the performers, the backup dancers, nor the guests. There was simply no exchange of energy between the parties which is the hallmark of a good performance. Everyone seemed to be doing what they were “supposed to be doing”. A weird Truman show of spiraling memetic desire. A 21st century “wang hong-laden” version of the Emperor has no clothes. The first wave of tourists posts their selfies at Jiu Ba Jie, so the second wave follows and so on, despite the seemingly forced nature of all the various participants behind each window pane sitting in silence as the screams and lights ricochet off the walls around them. An ancient China meets millennial doom scrolling meets Khaosan Road blend of horrors.

Shangri-La was more palatable.

Shangri-La - Paradise in the clouds

During the ride north, the architecture morphs from the Naxi off-white to a decidedly Tibetan style. Larger, neutral colored boxes with various shades of brown and slanted square roofs. The interior and frontal façade often contain intricate wood carvings, while the sides are coated with ~18 inches of thick clay plaster for insulation - keeping the home cool in the summer and warm in the winter.

The houses and plots are much larger than just two hours south; accentuated by the large glass coverings often constructed over the courtyards to shield against the harsh winters. Yaks and meandering cows roam liberally into the two lane highway cutting through picturesque farms and plains. Temperatures drop quickly into multi-layer territory once the sun begins to set - even in June.

In town, the density rivals Lijiang. From the city’s acropolis - crowned by a beautiful Tibetan temple and an adjoining ~60 foot prayer wheel - the rectangular square roofs hide many of the narrow pathways and intricate woodwork beneath, not matching the beauty of their shingled southern cousins.

From below, however, the city more than holds its own. The layers of wood and stone, generous use of wool fabrics and thick carpets, and the decidedly winter weather flavors - from Yak meat dumplings to hearty soups - provide a Tibetan, mountain-town feel, in sharp contrast to settlements just two hours south.

The people of the plateau.

My lack of enthusiasm for the coarseness of Yak meat was countered by my newfound love of “su-you-cha”. This delightful concoction - literally translated “Yak Butter Tea” - is a blend of Yak milk, Yunnan tea, and local oils served in both sweet and sour variations; the perfect drink to complement a crisp walk through old town. The drink would sell like hotcakes in Williamsburg in late autumn, leaning into the Tibetan brand no doubt.

***

Powered by the calories lent via untold cups of the warm nectar, we boldly ventured from the comforts of our lovely “minsu” into the borderlands facing Tibet. Many tunnels remained under construction, so we elected for a six hour drive north. A journey filled with violent fluctuations in altitude: from the valley floor with ~103 degree heat through an elevated mountain pass at >4200m facing one of Tibetan Buddhism’s more revered peaks, another 2000 meters above.

The rural highlands experience was on full display. The elevated roads carved from the mountain side often neglected guardrails, cars passed each other with surgical audacity overlooking 1000 meter cliffs. The restroom stops were often little more than a slanted half-pipe running from the floor to a howl in the wall; requiring a bucket of water to manually splash the interior towards the nature beyond. The congregating flies were often the worst part.

And still, it was worth it.

Given their revered station in Tibetan culture, summiting the peaks of Meili Snow Mountain is forbidden. Each morning at around 6am, the sun emerges to illuminate the highest peaks, beams of light sparkling off the snow and slowly creeping down the rest of the face before the small mountain towns clustered opposite emerge from the darkness. There is something divine about the experience. The cold wind rattling the prayer flags as the spine illuminates, standing guard over the terraced farms for centuries.

In the afternoon, the clash of epochs is visible once again. A group of 30 older Tibetan locals have traversed the mountains to pay their respects - completing full-bodied prostrations amidst a deep, rhythmic chanting. Twenty meters to the left, a young woman in a small white dress is gesturing in front of a phone stand. The battle rages - her tolerance of the cold is admirable, but the gusts sweeping down from the plateau knock at her phone-stand while the rattling prayer flags behind drown out her high-pitched narration. She calls an audible, shifting to a handheld selfie stick, monologue now reduced to smiling, nodding, and cute waves.

The weathered Tibetans pay her no mind as the chanting continues, pressing their faces to the cold ground in what has to be at least the 100th time. There is no sign of an end to their procession as we head back to a small bed and breakfast for an unfortunately diluted su-you-cha.

Developing the West

On the return, our driver explains the trek from the mountain villages surrounding Meili Snow Mountain to Kunming used to take as long as a month - a journey which today can be made in as little as one, rather long, day.

The monumental project of developing the west is well underway - trains, highways, bridges, and airports - galloping across the frontier to the benefit of hundreds of millions previously at the mercy of mother nature - isolated from the modern wonders of healthcare, running water, and markets.

And still, the relentless march of modernity is not without its downsides.

On the way out of town, we swung through the Gadansong Zanlin Temple in Shangri-La. A beautiful, white Tibetan complex - smaller but similar in aesthetic to the famous Potala Palace near Lhasa.

It’s majestic.

As we ascended the flights and stepped over the floorboard into the temple with reverence, the respect I had witnessed the prior day on the mountain top seemed to languish. A multi-generational pursuit of wisdom and self-mastery giving way to secular, commercial realities. Many young monks could be observed playing on smart phones during prayers. Older monks had set up a booth and appeared to be selling “indulgence” candles for blessings. AliPay and WeChat QR codes were strung up liberally alongside other cash collection jars in front of the golden statues. One monk went up the stairs ahead of me, pulling up his robes to reveal a new pair of Air Force One’s.

I’m not sure if this is a one off or the natural blending of Tibetan Buddhism with Chinese folk religions emphasizing luck and financial outcomes or if the central government’s crackdown in Tibet and insistence on the “Sinicization of religion” or some combination is responsible, but the small corruptions were discouraging.

I have little patience for romantic nostalgia about the good old days. While rather boring, I’m a firm believer in Steven Pinker’s Enlightenment Now thesis. That decade after decade after decade, the post-enlightenment march towards modernity has generally been an unmitigated force for good - towards literacy, limited child mortality, longevity, higher living standards and happiness. A move from subsistence toil towards high speed rail. In China’s southwest, this happy transition is well-underway.

However, that does not mean there aren’t pockets worth preserving - environmental, cultural, and religious. Yunnan has more such pockets than most.

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If you enjoyed this piece, please feel free to check out my prior “portraits” for city’s below:

Taipei

New York

Bangkok

Until next time,

PD :)

MACRO HEAVY

There is no denying we are in a macro heavy investment environment. “Fundamental valuation” analysis has given way to a market largely dictated by the mercurial incantations of the Fed. Bad news is good, good news is bad. The key driver of asset performance is less actual performance and much more about the global denominator in which such assets are priced (i.e. dollar-based liquidity.)

Long-term debt cycle evangelist Ray Dalio is on record proclaiming the late hour of our current cycle. A ~70 year period of continual leverage built up in an economic system which will ultimately find a reckoning as individuals realize there are more “claims on assets” (i.e. debt or money) than there are underlying assets to be claimed. The three ways in which this “default” can occur are a restructuring (everyone takes a haircut), austerity (spending is reduced), or debasement (inflation runs hot, reducing the future debt burden by devaluing the currency).

Long-term Debt Cycle

Source: The Hatch Fund

Macro is challenging because of the quantum of significant variables: Astrology for the affluent, if you will. Late in a debt cycle, the challenge rises as traditional metrics are replaced by the unknowable, yet consequential decisions of fallible central bankers sitting in clandestine ivory towers driving an ever more unwieldy machine. The longer the music plays, the greater the consequences of mismanagement.

I am no macro guru. Particularly in the short term, palm-reading the machinations of the market is a talent few have been proven to possess. The chart readers, the liquidity watchers, the Fed interpreters - 10% investors, 90% infotainer. The sharks do not spend time on social media.

However, when the noise gets to a fevered pitch, sometimes it’s helpful to step back at a high level and use simple frameworks to weigh the main variables.

Below is a highly simplified, non-quantitative framework to examine the inflation-deflation debate. The Nobel-worthy seesaw framework :)

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The Esteemed Seesaw Framework (VERY broad strokes)

Post-1990, the global monetary regime was anchored by myriad disinflationary factors steadily dragging interest rates down following Paul Volker’s famous 1980s showdown with inflation.

The world was at peace under a U.S. hegemon. Free market ideology was traversing the globe, opening new markets for outsourcing and driving down labor costs. The PC revolution was underway, reaping productivity gains at the pace of Moore’s law. The internet - near free, instant communication without borders - had begun its ascent.

With such disinflationary tailwinds, even looser monetary policy proved unable to stir inflation. These productivity tailwinds would prove dominant all the way through 2020, including the GFC.

The subprime crash was another spectacular deleveraging event; a deflationary juggernaut stemming from U.S. excesses to hobble the global financial system, leaving an extended downturn in credit, earnings, and jobs in its wake.

The Quantitative Easing unleashed by Great Depression student Ben Bernanke helped to combat this spiral - potentially staving off a 2nd Great Depression - but at the cost of a Fed balance sheet and significant moral hazard introduced into the private markets.

However, to the surprise of many, the scourge of inflation was not unleashed in the wake of this sizable US$3.7 trillion intervention by the Fed. The prices of goods and services remained stable. Mainstreet’s demand remained muted. Excess liquidity flowed not into goods and services but into the price of assets.

After 2008, both bankers and investors became complacent.

Inflation had been “tamed” by a combination of demographics, process efficiencies, accelerating technology, and technocratic management. With such tailwinds, there would always be room for ample liquidity injection to combat the excesses of the business cycle in the face of any Minsky moments. The ensuing bull run was glorious, papering over any external shocks with cheap money.

