first Derivative 
January 9, 2022
⛓ Crypto & Web3
This is probably where I’ve spent most of my time reading/thinking lately. The first two are more crypto evangelist and the second two are more sober. But I really liked all four and at their core, I don’t think they’re necessarily in contradiction with each other. It’s hard to separate the wheat from the hype when doing crypto reading but I do think there’s value there, or a good enough chance that there is. If interested in all, I recommend reading these four in order but if you can read only one piece in this issue, I’d read Crypto Bezos, for the 60 Minutes interview with Bezos alone.
An Engineer's Hype-Free Observations on Web3 (and its Possibilities) (PSL) by Dave Peck & the PSL Team
What: A generally beginner/intermediate primer of the crypto landscape, what’s possible technically, challenges, future avenues. Very clearly laid out. H/t to subscriber SK for this one.
Crypto Bezos (Not Boring) by Packy McCormick (Sep 2021)
This is the one that’s head my mind spinning the last few months. The essay analogizes the current crypto landscape to what the Internet in the 90s might have looked like when a younger Jeff Bezos was working at D.E. Shaw and observing the rapidly growing Internet. Off that, the question asked is: “What kind of company would Jeff Bezos start if he were 30 years old today?” And I think Packy does a good job drawing the links with Bezos/Amazon to suggest how we should start thinking about this questions and what might be some natural directions to go in. I won’t excerpt too much because it’s worth reading it its entirety, more than once.
Bezos, on the other hand, set out with the intention to build a giant business by leveraging the internet’s unique capabilities, and was careful to highlight that Amazon was not an internet business. It was a customer business. Amazon could only exist because of the internet, but being on the internet wasn’t the value proposition. Bezos knew that the internet was a tool he could use to give customers the things that actually mattered to them: better selection, lower prices, convenience, and a superior customer experience…
Bezos realized, though, that the internet wasn’t ready for everything yet, and had disadvantages compared to offline retail, so he decided that whatever he built needed to be something that could only exist online…
Is This Public? (Virtual Elena) by Elena Burger (Jul 2021)
What: Essay linked to in Packy’s piece about someone leaving a hedge fund to go work in crypto.
It reminded me of a lot of my own reflections from when I interned at a hedge fund and how I still think now more or less. Definitely worth a read.
…the idea that if you eliminate middlemen and share value with users of a protocol instead, the positive externalities are so great that the crypto can start behaving like a public good…
NFT projects allow creators and collectors to share in the value of art created by eliminating (or at the very least, reducing the take rate) of middlemen, while encoding an enduring revenue stream for the originator of a specific work. Hopefully we’ll soon see ways to map this model onto other scalable operations, like music and other forms of entertainment, DAOs that own real estate, and maybe a blockchain-based Uber.
My first impressions of web3 by Moxie Marlinspike (Jan 2022)
What: A well-written, more skeptical take about the current crypto landscape and capabilities, chiefly pointing out how already Web3 is not the decentralized utopia it’s often sold as:
However, even if this is just the beginning (and it very well might be!), I’m not sure we should consider that any consolation. I think the opposite might be true; it seems like we should take notice that from the very beginning, these technologies immediately tended towards centralization through platforms in order for them to be realized, that this has ~zero negatively felt effect on the velocity of the ecosystem, and that most participants don’t even know or care it’s happening. This might suggest that decentralization itself is not actually of immediate practical or pressing importance to the majority of people downstream, that the only amount of decentralization people want is the minimum amount required for something to exist, and that if not very consciously accounted for, these forces will push us further from rather than closer to the ideal outcome as the days become less early.
And I think that actually that agrees with what Packy looks at through a Bezosian lens as business opportunity enabled by crypto rather than a crypto decentralized mission:
Crypto Bezos might not be afraid to retain centralized control over the business while giving customers upside via social tokens instead of going full DAO.
He might not care about decentralization for its own sake, unless decentralization proved to be better for customers.
He might build customer experiences that abstract away the crypto, dumping large sums of money upfront into R&D to retain power on the backend with a smooth front-end
📊🔮 David Shor is Telling Democrats What They Don’t Want to Hear (NYT) by Ezra Klein (Oct 2021)
Who: Democratic data guru
What: Projections of Democratic doom & gloom through the slightly skeptical lens of Ezra Klein
Shor thinks one of the main forces making the demographic landscape more difficult for Dems is educational polarization which Klein does a good job contextualizing as class polarization
…I believe, as does Shor, that educational polarization is serving here as a crude measure of class polarization. We tend to think of class as driven by income, but in terms of how it’s formed and practiced in America right now, education tracks facets that paychecks miss. A high school dropout who owns a successful pest extermination company in the Houston exurbs might have an income that looks a lot like a software engineer’s at Google, while an adjunct professor’s will look more like an apprentice plumber’s. But in terms of class experience — who they know, what they believe, where they’ve lived, what they watch, who they marry and how they vote, act and protest — the software engineer is more like the adjunct professor.
Democrats are on the edge of an electoral abyss. To avoid it, they need to win states that lean Republican. To do that, they need to internalize that they are not like and do not understand the voters they need to win over. Swing voters in these states are not liberals, are not woke and do not see the world in the way that the people who staff and donate to Democratic campaigns do.
