The Age of Crypto Monopolies

Renown as the co-founder of Paypal and the first investor in Facebook, Peter Thiel has enthralled the investing world with his insights on durable businesses. In his book, Zero to One, Thiel describes our world as dynamic and in such a world, creative monopolies are a positive-sum game: they add entirely new avenues of business and thus create value instead of acting as rent-seekers. Likewise, the history of American industry is a recursion of various monopolies from the days of Rockefeller’s Standard Oil in the late 19th century to Intel’s hold on manufacturing semiconductors in the 1960s and to Microsoft’s dominance on the operating systems market the 1990s. The constant between these corporations is that their dominance often frayed with the entrance of new monopolies: these entrants did not compete head-on, but rather by sidestepping the current incumbent at the time.

But can we apply Thiel’s insights to the cryptocurrency ecosystem at the moment? I believe so because we’re swiftly seeing the preeminence of certain coins like Ethereum replacing the paradigm of aggregation theory and controlling the cryptocurrency sector. For the “uninitiated,” imagine Ethereum as a platform for smart contracts and decentralized applications to build off of — an analogy would be what Linda Xie mentions as Apple’s App store and all the apps under its umbrella¹. While Apple acts as a forceful intermediary in this sense, there is no barrier to entry to creating an Ethereum decentralized application (dapp) or harnessing its smart contract capabilities. There are substantial reasons why Ethereum’s market share is vastly expanding: the Ethereum Enterprise alliance houses the most premier names in business including J.P. Morgan, Intel, and Deloitte². And developers find Ethereum as the key platform for the foundation of their decentralized applications because of Solidity — Ethereum’s programming language — which is a close cousin of Javascript and C.

These features of Ethereum have led to a massive rise in the number of ERC-20 tokens, specifically standards that tokens have to meet to exist on the Ethereum network — in the ecosystem. These can then be transported and contained with Ethereum public addresses and wallets like Parity or MyEtherWallet. Some of the largest coins by market cap fall in this category, including Omisego (OMG), Augur (REP), and Golem (GNT)³. As the network effect of Ethereum continues to grow and as more developers start their journey in blockchain by programming with Solidity, it could lead to Ethereum acquiring significant market share across the spectrum. At the time of writing, Ethereum’s dominance is roughly 13 percent of the total cryptocurrency market cap; yet, if past technological advancements can serve as a signal, then we will definitely witness a few coins taking control over the entire market. Ethereum stands to be the creative monopolist in this case: this is not necessarily a negative outcome.

Thiel highlights four characteristics that successful monopolies have an amalgamation of: proprietary technology, network effects, economies of scale, and branding⁴. Ethereum fulfills all of these by a wide margin because it started off by capturing the niche for building decentralized applications in the same vein as Microsoft swallowed the market share for operating systems. Fundamentally, a virtuous cycle is created whereby a better platform attracts higher-quality engineers and therefore, grander apps are released to the public, who are then drawn to Ethereum ad infinitum.

But I believe that this might be a wonderful change for the sector. Ethereum’s consolidation would create certain standards that are followed and an ease-of-use for consumers — MyEtherWallet has become the favorite wallet of many. However, the potential second-order effects are left to the imagination. There was no possible way one could predict that driving more would lead to the exponential development of big box stores like Walmart. Maybe Ethereum’s monopoly would enable developers to work on applying blockchain technology globally; currently, the ecosystem is divided on a myriad of issues, such as the best way to validate blocks (i.e. proof-of-work or proof-of-stake). Certainly as time passes and blockchain becomes an established technology, Ethereum might lose its status, but all the core conditions for a monopoly are present when generally even one suffices for a business.

While the word “monopoly” might leave a horrid taste in the mouths of government officials and average consumers, they indeed shape our economies in a variety of industries. From an investor’s standpoint, it makes sense to focus allocate most of one’s capital on the most durable business. One would survive — and probably succeed beyond their wildest dreams — in this market by investing in coins that have the potential to escape competition and become true dynamic monopolies. Indeed, Thiel exclaims: “Competition is for losers,” but as of today, it seems Ethereum has eviscerated its competition⁵.

Index

[1] Linda Xie’s story on Medium concerning Ethereum and ERC-20s: https://blog.coinbase.com/a-beginners-guide-to-ethereum-tokens-fbd5611fe30b

[2] Members of the Ethereum Enterprise Alliance: https://entethalliance.org/members/

[3] Data pulled from Coinmarketcap.

[4] From Chapter 5, “Last Mover Advantage” of Peter Thiel’s Zero to One. Fantastic book!

[5] From Zero to One.

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