S&P 500 Index

But all good things, including low-inflation regimes, must come to an end. To the surprise of many pundits, the weights of the seesaw shifted sharply during the pandemic.

With COVID, the size of the spending bazooka was astronomical, but the key misstep was a misdiagnosis of the type of crisis the pandemic had introduced. The bureaucrats were, as usual, fighting the last war - haunted by the spectre of another financially-driven deflationary collapse.

With COVID, many of the previous tailwinds driving productivity gains abruptly reversed. “Lockdowns” and shortages plagued global supply chains, highlighting inherent vulnerabilities - of both biological and geopolitical origins.

Compounding the problem, the U.S. government expanded beyond monetary policy (keeping interest rates low) and into fairly non-discretionary fiscal policy (PPP + Stimmies) at the exact same time supply-chain shortages emerged. To be fair, what else can you do when individuals are stuck at home without work? The supply-demand imbalance soon became obvious.

And then came the kicker. The nail in the coffin for an already deflated “team transitory” (sorry).

Geopolitical conflict emerged as a significant variable for the first time in 30 years as Russia invaded Ukraine, sending delicately constructed global energy markets into a tailspin. The conflict spooked markets into a further examination of the rising tensions between the U.S. and China, accelerating the “decoupling” narrative across both public and private investors - an expensive undertaking.

Upon realizing its misdiagnosis, the Fed had no choice but to slam on the breaks. Hard.

Today, we are tilting from inflationary to disinflationary quite aggressively as demand is crushed by the Fed’s aggressive tightening cycle. The impact is just beginning to bleed out into the real economy via the wealth effect, the real estate freeze, and a regional banking system paralyzed by Fed inflicted duress.

However, financial intervention aside, the secular trends are no longer as one sided as they had been for 30 years prior.

Sure, the disinflationary tailwinds are not negligible. Digitization / automation continue their relentless march. Aging demographics will weigh on consumption. The AI productivity bomb has only just begun. However, the counterweights of geopolitical conflict and the green transition are also only just beginning to be felt.

Conflict is always inflationary. Thirty years of efficiency optimization reversed in short order: a new regime of “resilience” requiring greater domestic investment, a reorganization of supply-chains, increased military spending, and revamped infrastructure to re-shore lost capabilities. This is all happening at the same time global governments have committed to a green transition which will cost US$9.2 trillion annually through 2050 (US$275 trillion in estimated aggregate expenditures to reach net zero).1

Source: McKinsey: The net-zero transition

These investments are all capital intensive.

And the borrowing to undertake such large investments will now be happening at 5% as opposed to near 0%; all in highly indebted economies with fairly bleak growth outlooks.

The Cost of Free Money

It’s hard to argue with Stan Drunkenmiller - an investment icon boasting a 25 year track-record of ~30% returns - arguably the individual on the planet most in tune with the machinations of the market. Drunkenmiller is convinced of a hard landing, citing “11 years of free money, a broad asset bubble, and the Federal Reserve increasing rates by 500 basis points within 12 months”2 as “unprecedented”.

He has compared the reckless pace of spending in the U.S. to “watching a horror movie unfold”, citing the Congressional Budget Office’s estimates that seniors will account for ~100% of tax revenue by 2040 and if future entitlements are taken into account, the U.S. debt burden is closer to US$200 trillion, far more than the official US$31.4 trillion limit3. Simply put, the situation is looking dire and something will have to happen to the money spigot.

The above color Drunkenmiller’s assertion of a “high probability” the stock market is flat for the next decade; a stark departure from the up-and-to-the-right markets we have grown accustomed to over the past decade.

For the first time in decades, the Fed’s hands will be tied by the structural forces listed above with any lack of resolve carrying the risk of a second inflationary spike and a rebuke from the bond vigilantes. Because of this, the Fed will almost certainly error on the side of caution, steering the economy into a near-term recession.

However… and I say this very timidly… I can’t help but seeing the outlines of a bizarre Deja Vu; a replay of the last four decades played on 3x - 4x fast-forward in the decade ahead.

While painful, inflation will be brought to heal (likely by a recession), the great infra investment cycle will not last forever, and continued gains in automation will reintroduce deflationary tailwinds offsetting increasing expenditures.

This will once again provide central bankers with leeway to spend, driving liquidity back into the market, debasing the denominator, letting inflation run a bit hot to ease the debt load, and boosting asset prices with corporate profits less saddled by pesky labor costs.

In my opinion, we will emerge from 2020s pointedly in the age of capital. An age defined by automation driven productivity and a politics of redistribution.

THE AGE SOFTWARE ABUNDANCE

One of the most insightful pieces I’ve read recently is “Societies Technical Debt and Software’s Gutenberg Moment” by Sk Ventures.

What does a world look like in which the cost of producing software drops precipitously?

A world in which software development dramatically expands from a specialized, expensive few to anyone capable of manipulating natural language?

LLMs (large language models) have advanced quickly to serve as a sort of “meta compiler” between natural language and code, similar to the way a coding language is compiled into the 0s and 1s which laisses with the microprocessor. With the rise of this new meta compiler, the price of software development will plummet, rapidly expanding production.

What if the pace of new software deployed will now directly follow the exponential jumps we have seen in computation capacity?

Source: OurWorldinData, BothFleshandmore.com

What impact will this have on Baumol’s cost disease?

What happens when the cost curves underpinning micro-electronics begin to infiltrate other, traditionally higher cost service-oriented industries with automated intelligence?

This will be a massive deflationary shock.

THE AGE OF CAPITAL. THE AGE OF POLITICS

I could be wrong, but my base case is a choppy ~24 months followed by a market realization that the acceleration of AI’s gains is likely to outstrip other, more inflationary inputs. With the pace that AI has moved the last 6 months, it seems probable we will have ubiquitous, cheap intelligence by the end of the decade. A productivity bomb to dramatically outpace the outsourcing and telecommunications boom of the post 90s era, driving down costs, and uncuffing Central Bankers once again.

The tug-of-war would then resume: Automation vs. the Money Printer.

If this hypothesis is true, the implications should be clear. First, similar to the last three decades, owning assets - and higher risk assets at that - would be the best way to preserve or enhance purchasing power (assuming regulations / politics remain in their current status quo). The printers will be on, interest rates would come down, and the liquidity in which assets are priced once again expanding.

However, just as many investors this cycle have learned that the “market” is subordinated to policy of central banks, during the next cycle investors will learn the market is subordinated to politics. Decisions made in the halls of congress, the chambers of parliament, or the compound at Zhongnanhai will increasingly dictate ultimate after-tax returns. The disruption caused by AI will drive unparalleled efficiency gains, but also unparalleled displacement and public rebukes of the “invisible hand”.

Interestingly, policy makers have set a course where easy money will be difficult, if not impossible to turn off. These manipulations of the market have furthered inequality leading to social unrest. This social unrest will be accentuated by technological acceleration. The outcome will be an appeal to the same policy makers to step in to redistribute the manipulated gains which they engineered in the first place. I guess there are two ways to say it… both ending in the same place.

In a world of abundant software, money will be cheap. In a world of cheap money, assets go up. In a world where assets go up, inequality widens.

In a world of abundant intelligence, labor is displaced. In a world of displaced labor, returns to capital increase. In a world where returns on capital increase at the expense of labor, inequality widens.

In a world of rising inequality, outcomes will be decided increasingly by politics...

Perhaps the only realm more difficult than economics to predict.

Photo Source: Zhang Yun, China-US Focus

“A moment comes, which comes but rarely in history when we step out from the old to the new when an age ends, and when the soul of a nation, long suppressed, finds utterance”

- Jawaharlal Nehru, “Tryst with Destiny”

In international investment circles, the tangible cooling on the Chinese market and the counter enthusiasm surrounding the subcontinent is palpable. In normal times, such “consensus” signals would make my spidey senses tingle: a contrarian signal to hone my near-term focus on Chinese names. The Fed hiking cycle, the Chinese internet crackdown, the lockdowns, the “decoupling” narrative, and growing political and governance concerns for international capital in the world’s second largest economy combine to suggest attractive entry points in some generational Chinese companies. For any remaining skeptics of the Chinese tech ecosystem, I recommend a visit to Tsinghua University in Beijing: the ambition, creativity, and work ethic I witnessed during a recent visit are truly world class.

However, an objective view of the landscape betrays not just temporary dislocations in price or sentiment, but large, structural changes in the tectonic plates underpinning the global economy. A very real “regime change” birthed of geopolitical and ideological realities which, for the first time since the fall of the Berlin wall, threaten to shift the currents of international trade.

China’s meteoric, yet stubbornly undemocratic rise within the existing world order, COVID’s revealed supply chain fragility, and Russia’s invasion of Ukraine have set the stage for a “reassessment” in capitals from D.C. to Moscow; Brussels to Beijing. History has rebooted.

This marks a significant turning point; a westward shift in the tailwinds sweeping down from the Himalayas.

China’s four decade growth miracle will not simply collapse as suggested by Peter Zeihan, but is likely to slow as previous tailwinds become headwinds. Demographics aside, the destination of new manufacturing capacity will no longer default to China. At the margin, governments, companies, and investors are actively assessing their geopolitical exposure, and because of China’s successful integration within global supply chains over the last three decades, many international firms now find themselves over-exposed. This will weigh on Chinese growth.

It’s equally massive neighbor to the southwest is the logical beneficiary of this diversification. For too long, India has been held back by its lack of manufacturing prowess: it’s historic suspicion of international investment, unwieldy bureaucracy, underinvestment in infrastructure, and the gravitational vortex for FDI which has been modern China over the last thirty years, all frustrated India’s potential as a manufacturing powerhouse.