“I think the core problem with the Democratic Party is that the people who run and staff the Democratic Party are much more educated and ideologically liberal and they live in cities, and ultimately our candidate pool reflects that,” he said…
“I don’t think it’s a coincidence that the people we’ve lost are likely to be low-socioeconomic-status people,” he said. “If you look inside the Democratic Party, there are three times more moderate or conservative nonwhite people than very liberal white people, but very liberal white people are infinitely more represented. That’s morally bad, but it also means eventually they’ll leave.” The only way out of this, he said, is to “care more and cater to the preference of our low-socioeconomic-status supporters.”
A critique of, if not Shor, then Shor’s salience:
The suspicion here is that Shor has come up with a class-polarized way of responding to class polarization. He’s a smart, wonky nerd who thinks about politics in terms of polling and policy, and maybe he’s projecting that onto the electorate, too. According to this line of thinking, even as he’s trying to escape his ideological biases about what voters believe, he’s replicating his biases as to how they think and act…
Shor’s critics argue that he’s too focused on the popularity of what Democrats say, rather than the enthusiasm it can unleash. When pressed, Podhorzer called this theory “viralism” and pointed to Trump as an example of what it can see that popularism cannot. “A lot of things Trump did were grossly unpopular but got him enormous turnout and support from the evangelical community,” Podhorzer said. “Polling is blind to that. Politics isn’t just saying a thing at people who’re evaluating it rationally. It’s about creating energy. Policy positions don’t create energy.”
“I think the conventional wisdom has swung too far toward believing policy isn’t important,” he said. He agrees that enthusiasm matters, but it has to be enthusiasm for a message that doesn’t alienate the undecided. “A lot of politics is about what you talk about,” he told me. You should sort your ideas, he said, by popularity. “Start at the top, and work your way down to find something that excites people. But I think that what actually happens is people sort by excitement first. And the problem is the things that are most exciting to activists and journalists are politically toxic.”…
I think it’s great to push the envelope and be ahead of history. But you want to be five years ahead of history, not 15 years.”
💊💰 This man is the Jeff Bezos of the international drug trade (Toronto Life) by Stephen Marche (Nov 2021)
What: Interesting profile of the man who ran one of the largest international drug syndicates, Sam Gor, with $21B in revenue, 7x El Chapo’s Sinaloa Cartel.
Tse’s distribution insight:
In the 1990s, Tse helped establish one of the most impressive drug shipment networks in history. He and his colleagues observed a couple of basic facts: it was easy to smuggle drugs from Asia into Canada, it was relatively easy to smuggle drugs across the border from Canada into the U.S., and the U.S. was the biggest narcotics marketplace in the world. So, if the right connections could be made, there was a chance to build a stable logistical chain to smuggle heroin through Canada.
After a stint in jail, Tse got out to realize the drug market was changing:
Meanwhile, by the mid-aughts, the global market for heroin was shrinking, and the market for synthetic drugs was spiking.
Tse recognized the opportunity synthetic drugs in Asia represented, and not just in the size of the market, which was five times that of North America. Synthetic drugs were also much cheaper to produce. It takes thousands of farmers to generate a tonne of heroin. It takes 10 guys in a lab to make a tonne of meth. The materials—pseudoephedrine, anhydrous ammonia and red phosphorus—are extremely cheap, less than $1,000 a tonne in some cases, and widely available in many parts of Asia. Tse recognized that he could change the entire business model of illegal drugs.
And Tse’s Amazon-like business insight:
One of Tse’s major innovations, which defined his organization and overturned the structure of the illegal drug industry, was guaranteed delivery. If a dealer paid for the drugs, he’d receive them. If they were seized, Sam Gor would replace them at no cost to the buyer. Guaranteed delivery was possible because the production costs were negligible. This was the idea on which Tse built an empire…
Guaranteed delivery was the source of Tse’s power. Why would Australian biker gangs struggle to bring in chemicals in bulk (which are much harder to buy in Australia), manufacture meth, then compete to make the best product? Sam Gor would supply the highest-quality meth, sell it to them for a reasonable price and guarantee a risk-free delivery. In one sense, the bikers and the triads were losing control. They were depending on a supplier. On the other hand, an ocean of uncertainty and risk had been removed. It’s like Amazon. Why do you, and everyone you know, use Amazon even though you don’t want to, even though you read nightmare stories about working conditions at their warehouses and you want to support local businesses? Because if you order a book from Amazon, it doesn’t cost any more but it arrives at your door, sometimes the same day. And if there’s a problem with your delivery, they fix it. After a while, you start to think of Amazon less as a retail option and more as a utility. In the 21st century, the way to conquer people is by giving them what they want.
🇷🇺🇺🇸 What the US Misunderstands About Russia (Project Syndicate) by Nina L. Kruscheva (Dec 2021)
What: Sympathetic articulation of the Russian perspective in this new Ukraine crisis
Echoing American exceptionalism, there is a sense among Russians that their country is a fundamentally great power with a pivotal historical role to play. According to a 2020 poll, 58% of Russians support the country following its “own special path,” and a whopping 75% think that the Soviet era was the “greatest time” in their country’s history.
