Why did Charlie Munger and Buffett always reject digital assets?
The author Dave Kajpust is a senior observer in the blockchain industry with a number of far-reaching research papers. Encrypted Valley has previously published its masterpiece "Interpretation of Blockchain Interoperability: Cosmos vs. Polkadot".
The author starts with the economics of Charlie Buffett, a partner of Berkshire Hathaway, a well-known investment company, and his friend Warren Buffett. It is closely related to the encryption economy, inferring and deducting, revealing the blockchain. The inherent law of industry development. I personally believe in the potential of blockchain technology. However, I must admit that Charlie Munger and Warren Buffet are 100% correct in their criticism of digital assets.
Once you understand how they think, it's not hard to see why they strongly oppose BTC and other digital assets. Let's walk into Charlie Munger's brain and find out.
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Image: Unfortunately, the thumbs of Munger (left) and Buffet are not for the blockchain.
In "The Poor Charity Book: Charlie Munger's Wisdom Proverbs," Charlie published a book entitled "Academic Economics: The Advantages and Disadvantages of Considering Interdisciplinary Needs" at the Department of Economics, University of California, Santa Barbara. The presentation focused on the shortcomings of economics in many interdisciplinary studies.
In a sense, cryptographic economics is even more interdisciplinary than economics itself. Cryptologists, distributed computing engineers, game theory experts, and open source developers all work together, but none of them have received systematic training in enterprise management.
On the other hand, each blockchain project has business people such as marketing, sales and operations, but they may not be familiar with the technical details.
Therefore, I adopted Charlie's five criticisms of economics and linked them to cryptographic economics. Some of these criticisms will help us accurately identify which blockchain protocols are building the tools we really need.
"Iron Hammer Syndrome"
"For a person holding a hammer, the problems in his eyes are like nails."
In a whole new area of blockchain, we may not know what technology to develop. This confusion can lead the team to focus on indicators that are not related to product success. In addition to social proof, some of these indicators seem to be important milestones. But in reality, this makes us overestimate things that are easy to measure.
- Exaggerating the market value of white papers
The white papers in the blockchain world have moved away from the original.
The original intent and role of the white paper is to describe the problem to the reader and propose a technical solution to the problem. The BTC white paper is a positive example. It's short and incisive, and most of the technology has been developed. Therefore, less than three months after the publication of the white paper, the main network was launched.
Regrettably, the past two years, using a white paper to portray a vision, using token financing or private investment to raise funds, has become a key point in blockchain projects. So the team put all their energy into writing a perfect white paper instead of building the software product itself.
It's easy to write a white paper, just use a fascinating story to tell the story of your product. But it is much more difficult to deliver an actual product.
Because of this shift, look at the white paper to focus on its essence, rather than on the stories told inside. At any time, before considering a project, you should focus on the technology behind the white paper.
- Overemphasizing easy-to-measure value
Community building is an important indicator in each blockchain. However, it is difficult to measure. Open source code contributions, product user engagement, decentralization and diversification of miners and verifiers in the blockchain are key pieces of information that demonstrate the health of the community. But these indicators are difficult to obtain and require meaningful data support.
Simple numbers are relatively easy to understand, such as the number of members in a Telegram chat room. The Blockchain Agreement is keen to show off the number of members of their Telegram, and some of them have now reached 100,000.
This huge number is misleading because it does not actually reflect community engagement. By using some good marketing tools, such as free airdrops, it is easy to temporarily fire this number. But having 50,000 members does not mean that there has been good communication between the company and the community.
The chat room is full of news, so that it becomes difficult to follow.
Report from the media: "Take the Telegram Tracker as a hype: the more new members, the more hype." As you can see, the Telegram group is an indicator of temporary hype, not a real community building.
Comparing one Telegram group to another Telegram group is an easy to measure indicator. But as investors and community members, we should not let ourselves be so easily convinced. We should focus on indicators that are more difficult to obtain, such as open source contributions.
For blockchain agreements, there is a social pressure to follow up and build a large Telegram member. But the best team is committed to building a community for developers and building effective communication channels with end users of the product.
- Insufficient resource allocation for technology research and development
From a legal perspective, token financing is still in a gray area.
Greed has led many projects to easily raise millions of dollars without due diligence. Now they are worried that the money will be traced back to a security.
Now, the operating entities behind these projects must spend time and money persuading everyone: their blockchain is a distributed agreement from the beginning, not a security. This wastes the resources that can be used to build the product.