These headwinds are beginning to subside.

Is it now India’s turn to inflect? Will history look back from 2050 and tell a story of the India “go-go years” similar to post-1990 China? Why now? Why did China inflect first to begin with?

As always, a peak into the annals of modern history between the dancing giants can provide clues as to what may come next.

“Let some people get rich first”

- Deng Xiaoping

Why did China get rich first? How was it able to capitalize after the post-Mao upheaval to embark on the most miraculous economic run in history? To grow GDP from ~US$230b to US$15t (a >60x increase!!!) in under two generations, catapulting GDP per capita1 by >10x in the process?

Interestingly, India’s GDP per capita was higher than China’s up until about 1990 before the China growth story kicked into high gear, inflecting aggressively after the 2001 ascension into the WTO.

This is not to say India’s performance has been dismal. Since the liberal reforms starting in the early 90s, it’s ~5-6% growth over the period has been respectable, birthing greater urbanization and glitzy metropoles from Delhi to Bangalore, Mumbai to Kolkata, forcing open the narrow doors from desperate poverty to the budding sprouts of an aspiring middle class.

However, China’s performance has spoiled the curve; a growth miracle unparalleled in human history lifting >850 million people out of poverty. A combination of sound leadership, good policy, rural investments, hard work, and strategic integration into global supply chains provided the foundations for China’s meteoric rise.

But did it have to be this way? Was China always destined to be the “factory of the world”?

I would argue no. India missed a golden opportunity in the post-colonial decades to cement itself as a manufacturing hub - to establish its own ties with western markets and integrate with a globalizing world post-WWII while China struggled through the upheaval from the Great Leap Forward and the Cultural Revolution.

By the time India began correcting course in the 90s, the Chinese agglomeration effects had a 13 year head start. India has been struggling to catch up ever since.

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“Time is not measured by the passing of years but by what one does, what one feels, and what one achieves”

- Jawaharlal Nehru

After winning independence from the British in 1947, India’s leadership was justifiably skeptical of outside interference. The rapid USSR industrialization story was in full swing, and founding Prime Minister Jawaharlal Nehru leaned towards socialism as the model to kick-start India’s post-colonial economic engine. This proved a significant misstep for two generations of Indians.

To be fair, Nehru had his hands full with much more than economic matters after India’s founding, consolidating a fragmented India into a unified nation. The tapestry of states, provincial princes, languages, religions, and customs which makes India so vibrant also makes the world’s largest democracy difficult to steer. After the British withdrawal and the chaos of partition with Pakistan, Nehru jumped from crisis to crisis - separatist movements in the east, conflict in Kashmir, disputes with dethroned princes, not to mention religious riots inflaming the country. Simply keeping India together, under a secular constitution, was a heroic effort. The fact India has remained democratic defied almost all expert opinions going back to partition - a testament to the truly unique story that is modern India and the political leadership of Nehru.

Still, in hindsight, Nehru’s economic policies - focusing on self-sufficiency, state-led investment, and capital-intensive public works - proved a substantial drag. In the post-WWII years, the playbook for rapid economic growth was visible along the Pacific rim. From Japan to Korea, Taiwan to Singapore, land reform, integration within global supply chains, opening to foreign direct investment, all while protecting and subsidizing local champions disciplined through export controls, drove impressive rates of growth in much of East Asia in the decades after WWII.

A formula China was to study closely in the late 20th century.

Sadly, India was slower in its economic enlightenment. Post-Nehru, growth was further frustrated by his daughter Indira Gandhi who oversaw the continued centralization of economic policy. Indira Gandhi’s reign witnessed nationalization of the banks, various caps on private business, high tariffs, barriers to international trade and foreign exchange, and the expansion of the Kafkaesque “License Raj” - a labyrinthian cacophony of permits and licenses which made doing business in India almost impossible. Skepticism of the outside world remained, discouraging external investment and shunning global supply chains in favor of “self-sufficiency”, failing to galvanize the abundant lower cost labor so in-demand from a newly rich and globalizing west.

While India writhed in economic malaise, a mummy of self-inflicted red tape, China was throwing off the shackles of its own ideology and policy missteps of the Mao years. The consequences did indeed “shake the world”.

“It doesn’t matter if a cat is black or white, as long as it catches mice”

- Deng Xiaoping

After the upheaval of the Cultural Revolution, Deng Xiaoping was restored to power, deftly navigating a charged political climate, to embark on the famed era of “reform and opening”.

To summarize much, the era was marked by:

1. Economic liberalization with the planned economy gradually replaced by market oriented reforms (from ~12k → 1.5m private enterprises from ‘78 - ‘90)2

2. Agricultural reforms allowing farms to keep and sell surplus production (boosting grain output from 305m tons in 1978 to 407 million tons in 1984)3

3. Special economic zones to attract investment and foster export-led growth (most famously Shenzhen)

4. Decentralization of decision making power - providing more provincial decision making power (empowering local officials)

5. Throwing open the Doors to Foreign Direct Investment (from $3.5 billion in 1990 to 333 billion in 2021)4

The policies worked. After laying foundations in the 80s, the reforms began to show results. The promise of a large domestic market and a massive pool of affordable labor sucked money in like a blackhole - with an initial inflection visible in the early nineties (~13 years after reforms had begun).

India, similarly, had to wait for ~13 years for a noticeable inflection in FDI after the liberalizing market reforms under Dr. Manmohan Singh in the early 90s, doing away with some of the worst excesses of the License Raj.

Foreign Direct Investment (US$ in Billions)

Source: Worldbank FDI data

The reforms under Deng which sparked this FDI boom catalyzed an agglomeration effect: FDI boosted exports, more exports bred expertise, expertise attracted more FDI and around we went. In short order, it seemed all global supply chains had a foothold in China; a foothold which turned into a crater after entry into the WTO.

Exports of Goods and Services (US$ in Trillions)

Source: WorldBank Export Data

In both of the above charts, we see India is ~15 years behind China; (coincidentally?) roughly the same gap in their respective shifts towards more market friendly policies. After its early lead, China has maintained its strangle hold as the world’s global manufacturing hub, while India has been forced to substitute by exporting services.

The big question now is: will India finally begin to see an inflection in FDI and goods-based exports to kickstart its own agglomeration effects on the elusive manufacturing-led growth ladder?

If so, large shifts might be underway. The rise of China has been the biggest geopolitical and economic development of the last 30 years.

Deja Vu?

“Dream, dream, dream. Dreams transform into thoughts and thoughts result in action”

- Dr. A.P.J. Abdul Kalam, 11th President of India

Based on purely economic factors, the answer would be “no”. As highlighted by Ying Chen at LKY School of Public Policy, global manufacturers do not simply look for “the lowest cost of labor” but instead seek “labor productivity and cost-effectiveness” per unit of output. Due to various inputs, including pre-reform era policies directing public health and education to rural areas, China’s life expectancy and literacy rates remain well ahead of India, yet to even reach China’s 2001 level of development:

“Productivity can be affected by many factors, including labor quality, physical infrastructure, economies of agglomeration, and technology, in all of which India is currently lagging behind China”

- Ying Chen

Despite rising labor costs, the above combination of inputs has kept manufacturing capacity located in China with a stubborn ~29% of the total global manufacturing footprint calling middle kingdom home.

Yet, calculations are no longer purely economic. In the post-pandemic world, many companies including Apple, Boeing, Nokia, Ericsson, Samsung5 and others have announced increasing capacity in India - both to gain proximity to a large local market, but also to diversify their growing geopolitical risk. Is this the potential spark needed to propel India from a services powerhouse to a significant global power?

Whether or not India can capitalize on this golden opportunity remains to be seen. Infrastructure remains underdeveloped, climate change challenges are on the rise, pollution is already wreaking havoc, education is suboptimal, the Kafkaesque bureaucracy is far from dead, and ease of doing business remains a challenge.

And yet, the Elephant is gaining momentum across many important metrics:

• Ease of Doing Business: India has gone from ranked 142nd (out of 189) in 2015 to 63 (out of 190) in 2020 - a strong indicator of Modi’s seriousness in attracting external investment to India

• Youth literacy jumped from 76% in 2000 to 92% in 2018

• Life expectancy jumped from 62.5 years in 2000 to 70 years by 2019

• Poverty rate: the percentage of the population living below $1.90 per day has declined from ~35% in 2000 to ~9% in 2019

Announced in 2014, the “Make in India” initiative also appears to be sprouting legs:

• Production-linked incentive schemes are emerging in key industries

• Infra spending is up significantly

  

• A train transformation is underway - and yes, they are manufactured in house

• The real estate boom in major Indian cities is well underway

• Not to mention impressive gains in defense and space related industries

These production trends will be assisted by a large and growing domestic market. Despite the relatively low GDP per Capita, there are still 100m Indians with per capita income comparable to Mexico, China, or Eastern Europe. India is now the world’s third largest auto market and third largest aviation market; trends which signal its ascension on the world rankings.

If growth rates persist, India will surpass Germany and Japan in GDP by the end of the decade to become the world’s third largest economy.

“You can change friends but not neighbors”

- Atal Bihari Vajpayee, Former Prime Minister of India

And while the East Asian blueprint is quite clear, the world has changed much in the last thirty years. Automation in particular promises to make many supply-chains less labor intensive. Many western companies are keen to “near-shore” hubs closer to home. Advances in artificial intelligence promise to outpace “upskilling” efforts across the globe and soon will be integrated into robotics. The “demographic dividend” may yet turn out to be a “demographic liability”.