Yet, crucially, only 28% of respondents report wanting to “return to the path the Soviet Union was following.” In other words, what Russians want is not to revive the USSR, but rather to preserve their country’s status and influence, which means maintaining its sphere of influence. The notion that the West could pursue an eastward expansion of NATO without pushback was always pure folly.
Kennan recognized this from the start. In 1998, when the US Senate ratified NATO’s expansion to Poland, Hungary, and the Czech Republic, he predicted that Russia would “gradually react quite adversely,” and the West would claim that is just “how the Russians are.” Since then, NATO has expanded to 11 more ex-communist countries, including three former Soviet republics. And, sure enough, Putin is now demanding that NATO deny membership to former Soviet countries and scale back its military deployments in Central and Eastern Europe. To no one’s surprise, the US and its allies refused.
Even if Russia isn’t motivated by reclaiming its Soviet territory per se but a desire to reestablish itself as a great power as it has been through most of its history, I’m not sure how much of a difference that makes in practice, if they both demand an exclusive sphere of influence in Eastern Europe.
🇷🇺🇺🇸 How NATO Must Respond if Russia Invades Ukraine (1945) by Andrew A. Michta (Jan 2022)
Still, judging by the scope of the demands presented by Russia in the two so-called “draft treaties” with NATO and the United States, respectively, Moscow must have no illusions that these would be accepted, for they would remake Euro-Atlantic security, creating conditions that would undermine NATO and America’s ability to work with its allies. Putin may have already decided to move militarily, and calls for the West to negotiate could create a “maskirovka” and in doing so provide a casus belli for Moscow, which would try to claim that Washington had refused to consider its terms.
If the demands to negotiate have a larger aim it is to divide the alliance. Most importantly, the idea that Russia would need a written treaty guarantee to forestall Ukraine or Georgia’s accession to NATO is absurd. Putin knows that so long as he occupies Donetsk and Luhansk in Ukraine and Abkhazia and South Ossetia in Georgia, the countries have no chance of making it into NATO, for a vote to enlarge the alliance would mean in effect a vote to go to war with Russia.
Re: a weak response to a Russian invasion, involving mainly sanctions:
Should the response to Russia’s invasion of Ukraine be more of the same, Europe’s security would deteriorate dramatically. The zone of competition would shift from Eastern Europe to Central Europe and the Baltic states, where the next round of Putin’s demands could be a de facto “Finlandization” of the Baltic States and pressure on the United States and NATO to remove military assets from the intermarium between the Baltic and the Black Seas, especially from Poland and Romania. In this scenario Putin would target Germany as his “partner of preference,” with the expectation that by applying its energy weapon Moscow could eventually coax Berlin into a “neo-Bismarckian” accommodation that would in effect divide Europe into two spheres of influence, rendering the United States increasingly irrelevant to the overall strategic balance in Europe.
🌏 Global Dispatches
🇨🇳🍼 China Is Haunted by Its One-Child Policy as It Tries to Encourage Couples to Conceive (WSJ) by Liyan Qi (Jan 2022)
Why: China’s birthrate fell to a new low of 1.3 (2.1 is replacement rate), lower than Japan’s 1.3, but China’s GDP per capita is only a fourth of Japan’s. China’s population is probably in decline now and a rapidly aging population and a shrinking workforce to support it spells social and economic stress and instability.
With the number of births declining year after year, China is now racing in the opposite direction, closing abortion clinics and expanding services to help couples conceive. But a legacy of the one-child policy, scrapped in 2016, is a dwindling number of women of childbearing age as well as a generation of only children who are less eager to marry and start a family.
On the social impact of the one-child policy:
Chinese people’s views about family and birth have been reshaped over the past few decades, and the government’s latest efforts can’t easily reverse that, said Yi Fuxian, a U.S.-based researcher who has long criticized the Chinese government’s population policies. Mr. Yi expects 2021 data may even show China’s population has started to shrink, years ahead of government forecasts.
But like most of the developed world, the cost of having a child has simply gone up, not to mention the career and financial opportunity costs in a society rearranged to prioritize economic growth:
“It all comes down to money,” Mr. Liang said. “You cannot change people’s mind or force upon them some kind of value system.”
He estimates that to raise the fertility rate to the replacement level, the government needs to subsidize families by an average of one million yuan, or around $160,000 per child in the form of cash, tax rebates and housing and daycare subsidies.
🇰🇿 What’s behind unrest rocking oil-rich Kazakhstan (AP) (Jan 2021)
What: A good explainer on recent massive protests in Kazakhstan
Why: Kazakhstan’s a large producer of oil (and uranium). The government and Russia are claiming Western intervention and this comes as tensions are building into a standoff on the Russia-Ukraine border, so this may increase the urgency there. (Interesting Twitter thread on Kazakhstan in relation to Russian interests and chances of escalating into a larger conflict. Video of Almaty firefights here.)
🇨🇱The fight for the future of Chile (FT) by Lucinda Elliott and Michael Stott (Dec 2021)
Why: The election’s already passed but thought this did a good job covering the two candidates and where Chile is today