This can be attributed to poor management or lack of accountability, which is a deadly shortcoming for startups. Of course, some special groups don't look at it like lawyers, and they are happy to see this new source of income in the blockchain.
In fact, there are better ways to raise money. For example, Balance, a project called "Ethereum wallet," raised $1.2 million through crowdfunding. This is a reasonable venture capital. They can now focus on building a great product without worrying about SEC review.
Crowdfunding is a perfect balance between complying with the law and finding ways to allow public investment. This is what the blockchain space means, and it shows the responsibilities you want to see from the founding team.
Insufficient attention to the concept of "Febezzelment": no hard-scientific basic approach to total attribution
Munger coined the term "Febezzelment", which refers to the use of simple algebraic functions to distinguish between authenticity. Blockchain investors ignore the basic rules of simple algebraic operations, resulting in billions of dollars out of thin air.
- Forked blockchain creates money out of thin air
Let's take a look at BTG (bitcoin gold). The team behind BTG forks the BTC by simply changing the mining algorithm to make it more suitable for GPU mining. Development work began on September 5, 2017, and BTG was released on November 12, 2017.
They also decided to mine 200,000 BTGs first and then sell them at the market price of 20,000 BTC to fund development. When the BTG was launched at the end of October 2017, the value of 20,000 BTC was approximately $120 million. With more than two months of development work by several developers, the team was able to create millions of dollars out of thin air.
Let's examine simple algebra that is easily overlooked by investors. Before the BTG came out, it had no community and no proprietary code. You can write the equation like this:
$0 BTG = no community and code
After two months of development, BTG came out, and the final market value reached a peak of nearly 8 billion US dollars. The equation is as follows:
$8 billion = two months of development work
Obviously, this equation is unbalanced. That's why Charlie doesn't believe in digital assets. Let us study the token financing.
- Tobacco financing creates money out of thin air
Typical first-time token financing will allow investors to generate incorrect return on investment expectations. They expect to double their funds in a few days, which is not sustainable.
Suppose a team creates a white paper and a website. Then they run token financing and raised $10 million worth of Ethereum. After only one day, the tokens received by investors can be sold in the market and receive a 200% return.
From the above picture, it is not difficult to see that 20 million US dollars was created out of thin air. This project has only one white paper and one website. We can't always deceive ourselves. In the end, this false mathematical equation will explode in front of us. The price of the time coin will fall to 0 US dollars.
Investors can only blame themselves for being not careful. But we must also point out that the funds raised by these teams far exceed their actual value. Because of the poor incentives of this financing model, it is too easy to raise funds.
The incentive mechanism for the first token financing was poorly designed because it encouraged the use of marketing, hype and manipulation to raise funds rather than building technology that people could use.
People often talk about how EOS has raised $4 billion for their ICO. But less mentioned is that 7% of the funds are Ethereum. Ethereum is the world's largest smart contract platform with the world's largest open source developer, and currently blocks.one (the company behind EOS) owns 7% of its shares. This raises the question: Why do they deserve it?
EOS (block.one) owns 7% of the shares in the ether. But what did they do to get it?
Regrettably, so far, they have produced far less than 7% of the total supply of Ether. What they do is to be more motivating than any other company. They are like a wounded employee, holding compensation benefits, suing the company for asking them to take 7% of their assets to build their own competitive company. EOS is the most greedy project in the blockchain space. The other 100 blockchain startups can get $4 billion in funding, which will create more jobs and a more competitive and diverse environment.
Overemphasizing macro and neglecting micro perspective
Charlie said that the economics community has placed too much emphasis on macroeconomics, but not on microeconomics. There are similar problems in the blockchain field.
Blockchain agreements boast that their platforms can replace large, poorly centralized entities, but never mention how they will be accepted by users.
A good example is the competition between distributed storage protocols (Filecoin, Storj, Sia) and Amazon Web Services, a multi-billion dollar industry. From this perspective, these agreements seem to be attractive investment opportunities.
However, we rarely see information that the team really provides details of its protocol at the micro level. How can distributed protocols, distributed developers, and distributed service providers compete with AWS at the price of end users? After all, AWS has a very centralized, very organized service and is cheaper.
The blockchain project either completely misses this or deliberately ignores it or hides it in a grand agreement.
A $1 billion opportunity is a fascinating story that has caused many people to turn a blind eye to details. For example, the cost of user acquisition, and how the decentralized service is more affordable than the centralized service.
If the network can be adopted on a large scale, distributed storage may one day compete with Amazon. But for now, large-scale adoption is still very far away.