Still, automation will take time.

Last year, I wrote a fairly pessimistic piece called Deglobalization and the Developing World which I now recant somewhat. While the piece highlights real concerns, near-shoring can only go so far to contradict the laws of economics. For instance, the bloated cost structure will never allow for the building of trailing-edge chips in the United States despite its strategic benefits. However, geopolitical realities dictate investments will need to be made abroad to limit chokepoints by geopolitical rivals.

This is where India (and Mexico and Southeast Asia) has have a real shot and capturing some of the manufacturing share which has been soaked up by China in previous decades. A final push to get another 1.4b people on the road to manufacturing-led growth before the automation gap closes the door completely. To be fair, the confluence of factors which led to China’s rapid ascension is unlikely to be replicated, but a path between India’s current trajectory and China’s trajectory post WTO inclusion is very much in the cards.

China has stood up and gotten rich; a growth miracle which indeed “shook the world”.

After a winding journey, it’s giant neighbor to the Southwest appears to be stirring.

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Good Reads

• China’s Economy: What Everyone Needs to Know by Arthur Kroeber

• When China Rules the World by Martin Jacques

• Deng Xiaoping and the Transformation of China by Ezra Vogel.

• In Spite of the Gods: The Rise of Modern India by Edward Luce

• India: A Portrait by Patrick French

• Superfast Primetime Ultimate Nation by Adam Roberts

• Will India Replace China as the New Global Manufacturing Hub? by Ying Chen

• Here…comes…India!!! by Noah Smith

1. First off, RD ended up selling our assets to a larger APAC based manager, so moving on to next opportunity soon

2. As such, this publication will be converted back into my personal blog under the resurrected pseudo @PonderingDurian :). I will still write about crypto / APAC tech, but now I have broader license to explore novel topics to which I’m drawn

Today, synthetic biology is at the top of that list.

“We program computers to manipulate bits, but we program cells to manipulate atoms. Cells are the building blocks of our food, our environment and even ourselves”

- Ginkgo Bioworks 2022 Annual Report

Programming Cells

I will readily admit, this is a full Beijing eight-lane highway outside of my lane. Luckily for you, I don’t care. The promise of programming cells, directing the language of life, as easily as we have come to manipulate the 0s and 1s which have infiltrated every facet of our lives is simply too transformative not to put under the microscope (sorry).

Staring back from the vantage of 2023, the invention of the transistor at Bell Labs in 1947 is in contention for the most important invention… ever. The manipulation of electrons through silicon wafers, interpreted as 0s and 1s by the processors lacing our pockets, our cars, our company clouds, and our militaries has been matched in its impact only by the complementary engineering grit and ingenuity which has allowed Moore’s law to continue unabated.

Number of transistors on microchips over time (LOG SCALE) predictably leads…

Our skyrocketing computational capacity….

The TikTok dance video you watched this morning. The microelectronics which govern your steering. The GPUs powering the GPT search which suggested the above graphs - all made possible by the world’s most complex manufacturing supply-chain built to digest ever more electron zaps on a single piece of silicon.

In many ways, the last 75 years could be told1 most appropriately through the lens of micro-electronics which has arguably shaped communication, entertainment, economics, and geopolitics more than any other trend.

However, the revolution has largely been restricted to the digital sphere. This sphere is slowly encroaching on all other industries through sensors, robotics, networking and more, but the information revolution has yet to bear the same fruit in the world of living organisms (sorry again).

My initial, under-educated, foray into the world of biology would suggest this is about to change.

The Language of Biology

To put it succinctly, we are slowly discovering the language of life. It turns out, the 0s and 1s which have underpinned the information revolution are not so different from the four nucleotide bases (A,T,G,C) which construct the now famous double helix of DNA in the genome: the software for cell construction.

The sequence of the DNA base pairs is transcribed by mRNA (think molecular fax machine) into the ribosomes (think molecular manufacturing facility) which read the sequence and begin constructing the amino acids which make up proteins which perform the essential functions for cell life.

While still early innings, we have come a long way in deciphering the genetic information which programs the cellular machinery behind life itself. Once you wrap your head around this fact, it becomes hard to think about anything else!

If Newtonian physics was the language of the industrial revolution, then atomic physics was the language of the digital revolution.

The digital revolution in turn has produced a new language - artificial intelligence - which holds great promise in unlocking the secrets of biology.

I will venture to argue the largest beneficiary of the recent advances in artificial intelligence (neural networks, large language models, and the advanced compute which enables them) is biology. As opposed to physics and computers which follow deterministic universal laws, biology has more complexity. Many genes (the software of life) are not monogenic (meaning one gene = one trait) but are polygenic, (each trait is impacted by a large number of genes in combination). Furthermore, there are a plethora of ways in which environment and randomness can impact both genes (mutations) as well as the transcription / translation process from genes to a unique protein.

This creates a staggering number of potential combinations from the relatively simple, elegant base pairs.

Source: Google’s DeepMind AlphaFold Initiative

Fortunately, the cost of acquiring, storing, and analyzing ever larger data sets is decreasing dramatically. The collision of big data, AI, and precision genome editing tools betray our position on the precipice of a decade of technical breakthroughs in programming life: a toolset which has broad applications across therapeutics, agriculture, synthetic materials, and more.

Why Now?

Three catalysts in particular have arrived which put the programming of cells within reach.

1. The increasing availability of large datasets - driven in part by the rapidly decreasing cost of sequencing genomes

2. The rise of advanced neural networks - powered by the acceleration in computational resources and processors for AI applications

3. Continued advances in methods to precisely edit and synthesize strands of DNA

Large Data Sets

In biology, this bucket needs work. A key driver behind the success of OpenAI’s transformer models is the unending data available on the internet on which to train. Outside of protein folding, few problem sets in biology have the data quantum necessary to unleash AIs full potential. To have a prayer at beginning to decipher the language of life, we need to feed the beast.

Fortunately, more data is coming… fast. The US$2.7b required to sequence the first human genome during the Human Genome Project has been aggressively surrendering to deflationary technological forces - outpacing even Moore’s law in cost reductions.

Source: National Human Genome Research Institute.

The plummeting costs and increasing demand for programmable molecules will drive a significant boost in DNA sequencing (along with corresponding phenotypic data) on which to uncover more relationships. Like the exponential curves in structured and unstructured data which accompanied Moore’s law in micro-electronics, bio-derived data sets are likely to follow a similar exponential path.

This bodes well for unleashing the full potential of AI’s recent acceleration in biology.

Artificial Intelligence

The relationship between genotypes (the genetic information of an organism) and phenotypes (the observable from the expressed genes) is complex for numerous reasons. First off, many traits are influenced by multiple genes (“polygenic” traits) making it difficult to decipher which combination is causing which trait. Incrementally, genes interact in complex ways - often enhancing or masking the impact of other genes in their expression. Secondly, environmental factors like nutrition, stress, temperature, chemical exposure and more can impact how underlying genes are expressed. The are more variables in play than just genotype input → phenotype output, further complicating our puzzle. Lastly, epigenetic factors - essentially “turning genes on and off” without modifying the order of the genome further complicate the causality.

Given the multivariate nature of the relationship, going from a gene sequence to a cell, not to mention an organism, requires unraveling this spiderweb of complexity. Fortunately, these are exactly the kind of relationships neural nets thrive at uncovering.

The AlphaFold project from Google’s DeepMind cracking the famous “protein folding problem” is perhaps the most prominent example. By showing the model the sequences and structures of ~100,000 known proteins, AlphaFold can now predict the structure of a protein from its amino acid sequence, “at scale and in minutes, down to atomic accuracy”. The project has opened up its database of ~200m protein structures to the scientific community, helping accelerate a broad range of scientific discoveries: from drug development in rare diseases to enzymes that can break down single-use plastics to combating anti-biotic resistance.

As data in biology becomes more ubiquitous, expect the compounding of AlphaFold-like discoveries to build on each another. Larger data sets = better models = more discoveries = more data we realize we should track.

As we decipher the language of life - these unique combinations of A, T, C, and Gs which make up the codons, which make up the amino acids, which construct the proteins, which power the cells which make up the organism - what is stopping us from moving from reading the code of life… to writing it?

It turns out, not much.

Synthesis - Editing / Creating New Life

In his recent book, “Editing Humanity” Kevin Davies traces the science, characters, implications and drama behind the recent CRISPR-Cas9 breakthrough now largely attributed to scientists Jennifer Doudna and Emmanuelle Charpentier. The “molecular scissors” discovery as the now-tired metaphor proclaims has ushered in a new generation of genome-editing tools giving humanity the power to accurately manipulate DNA.

Building on the initial discovery, David Liu’s team at the Broad Institute developed techniques for individual base pair editing - providing much needed precision in the high-stakes game of editing genomes to reduce “off-target” affects. These tools represent the first steps towards the coming “word processor” moment of genome editing.

Incrementally, the processes are beginning to scale; the artificial synthesis of DNA strands is becoming big business. Companies like Twist Bioscience, Integrated DNA Technologies, GenScript and more readily service customer requests for the production of high-quality synthetic DNA on a large scale. These ordered synthetic DNA strands can then be inserted into cells (think “software upgrade”) causing the cell’s machinery continuously churn out the desired sequence of new proteins.

Brave New World

The implications of the above are breathtaking. Involuntarily, the human brain leaps to questions of our own species’ genetic modifications. “The betterment of well beings” - a discussion fraught with knee-jerk hysteria, myriad ethical questions, and decades of regulatory red tape in virtually every case.

However, outside this can of worms, the possibilities are inspiring. Precisely manipulating electrons through silicon built the digital world around us in 75 years. The microprocessor, every appliance, the PC, the Internet, the Phone, the App Store - all through the manipulation of electrons.

What can we build once we have mastered the language of biology itself? What happens when we move from programming computers to programming cells? From resource extraction to growing biofuels? From food scarcity to genetically-induced abundance? From a life of pain to a baby free of sickle cell anemia or Huntington’s or a host of other life-threatening diseases?

The scope of programming cells spans almost every industry: from healthcare, to agriculture, to energy, to novel, more sustainable industrial materials.

To borrow an exert from Ginkgo Bioworks 10k:

“Synthetic biology, through the programming of DNA, enables the development of products made from all of these biological molecules, including DNA based gene therapies, mRNA vaccines, proteins and enzymes used as therapeutics, food ingredients or processing aids… antibiotics and other medicines, vitamins, fragrances, and even the building blocks of polymers that are today produced via petroleum”

Like many technical revolutions, there will be ups and downs. Hype cycles and deep corrections. The promise of utopia and the trough of disillusionment.

However, if you pick your head up and begin exploring the collision of DNA sequencing, AI’s acceleration, and the rise of precision genome editing tools, you might find a reason to smile.

A very solar punk future may be here before you know :).

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Note to reader: I’m still getting up to speed on SynBio as well, so don’t take this as gospel. However, if interested to learn more in this fascinating field, I found the below helpful.

Good Reads on SynBio:

1. Editing Humanity by Kevin Davies

2. The Genesis Machine by Amy Webb + Andrew Hessel

3. The Age of Living Machines by Susan Hockfield

4. Regenesis by George Church and Ed Regis

5. The Century of Biology by Elliot Hershberg

6. The Bio Revolution by McKinsey (s/o to author @travers_nisbet)

7. Ginkgo Bioworks Annual Report

Notable Orgs:

If interested to get active at the intersection of crypto and synBio, please check out ValleyDAO. This is a new decentralized organization open to all aiming to fund and commercialize academic research in the synBio community.

Over the last two years, basically one question mattered to investment performance:

“Did you predict the resurrection of inflation in the wake of COVID and its persistence?

Given ~40 years of benign inflation, most experts were dismissive of the inflation “Cassandras”. Despite large amounts of QE, the inflation mongers after the 2008 financial crisis proved sterile. Deflationary forces ultimately won the day, leading to slow growth even on the back of accommodating monetary policy.

So, what changed?

Disclaimer: I’m not an economist, and macro is not my area of expertise. I, too, was caught off guard by the persistent inflationary shock and am using this essay as an attempt to understand why.

To many in the financial markets, the below explanations may seem obvious, but I still find it valuable to spell out what happened in plain English. Why this time was, in fact, different. And, in light of these facts, whether inflation will remain persistent or not and on what time horizon (clearly speculative). The trajectory of inflation is the singularly most important variable impacting the economy and investment returns and, to put it candidly, our ability to forecast its path is dismal.

I will timidly add my layman’s input to the literature and await my thrashing from the econ twitterati.

Unleashing the Ghost of Arthur Burns

Why, after a decade+ of quantitative easing and hefty deficits, did inflation raise its ugly head in 2021? Three culprits seem most likely:

• The Global Pandemic (COVID) was a different kind of “shock”

• Fiscal Stimulus (“Stimmies”) put $$$ in the hands of regular households

• The Revenge of Geopolitics: Real Politik > Adam Smith

The potent combination of printing A LOT of money AND giving it directly to households WHILE a global pandemic crippled supply chains AND globalization’s fragilities were highlighted proved a blow too many for the Great Moderation, unleashing the ghost of Arthur Burns on an unsuspecting public.

COVID:

The pandemic was ultimately a different sort of “shock” than the 2008 financial crisis. 2008 was a financial crisis: a build up of unsustainable leverage - particularly within the US housing market - which culminated in a rapid deleveraging (an unwinding of loans & spike in defaults) igniting a liquidity crisis as banks withdrew risk from the economic engine in a desperate attempt to salvage their balance sheets.

This was a “demand shock”: a chain reaction of de-risking from banks, investors, businesses, and consumers where actors “tighten their belts” and withdrawal credit at the exact time it is most needed. Learning from the policy mistakes of the Great Depression, the Federal Reserve stepped in as the “lender of last resort”, making loans to unsteady financial institutions to combat the deflationary spiral in an attempt to “jump start” the economy with needed liquidity.

The pandemic was different. As opposed to a pure “demand shock”, COVID had a significant impact on supply. The two happened in sequence. First, as market sentiment collapsed in February 2020 with the virus’ global onset, a large demand shock ripped through the system leading Jerome Powell & Co. to counteract these forces via a US$5 trillion bazooka:

Source: New York Times - Where $5 Trillion in Pandemic Stimulus Money Went

The bazooka managed to stall the collapse in demand, but did nothing to assuage the impact of the virus itself. Lockdowns commenced, stores closed, factories went unmanned, and supply-chains grinded to a halt. The severe response measures in China in particular (the “factory of the world”) ensured supply shortages of many key inputs from raw material refinement to electronics.

This reduction in supply happened at the exact time demand for every day goods and services received heavy government subsidies.

“STIMMIES”:

Until the pandemic, monetary policy - the manipulation of interest rates - had been the primarily tool policy makers had used to either slow or stimulate the economy. By lowering interest rates to friendly levels and lending money to banks cheaply, the Fed hoped to reignite growth after the global financial crisis.

However, monetary policy is intermediated through the banking system and capital markets. Instead of loans flowing to individuals and SMEs, the artificially cheap money was used by Wall Street and Silicon Valley to promote aggressive expansion, consolidation, and share buybacks leading to a boom in tech and capital markets more broadly. As opposed to an increase in prices for consumer goods and services, asset price inflation was the primary consequence of easy monetary policy intermediated through the banking system.

Clearly, monetary stimulus was at work in the wake of the 2020 Bazooka. However, fiscal measures (i.e. government expenditures) also played a role including ~US$1.5 trillion in direct stimulus checks and unemployment benefits to households in need of everyday goods.

Source: New York Times - Where $5 Trillion in Pandemic Stimulus Money Went

Clearly, much of this funding was necessary to keep families afloat amidst forced closures of their livelihoods. However, as opposed to asset prices, the “stimmies” were primarily spent on everyday goods - groceries, rent, gasoline, etc. - at the exact same time the supply shortages were hitting the market.

So, demand for consumer goods and services got a massive $1.8 trillion injection at the same time new supply was stagnating.

Demand up, Supply down = Prices up.

GEOPOLITICS:

The last inflationary variable is the “return of history1”. Ever since the fall of the Berlin wall in 1989, the U.S.-led world order has pushed new technology and free-markets to every corner of the globe. Factories were pushed offshore, tankers have grown to island size, China joined the WTO, and supply-chains have elongated in search of ever cheaper input costs. Telecommunications technology, globalization, and relative peace kept end-consumer costs down by letting Adam Smith's doctrine flourish globally, reducing labor costs and letting competitive advantage do its thing.

Blessed be the name of the market.

However, the pandemic highlighted the fragility of global supply chains. Suddenly, “resilience” trumped “efficiency” as the new supply-chain buzzword. Building “redundancy” gathered inertia as the U.S. - China “decoupling” rhetoric gained steam, and moved into hyper-speed with Russia’s invasion of Ukraine. After lying dormant for 30 years, geopolitics reemerged to replace economics at the top of the global pecking order.

“National security” including “food security”, “energy security”, “military spending” and control over “systemically important” supply-chains are resurgent in policy circles. New nuclear plants, renewable farms, LNG terminals, battleships, and re-shored factories are… expensive. They will require high investment.

This will put upward pressure on inputs from energy, to labor, to core tech components. In a word: inflationary.

What happens now?

The Fed: Making Money Expensive Again

Inflation is weird because much of it is psychological. Clearly, the supply and demand imbalance play a large roll in an initial inflationary jolt, but whether inflation persists and for how long depends on how market participants perceive inflation. If, for example, workers see prices increasing at the grocery store, they will demand higher wages. If grocery stores see their wages (a key input cost) increasing, they will raise prices further on end consumers.

This is an inflationary spiral or in the words of the economic clergy: “an anchoring of inflation expectations”. This is bad. Price stability is a key input for commerce allowing individuals and businesses to plan ahead and invest in the future.

The Federal Reserve, with a dual mandate to promote price stability (i.e. benign inflation) and maximize employment, now has the unenviable task of stabilizing prices before inflation expectations become “unanchored”. This means getting (the formerly subsidized) demand back in line with the (still limited) supply. Without tools to impact supply, the only solution is to crush demand.

This means making money expensive.

By raising interest rates, the Federal Reserve dampens economic growth. Money to invest in new projects becomes more expensive. Mortgage rates rise considerably. Over-levered or less profitable companies can’t meet their obligations and are forced to cut costs (i.e. jobs) and stop investments which dampens consumer spending and future growth prospects.

In capital markets, liquidity is pulled “back down the risk-curve” towards lower-risk investments. Suddenly, US treasuries provide investors with attractive yields (from 0 to ~5% nominal). Given no new money is entering the system (actually the inverse), higher-risk investments in equities, growth tech, and crypto are sold aggressively to position the portfolio for the new credit environment of lower risk and higher yields. With the cost of money going up, the price paid today for distant future outcomes goes down considerably.

This is what we have witnessed in 2022.

How Much Pain, Sir?