Too little attention to high-order effects
Second and higher order effects. When you raise millions of dollars to fund blockchain companies, you certainly want the founders to achieve high-order thinking.
- Second-order effect of increasing transaction speed
When it comes to the topic of speeding up blockchain transactions, people often ignore second-order effects. There is a simple check between security, scalability, and decentralization, and adding one will eventually reduce one of the other two.
This can be illustrated by the triangle below. Tweets from Vlad Zamfir:
Low latency termination provides high security. A large number of nodes provide a high degree of dispersion. Low overhead provides high scalability. You can't get the highest value of these three indicators at the same time, because there is a check and balance between each indicator.
This is a simple fact that has not been fully understood by investors and blockchain practitioners. Many blockchain protocols claim to have high transaction processing speeds, but never mention their sacrifices in terms of security and decentralization.
- Second-order effects of distributed applications (dApps)
Second-order effects are often overlooked when it comes to dApps used in the real world. Indeed, Internet companies and governments are controlling and selling our data, which is a worrying fact. So we need to build a decentralized network that allows us to interact outside of central control.
But the truth is that for the foreseeable future, dApp will be a slower, more expensive, and less friendly experience than existing central entities.
Each blockchain agreement should consider the following issues before raising funds:
“How many people will use dApps instead of centralized applications for their own data in the next few years?”
The conclusion of most agreements is that some people will be willing to pay extra for privacy. But this group is small. No matter how you design your dApp, it's hard to go beyond the centralized application for reasons beyond your control.
Another fact is that many of these services require you to control your own data and ask you to protect it. You need to make sure your PC is not hacked or your digital identity and assets may be stolen. People who use a decentralized network must protect their own data.
Centralized entities simplify these protection services and make our lives easier. This leads to another question that the dApp team should ask themselves:
“How many people are willing to invest their time and money to protect digital identities and assets without the help of centralized services?”
Similarly, some people will want to do this. From a 20-year development perspective, decentralized services may be as cheap and easy to use as central services. So we have reason to think that this is a promising project, and the only way to achieve this goal is to get into work. The problem is that blockchain agreements and investors lack an assessment of the actual short-term user adoption.
Did not pay enough attention to the technical impact and punishment mechanism construction
The most valuable thing from the blockchain field is the invention of BTC. An anonymous creator created a digital currency that gave people a new way of owning assets without involving centralized entities. This is a very powerful idea and it is offered to us free of charge.
At the same time, it has opened the way for many “sin” – token financing fraud, private key theft, pull dumping, attacking exchanges and market manipulation. This has caused problems for many investors. This system can only be perfected if a punishment mechanism for these actions is established.
Some of these punitive measures will be implemented through government legislation, as long as they do not abuse power and hinder innovation, which would be a good thing. But even in the normal economic world, almost no one will be jailed for the 2008 financial crisis. Therefore, the law itself will not be able to repair this system.
We need a better way for the blockchain protocol to be responsible for the resources they occupy. Because now, the founder is transferring all the risks to investors. Once upon a time, blockchain financing could easily raise $10 million. It's not a good medicine for a startup, because the founder has not experienced the hardships of getting funding.
An eye for an eye, derived from ancient religious laws, is a simple, problem-solving approach. The existence of the law provides favorable conditions for the two sides to reach an agreement in the game.
This will require the founding team to invest $1 million in funding when the contemporary currency financing raises $1 million. This reflects real investment, and people are more inclined to believe in the founders who will work hard for success.
However, it is unrealistic to expect a team to match their financing. One million dollars is a lot of money. What you want to see from a team is a work product that has taken them months or years to develop, so you already know that they have invested a lot of energy.
Vitalik's DAICO funding model is also a step in the right direction, as it allows the funds that were previously absorbed to be released over time. If investors feel that the team is not wise to spend money, they have the ability to recover the funds.
Summary: Is Charlie's criticism effective?
Charlie Munger is a very smart and experienced investor. The blockchain community often laughs at him and Warren Buffet's comments on digital assets. But frankly, they have decades of investment experience, and when you start to understand their way of thinking, you will agree with some of the danger signals they see.
These criticisms are valid, and we should take the views of Buffet and Munger seriously. However, we should also be optimistic about the long-term benefits of blockchain and decentralized networks. Even at the beginning of the stock market, there are rampant frauds and deceptions. But now it has matured into a reliable system that makes people feel safe when investing.
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Dave Kajpust author; DUANNI YI translation; Sonny Sun editor; Roy typesetting
Source: Encrypted Valley
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