The good news is it appears the Fed’s medicine is having an impact. Growth is falling fast with inflation following in its wake, expected to fall to from 8% in 2022 to ~4% in 2023.

Despite making strong progress, the Fed is likely to keep rates fairly “elevated” (close to 5%) throughout 2023 to ensure the “taming” of inflation.

Source: KKR Global Macro

The Fed must thread the needle between:

1. a tight labor market (i.e. many older workers have opted for early retirement during COVID and demographic decline means there are less younger ones to fill their shoes) and

2. a housing market which cannot sustain rates above 5% for very long (people begin defaulting on mortgages = deflationary spiral).

It’s a tight rope, but it looks like the Fed has a path to achieving it. The more interesting question is where is the “resting heart rate” for inflation on the other side of this initial spike?

Most expect a higher resting rate than the previous decade’s 1 - 2%.

The Inflationary Decade Ahead of a Deflationary Century

My base case is the 2020s will be inflationary so the 2030s will not. Near term, central banks are intentionally sedating economic activity to contain the supply / demand imbalances triggered by COVID + STIMMIES. However, the third leg of the stool - nation states reasserting themselves over the global free market - will provide a floor on prices. The reshoring of supply-chains, greater investments in redundancy and self-sufficiency, a shortage of labor in developed markets, and an under-investment in energy create the set up for an inflationary “investment phase” this decade.

Even with the promising trajectory of inflation accentuated by the Fed’s resolve, very rarely is inflation a one hit wonder:

However, higher costs of energy and labor in the short-to-medium term will also force developed economies to invest heavily in automation to remain competitive. The investment phase should see spikes in many input costs, but the implementation phase may see significantly reduced marginal costs - both in terms of labor and energy - for future goods and services.

Think solar cost curves. Think the marginal cost of nuclear. Think driverless cars. Think chatGPT v8. Think preventive medicine. Think the inside of a Tesla Factory.

Not a lot of… people.

Eventually, the overwhelming deflationary forces of these technologies will win out. The first wave of cost reductions were built on a combination of automation and lower costs from globalization. With globalization slowing, companies and governments will double down on automation. Automation has high fixed up front costs, but low marginal costs of production.

Alternative energy is similar. Solar and nuclear require upfront investment, but variable costs are low. With the need for labor diminishing and energy inputs decreasing in cost, deflationary pressures will reestablish dominance.

The question is really one of time horizons.

NOT INVESTMENT ADVICE

My own (likely flawed) prediction is inflation will be tamed over the next ~2 years due to conservative federal reserve management leading to a volatile, yet recognizable recovery in asset prices. However, given the pressures of the investment cycle and the psychological “regime change” undergone by many investors, continued bouts with inflation in the decade ahead seem likely.

Keep in mind, central banks around the globe need partially-elevated inflation to help pay off their staggering debt-loads. Additionally, if deflationary forces do reassert themselves, policy makers have found a new, popular tool - fiscal stimulus - which is unlikely to fade into the background.

During those future inflationary bouts where the Fed is forced to pump the breaks, risk-assets crater. Then is the time to step in and buy your ticket to the future: synthetic biology, crypto-assets, artificial intelligence, nuclear fusion, etc.

Once the inflationary decade is behind us and the upfront investments are sunk, buckle up for an unparalleled deflationary age. A market boom to make the 2010s look small courtesy of another cheap money bonanza.

Until then, keep your head on a swivel :).

- @PonderingDurian

Having lived in New York previously, followed by a stint in San Francisco with a 40 minute walk down market street each day, I was decidedly unmoved by his photograph. Major U.S. cities have always had their share of… “eccentrics” stemming from a high tolerance for both the less equal starting points and the poor choices which often blend into these unfortunate outcomes.

Spoiled by the city-state’s immaculate governance, clean streets, and near absence of crime, I suspected my Singaporean friend’s reference point was a tad… “out of touch”.

However, the reports of nightly subway attacks, COVID rioting, boarded up Walgreens, and mice-infestations were all troublesome regularities for the self-proclaimed “greatest city on earth”.

New York had always been one of my favorite cities. I was keen to see for myself.

***

After 24 hours in the air, I touch down to a cold, grey rain blanketing JFK. My ride, an early 2000s sedan smells decidedly of cigarettes. The driver looked of middle-eastern descent, likely a Queens native sporting a camouflaged Northface, muddied boots, and a thick beard. In sharp contrast to New York taxi-drivers, we have our ceremonial, administrative exchange before embarking on our otherwise silent 45 minute journey into the city:

“Durian?”

“Yes.”

Winter has arrived. Barren trees and two-story stand alone homes litter the edges of the four lane highway in Queens. An endless copy-paste of dilapidated painted ladies installments merge into graffiti-covered retail outlets with generic titles in fading font:

“Mike’s Grocery.”

“The Hardware Store”.

“The Hubcap Place”

The retail bleeds into small plot residential which bleeds into the construction sites which perpetually frustrate JFK arrivals. It’s often overlooked, but these neighborhoods are the life blood of New York City. A pipeline of hardened regulars who commute into the city daily, filling out the bleachers at Citi Field and MetLife Stadium, and performing many of the manual and service level jobs which give life to the glitzy metropolis to the west.

New York feels uniquely blue-collar for a global city. An acceptance of wealth-inequality combined with a fierce egalitarian social streak. Zero deference to wealth and an often visible disdain for the aloof Manhattanites stemming from a distinct personal dignity cultivated in immigrant homes and the neighborhoods we are driving through now.

LaGuardia passes on the right.

The construction zone is finally receding and the landmark airport has received a much-needed face-lift. The new terminal is blanketed in musical advertisements - “The Lion King”, “Aladdin”, “Chicago”, “Hamilton” - a hint of the high-culture available ahead as the houses morph into block apartments which slowly gain altitude inching towards Manhattan.

December is not white, but grey. Rain and mist engulf the tallest peaks across the steel-framed bridge as the city comes into view. Birmingham industrial-era Britain meets Shanghai. Stuy Town meets billionaires row. The 20th century standing its ground against the relentless push of the 21st. While the new glass structures soak up outsized attention, New York remains overwhelmingly brick, concrete, and brownstone. The city has managed to thrive despite the massive changes in political, economic, and technological might over the last 100 years. The old structures are infused with an annual influx of young flesh which make new pockets old and old pockets new - keeping the retail, restaurants, nightlife and ideas fresh: a 21-year old inside a 60 year-olds body.

New York is often reduced to clichés: the Wall Street bull or Rockefeller Plaza at Christmas or the towering, oligarch-filled condo’s overlooking central park south, but the industrial warehouses, railroads, and smoke stacks erupting from the Bronx, breathing life into the 8.5 million residents of the five boroughs are underrated: Industrial chimneys and brutalist, brick soviet-style public housing which dot the city’s exterior, standing guard over the interior’s $100 per sq/ft rents in layers of thirty story, x-shaped anchors as if teleported in at the direction of a 1950s urban-planning bureaucrat in Moscow.

I like it.

It’s weirdly more human. More range. More grit. Coming from Asia, these neighborhoods are a reminder not everything has to be floor-to-ceiling glass and luxury retail.

Perhaps that is New York’s greatest differentiator. The sheer range and fairly normal distribution which puts it in a class of its own. Stockholm has the distribution but lacks the variance, the peaks and valleys. Manila has the variance, but lacks the distribution. New York has a certain thickness. Spikey variance at the top and bottom? Of course. But also everything in between. The 1930s crumbling façade of a sandwich shop next to One Vanderbilt next to Grand Central. The hotdog stand wagoned in from Queens servicing the Google engineer and the construction worker. Wallstreet meets homeless meets Mainstreet. WASP meets Texan meets immigrant. Glass meets brick meets mural. White meets blue collar meets blue man group. The concurrent blend of class, race, verticals, and ideals is much thicker than most global cities – providing a density of texture with which is hard to compete.

The wall street titans and the subway homeless may be ~100 floors apart, but they live on the same street. The more interesting cohorts are the 99 floors in between. A colorful honeycomb of ethnicities, ages, ideologies, and careers - all piling into the same, rickety 100-year-old 6 line on their way to mid-town east.

From the college grad bussing tables, to the immigrant taxi driver, to the young professional, the depressing grey sky matches the neutral color tones of the soulless automatons speed-walking by with their uniform “eat-shit-and-die” glares, seemingly incapable of direct eye-contact. Despite the harsh, aloof exterior of the Manhattanites, a tangible energy remains. Everyone brushing past, on their way to an overworked job which likely cost them their first marriage, has a plan tonight. A date. A deal. A meal. An audition. Few people come to New York to pay ungodly rents for hole-in-the-wall sixth story walkups to order-in on Friday night making progress on their laundry pile during infomercials.

While often misplaced, this refusal to settle is weirdly inspirational.

Unlike the capitals in Europe or Australia, New York doesn’t cut down its tall poppies. It attracts them, cultivates them and celebrates them. Across finance, entertainment, media, and tech - the Darwinian jungle forges world class talent. Sure, most people won’t make it. They will get crushed against the rocks of reality where poor timing meets a lack of talent.

But most people don’t know that yet.

Especially the young, the lifeblood of the city. They are crowded into a small French bar in West Village - hanging onto thirty for dear life. The musician rubbing shoulders with the banker next to the au pair who is laughing at the ad agency rep who desperately wants to switch lives with the musician - all struggling to communicate above the deafening, eclectic mix of 90s punk fading into a new EDM genre for which I am too old.

This bar will be gone tomorrow, like many of the inhabitants, the fickle trends of Gotham’s social life reducing it to ashes. However, two more will rise: new names, faces, languages, and laughs on display through the pane as next year’s crop floods in. The siren song of the city’s energy a self-fulfilling prophecy in seducing new recruits.

The uber drops me at my friend’s apartment, the “The Empire State” license plate starring at me as it disappears into the grey December mist. For some reason, its hard to shake my excitement for the weekend ahead.

To Shanghai’s chagrin, the king may have lost a step, but he is still king.

In today’s “macro-heavy” world, one paradigm I have found helpful - particularly in crypto - is the Minsky moment. A close cousin to Soros’ Theory of Reflexivity, Minsky was a post-Keynesian American economist who preached the endogenous nature of the market cycle.

A Minsky moment is a sudden collapse of asset values, typically following a long period of asset price inflation and overvaluation. Long periods of stability and prosperity often lead to greater risk-taking and leverage. This investor complacency is followed by a sudden collapse in asset prices, causing the prior buildup to unwind quickly, leaving behind cascading defaults and liquidity crises which can spill over into the “real economy”.

Despite technocratic narratives of “taming the business cycle”, suppressing human nature has proven evasive:

The reinforcement between increasing asset values and growing risk-appetites, causes the pace of borrowing to outrun underlying productivity growth.

Eventually a catalyst (often a tightening of financial conditions), will cause market participants to take some chips off the table. The credit cycle then kicks into reverse…

The Minsky Moment:

The deleveraging is typically much faster than the initial run up. Margin calls force selling and asset price decreases force margin calls in a mutually-reinforcing unwind, all against a backdrop of vanishing liquidity. The wealth effect evaporates; low consumer spending seeps into earnings further weighing on asset prices which can flow into unemployment figures as management “right sizes” the cost structure.

Monetary policy is often a central driver, the expansion or contraction of M2 into the financial system is a key ingredient to both the build up and the unwind. Minsky, like Keynes, was in favor of government intervention to stem the deflationary collapse - not letting the excesses of financialization spill over into underlying economic productivity.

***Skip to the footnotes now for an overly detailed exploration of the theoretical tug-off-war between neo-classical and Keynesian technocrats which drove the monetary policy pendulum during the last 100 years which I ultimately decided was nothing more than a fun detour... ***1. For the normies, please read on....

Minsky’s writing’s went largely under-explored until 2008 when the neo-liberal consensus shattered spectacularly; years of near-blind underwriting which led to the world’s largest Minsky moment since the Great Depression: the subprime mortgage crisis. The reigns were once again handed back to Bernanke and the Keynesian camp, electing for massive rounds of quantitative easing to counter-act the deflationary implosion of one of the world’s largest asset classes.

In the aftermath, however, we are having a hard time weening off the medicine. Monetary and fiscal restraint is out of vogue on both the right and the left, with deficits climbing regardless of who is in power.

While government counter-cyclical intervention is a helpful tool to stave off harmful unwinds after a Minsky moment, if abused, it can simply push short-term private market volatility into systemic fragility at the base layer: government finances.

It certainly seems like trading short-term volatility for a larger Minsky moment in the future. Interestingly, crypto’s libertarian experiment was birthed in protest to this exact moral hazard, hoping to provide an alternative:

A parallel financial system based on the promise of transparency, immutability, and distributed, algorithmic monetary policy. Frustratingly, from the vantage point of 2022, reality has dramatically under-performed the vision.

Where did it go wrong?

Why is Crypto So Volatile?

In 2022, crypto has been plagued by a slew of very public hacks, frauds, and bankruptcy’s leaving a trail of scandals and scarred speculators in its wake.

The grandiose promises of web3 - A replacement for a broken financial system? A counter-balance to the growing market power of the data monopolies? An escape from the looming financial repression of national governments? - reduced to a pile of lawsuits, squandered funds, and what certainly looks like nothing more than the burning ruins of a leverage-filled casino of “pet rocks”.

Outside of the DeFi “rugs” and even more so the irresponsible / illegal behavior of many centralized companies in the space (which cannot be justified), the number one complaint is:

“Why is it so volatile?”

How can an 80+ vol asset class be a “store of value” or a “medium of exchange” or a “unit of account” underpinning a new financial system?

A fair point. Since the movement’s birth in 2009, the asset class has undergone three drawdowns >80%. The post-Minsky corrections in crypto are apocalyptic relative to the existing system. But why? Will this ever change?

Below is my list of the underlying drivers of crypto’s volatility. Some points the movement will outgrow, but others are more endogenous to a completely open system, which is difficult to regulate, and does not have a fluctuating monetary base which absorbs the volatility of the traditional system.

1. Immature “call option” stage of market development

Crypto is still in its early innings. The technology has large potential, but remains unproven. It’s “venture risk, with public market liquidity” naturally leading to more volatile swings as the probabilities impacting crypto’s more distant future unfold today. A “call-option” on becoming “digital gold” or the future “decentralized operating system” have real adoption and execution risk which must be discounted back to the present at high rates.

2. Limited regulatory oversight

Excessive leverage, market manipulation, and fraudulent behavior are fairly endemic in today’s crypto market. While often excessive, securities laws and regulatory compliance stamp out the most blatant of malfeasance. Regular DeFi “rugs”, ~100x leverage offered to market participants, and insider pump and dumps clearly add to market volatility in this “buyer beware” financial free-for-all. While sometimes heavy-handed, we should not pretend regulation does not have benefits.

The massive build up of leverage in particular, both collateralized and undercollateralized to suspect actors has clearly had an impact on the violent Minsky cascades we have witnessed in 2018 and 2022.

3. Retail-heavy, global asset class in the social media era

Given its immaturity and size, digital assets still have not reached widespread institutional adoption leaving it captive to “hot money” flows without institutional anchors. Crypto-native traders tend to favor momentum, with leverage. Social media platforms like Twitter, Tiktok and Reddit further boost asset class reflexivity correlating market sentiment in a system accessible by anyone with an internet connection.

4. Limited “Fundamental Value” in the traditional sense

Layer 1 protocols are more like commodities than equities and so marginal supply / demand can lead to wide swings in price. The application layer of crypto systems is still immature and trades like unprofitable growth-stage tech - spiking and falling in line with interest rates and liquidity conditions with limited cashflows to underpin “floor” valuations.

5. No lender of last resort

Lastly, crypto does not benefit from the counter-balancing flows of a central backstop. The Minsky moment is left to its own devices in an asset class suffering from the four preceding volatility enhancers. Today, crypto remains a libertarian experiment, subject to the swings of global, unregulated, levered liquidity flows. When sentiment turns, the positive build up unwinds completely, with nothing to cushion the fall.

While highly imperfect, the interesting question becomes: would you rather have a highly volatile system with greater long term resiliency or a system which smooths out near-term volatility at the expense of systemic fragility? Unfortunately, the optimal blend of the two has proven evasive.

In that sense, there is something healthy in crypto’s regular track-record of completely wiping out speculators and irresponsible actors absent moral hazard. However, this habitual cleansing remains something crypto market participants should always remain cognizant.

I have noticed crypto veterans in their second or third cycle tend to be the most cautious. The scars from 2014 and 2018 are still fresh. Many flee to stables at the first sign of trouble, knowing from experience that leverage can disappear in an instant.

For those planning to stick around in the asset class for the next re-leveraging (which I highly recommend), let’s try to remain vigilant. In 2024, when the good times return, when “#super-cycle” is trending, “laser eyes” stage a comeback, and leverage loops are once again in vogue, please keep Hyman in mind. As long as the five attributes above remain, a Minsky moment is always just around the corner.

In crypto, there is no one to cushion the fall.

***

Merry Christmas :)

@PonderingDurian

Topics include:

• The end of easy money and the implosion of Layer 1 summer

• Modular vs. Monolithic vs. App-specific Layer 1 designs

• Building consensus around “modularity” and competing paths to maximize security and customization

• Where the internet of information differs from the internet of value

• Investment considerations for different time horizons…

Apologies for the hiatus. The last two months have been wild, but now is the time to start zeroing back in. May be a bit spotty heading into the holidays, but hope to up newsletter output into 2023 :)

Disclaimer: This is not investment advice. Crypto is risky. Please do your own research.

The Red Wedding

The dust from the 2021 Layer 1 wars is beginning to settle. The path to the citadel is littered with maimed or dead bodies. The easy-money euphoria cut short; Jerome Powell hijacking the punchbowl deep into the evening leaving a Red Wedding on trading screens in his wake.

(-100%) Terra Luna

(-92%) Solana

(-88%) Avalanche

(-82%) Polkadot

(-77%) Cardano

(-73%) Cosmos

(-65%) Ethereum1

Macro indeed won; the once two trillion dollar asset class thrown around like a rubber ducky in a hurricane. Crypto found itself alongside high-growth, non-profitable tech as fund managers and retail alike fled to the only reliable safe-haven around: the US dollar. The near-one correlation only deviating for short, idiosyncratic deleveraging cascades brought on by Luna’s collapse, 3AC’s demise and more recently, the largest fraud since Enron. Industry titans are on the brink. Crypto lenders are either insolvent or are nervously sitting by their phones. Funds are in liquidation or are “managing” LPs. Volumes are beginning their slow slide towards the X axis. The dark clouds of a 2023 recession loom ahead.

Winter is here.

Obvious parallels with the dot.com crash jump to the forefront. Transformative potential is on the horizon, but the prophesied “killer apps” remain elusive, onboarding friction devilish, and penetration curves notably stalled. Still, for those with conviction, the next six months will likely present strong entry points. The key question becomes: how do I parse out the Amazon from the Pets.com? The Myspace from the Facebook? The Google from the AltaVista?

A thoughtful review of design choices today could be the difference between early retirement and finding yourself among the next cycle’s #Lunatics.

Arguably no question is more important than which ecosystem to build or invest in.

Monolithic, Modular, or Make Your Own Adventure…

2021 was the year of base-layer experimentation. Ever faster, cheaper transactions combined with easy money and speculative euphoria lured retail to the latest hot chain, trumpeting colorful buzzwords like “Subnets”, “EVM-compatibility”. “Parallel Execution Engine”. “Directed Acrylic Graph” and more. The promises of a financial infrastructure overhaul, near-infinite market size, zero rates, and helicopter money to boot, nurtured Layer 1 summer to a feverish pitch.

As the hangover sets in, sober minds are re-examining the trade-offs at the heart of crypto’s base layer. Looking 3, 5, 10 years ahead, which design is likely to attract the developer talent, usage, performance, and security necessary to become the “settlement layer for the internet”?

The current design continuum sits below:

Monolithic

Monolithic chains - like Solana, Aptos, and Sui - target fast performance today on a single, all-purpose chain where dApps (decentralized applications) share the same consensus mechanism, data availability layer and execution environment. This provides frictionless composability and has produced several chains with impressive transaction throughput. However, bouts of congestion and limited customizability provide ammo to skeptics claiming a monolithic approach will never scale to billions of users across diverse use-cases. As Layer 1 summer dies down, momentum is shifting towards the other end of the spectrum.

Monolithic torch-bearers: Solana, Aptos, Sui, Ethereum (base layer)

App-Chains

In the red corner we have the “app-chain” evangelists, favoring a more open-ended “ecosystem of interoperable blockchains”. This approach is most associated with Cosmos - providing developers with customizable templates for easily launching new blockchains around specific applications.

Cosmos’ vision is a bottoms up approach, an organic “mesh” of overlapping, sovereign networks; a network of networks similar to the internet fostering a web of chains as diverse as the communities which spin them up.

Each chain can tweak the basic parameters to best meet a desired use-case and reduce the “rent” paid to an underlying base layer. The benefits of enhanced customization and value capture are balanced by the downsides of more limited security guarantees and higher friction in composability. To solve this, Atom 2.0 is pushing the ecosystem towards “inter-chain security” - allowing different chains to form alliances of shared security to further integration after its successful implementation of inter-blockchain communication (IBC) transfers last year. In doing so, the ecosystem hopes stand-alone communities can band together to share security much like the NATO-military alliance while maintaining individual sovereignty.

App-Chain torch-bearer: Cosmos

The below summary from Delphi Digital’s “Finding a home for Labs” succinctly outlines the tradeoffs between the monoliths and the app-chain world as they evaluate where to build after the Luna collapse.

Modular / Fractal

Between the two bookends, the Ethereum ecosystem has a promising, yet extended roadmap to have its cake and eat it too. Leveraging advances in zero-knowledge tech, Ethereum aims to marry the scalability / composability of the monoliths with the customizability / flexibility of the app-chain approach. This vision prioritizes base-layer security and decentralization, while scaling up using a fractal approach of rollups and other zk-tech which allow for greater transaction throughput and customization in the higher layers (Layer 2 and 3) of the chain, while settling back to and inheriting the security of the Ethereum base layer.

Source: Starkware - Fractal Scaling

In many ways, the end vision of both Cosmos and Ethereum is the same: use-case customization, trustless interoperability, high-performance and strong security guarantees for the apps built atop the decentralized infrastructure.

However, the sequence of actions is inverted: Cosmos starts with customizability and aims to bootstrap ever-greater security as activity / value increases on the network while Ethereum prioritizes security and adds incremental layers for flexibility / performance over time.

This difference in roadmap sequencing will likely determine which side of the market cap power law ATOM and ETH end up, respectively.

ETHEREUM VS. COSMOS: sequencing matters

Over the last six months, the monolithic thesis has come under fire - partially because of its association with a certain EA-shilling, meat-eating, vegan polycule in the Bahamas - but also due to justified concerns regarding the inflexibility in dealing with diverse use cases from DeFi, to gaming, to supply chains, to NFTs.

Thus, the app-chain thesis has been on the ascendance. A belief that apps themselves, with control over the user relationship, will ultimately tire of leaking “rents” to an underlying chain which forces frustrating compromises in meeting the needs of specific use-cases. Once an application - say DYDX - reaches a large enough size, they will choose to migrate to their own chain.

To summarize:

1. On the one hand, we have the true “internet of blockchains”. To let 100 flowers bloom in a chaotic intertwined mesh. A bottoms up, organic petri-dish of libertarian activity

or

2. On the other, an initial emphasis on a strong spine of security and decentralization at the base layer on which to build a fractal structure of layers which provide greater throughput, less costs, and further customization in time, without sacrificing on security.

While the internet took the former path, I’m inclined to believe the internet of value may follow a more structured course. A blockchain’s most notable attribute is the facilitation of trust - or, more accurately, its removal. Without a strong foundation, all the vibrancy and richness of the accompanying app layer becomes fragile. By prioritizing security and decentralization out of the gate, Ethereum focuses on what makes blockchain truly unique and attracts developers who target use cases - like money, finance and identity - which are likely to accrue the most value.

Let’s take a look at an (admittedly stretched) metaphor.

Anarcho-Capitalism vs. Constitutional Democracy

As opposed to information networks, blockchains are more like nation-states. They aim to secure trillions of dollars in property on behalf of users and need to align on foundational principles on which these digital communities are organized.

Cosmos aims to provide maximum sovereignty to its communities; a more free-wheeling, experimental mesh of sovereign networks which can customize their own legal systems and parameters but are able to band together in community-funded alliances for security against outside threats. In many ways, the level of experimentation and community autonomy is commendable:

“Why not let each community decide what is important to it and prioritize accordingly?”

“Why not provide complete flexibility and discover which parameters work best?”

“Why should we not take the internet of information approach to the internet of value?”

By providing flexibility, the Cosmos ecosystem is betting it can attract developers across a wide range of use cases constructing vibrant ecosystems of economic activity which can be used to fund military alliances with enough security for sustained growth. It’s kind of like the autonomous Greek city who can combine forces when necessary to fight a shared Persian invasion.

Ethereum, on the other hand, provides more structure; more like a constitutional democracy. A single meta-community (with many diverse communities within it) sharing certain ground rules / constraints (a constitution if you will) which constituents believe best promotes a pluralistic, vibrant digital society. The agreed upon ground rules include “taxes” (gas fees) and a partition of powers (decentralization) which helps to fund defense (PoS security) protecting the nation’s legal system (smart contracts) necessary to facilitate commerce (exchange), property rights (encryption), identity (SBTs), and other institutions we associate with human flourishing under more liberal (small L) regimes.

While innovative, the Cosmos approach is almost TOO neo-liberal or even anarcho-capitalist with a problematic degree of flexibility and lack of structure to build a shared digital community. Hobbes pre-Leviathan; idealistically hoping for Rousseau’s “noble savages” to live in harmony without the monopolistic force which establishes the order necessary for human flourishing. Whether men with guns or state-level censorship resistance, a monopolistic defense of property rights and the rule of law is essential for thriving economic activity.

The lack of structure and shared defense at the start will cause developers and users in high value use cases to question settling in the Cosmos ecosystem, making it difficult to achieve the monetary premium necessary to defend the “sovereignty” Cosmos communities so value.

Steve Newcomb, CPO of Matter Labs’ ZK-sync draws an apt metaphor when he praises Cosmos for its vision and innovation, but believes the ecosystem will become web3’s “Myspace”; too chaotic to build a sustained billion+ person network.

I tend to agree. Time will tell.

Investment Considerations - for the fox & the hedgehog

The above, however, says nothing about whether ETH or ATOM (the ecosystem’s respective “reserve currency asset”) presents a better investment opportunity as of Dec 2022.

While I may find Ethereum’s sequencing more favorable towards attracting higher-value use-cases for which I find public blockchains most relevant and the project with the most compelling roadmap in marrying the security and flexibility essential for long-term success, the market clearly agrees.

Ethereum is valued at ~US$160b vs. ATOM at a mere ~US$2.75b. Am I ~58x as sure Ethereum will command the same dominant position in 5 to 10 years? No.

ETH has clear advantages - network effects in terms of developers, security, and liquidity, not to mention the most comprehensive roadmap for scaling sustainably. However, the below transition from base-layer Ethereum to a ZK-enabled fractal utopia will not happen overnight.

While Ethereum has the highest probability in becoming the settlement layer for the internet, it will not have 100% share. As inflation is beginning to roll over and (hopefully) liquidation cascades begin to slow, riskier assets may once again catch a bid in the back half of 2023 as the tightening of financial conditions subsides.

Ethereum’s constitutional democracy is slow and steady - providing fertile soil for long-term builders. However, it also suffers from the law of large numbers and less short-term dynamism. Cosmos, on the other hand, is well-positioned to attract less patient builders from other maimed Layer 1 ecosystems while Ethereum works methodically through its extended roadmap.

For multi-decade hodlers, ETH is still the unrivaled smart contract platform to own. For more aggressive traders looking to catch a bounce in the Layer 1 echo bubble, ATOM is a leading contender to climb the Layer 1 leader board despite leaky short-term tokenomics.

As is often the case, an investment thesis can be quite different across time horizons. It’s always good to know if you are a Fox or a Hedgehog. When in doubt, its usually safest to stick with the latter.

- @PonderingDurian

****