The Norm of Expressing Value : Interview with Santiago Velez Block Digital Corporation ①

Santiago Velez is the co-founder and Research & Development Division Lead at Block Digital Corporation. Block Digital focuses on computing in support of decentralized ecosystems. He was a nuclear engineer in the power generation industry for 20 years and got into the space as he got very attracted by the gains and the price action that was going on in the market. It took some time before understanding the underlying technology or the problems it was to solve, however, as an engineer, he started looking into it in significantly greater detail. Ever since, it’s been the single most interesting thing for him in terms of this intersection of computing, code, monetary policy, economics, financials, and human interaction.

Interview Date : 12th February 2021

Is crypto about engineering or human psychology?

An engineer will try to identify a problem and then try to architect a solution around that problem to solve it. However, digital assets are more about human behavior and incentive systems driving that behavior, so it’s more about human psychology than about the underlying engineering structure. Engineers use the code to express some kind of an incentive system or set of values that you have about how human beings should organize themselves. But once that foundation is set, then it’s the psychology of human behavior that drives everything. Thus, most of the space is humans all the way down.

What is the norm of expressing value?

All of us were born into a society that has its norms around how you express value. The final distillation of those norms is our currency. As we grow up, we’re conditioned to assess the relative price of things like for example a gallon of milk, groceries, a car, a home, etc. in our native currency. We take that expression or conditioning for granted and don’t think that there’s anything else to it until occasionally we get a glimpse of it when we go to another country. When you spend some time there, you struggle to understand whether what you’re paying for is really worth it because the value proposition isn’t intuitively clear. And, it’s that uncomfortableness that offers a little glimpse into what I think is really going on. I wasn’t as interested in Bitcoin because I didn’t see it as relevant for me being in the United States as we have a very mature payment structure. Those problems are largely solved for us, so we don’t often find a need for entering into another money network. It wasn’t until much later that I started exploring the monetary system that it became clear what the latest narrative of Bitcoin was attempting to solve for, namely the unaccountability of central banking on our collective purchasing power.

How do you feel about Ethereum?

When I got into Ethereum, I didn’t really understand the nature of money itself but I understood there was something different than just Bitcoin. Something kind of clicked for me when I realized that you could program money in a way that you couldn’t in the past with Bitcoin. When I recognized Ethereum’s potential on how you could create decentralized applications that take advantage of this property of programmability, that was very fascinating. The ability to build all these interesting things that allow you to express value in a decentralized way let me down this rabbit hole around what the nature of value is today. Since then I have become currency agnostic, meaning I don’t favor any currency at all anymore. I feel that it’s our human right to express ourselves in terms of value propositions using whatever abstraction we choose to. The only constraint on that choice is the market supply and demand for that abstraction. Moreover, we still live in a community where other human beings have the power to define a market, and that market is setting constraints on our expression.

How is the traditional mindset around value?

In the traditional mindset of investing, you’re still kind of bound by your own geographical expression of value, the fiat currency. For example, if a person is fresh out of college, gets a job, and starts putting away for his retirement, he or she will have to make choices in terms of what they will invest in that will grow over time for their retirement. So, you want to jump on an investment plan train to get yourself to your retirement destination. However, the problem is that different asset classes move at different rates. Some trains are moving faster than other trains. So, as you approach that golden city into your retirement, you start thinking about “what if the train gets derailed?” or “what if it stops altogether?”. In fear, you start allocating resources in different asset classes and try to diversify. But at the end of the day, you’re still in the mindset that when you arrive, you are going to essentially liquidate your assets for fiat.  Because that is what your debts are denominated in. Even food and other goods and services are all bought in fiat currency. Thus, you’re still in this mental framework where you have these investments growing value, but ultimately still are going to liquidate.

Should people have the freedom to choose their expression of value?

I believe very strongly in personal freedom. And, from a freedom perspective of social responsibility, every individual should be able to express their value in the way they choose to without having to compromise with the way other individuals choose to. For example, if you happen to be a strong proponent of Bitcoin, and want to send me some, there should be no reason for me having to compromise accepting your Bitcoin. If I decide I want to accept your Bitcoin in XRP, the dollar, or the Yen, there should be an underlying process that facilitates that transaction with no friction. There should be a market that permits that transactability without compromise or counterparty risk, to enable each human to express their value judgment using the collective markets as the arbiter and that is the endgame this technology offers.

How can the liberal expression of value be obtained?

The purest expression of that is an exchange. That’s essentially what exchanges do. The problem is that many exchanges are still caught in the mindset of the traditional framework where they pair the digital asset to the local currency. For example, you might trade BTC for yen in a Japanese exchange first and then take that yen to buy some ETH with. Why do you have to take that extra step? Because that happens to be the market that you’re servicing and it’s a conditioned response for a business whose debts and obligations are tied to a particular geography. However, global exchanges will realize that you don’t need to take that extra step as it introduces friction, meaning loss in value. If the pairings are sufficiently liquid against one another, then you can simply trade one asset for another. All you need is a technology stack to facilitate that exchange without compromising security or introducing some new counterparty risk.

Will borderless trades be available for everyone on exchanges?

I think it will but I don’t think people realize that it’s happening. This technology stack will be a foundational layer of the Internet of Value. For example, if I send you an email through an email provider different from yours to communicate, I don’t require you to have the same email provider because there are protocol standards at the base layer of the internet like SMTP (Simple Mail Transfer Protocol), TCP/IP (Transmission Control Protocol/ Internet Protocol), etc. These are protocol standards that are information agnostic which handle that packet for two networks to communicate and neither party has to compromise. Similarly, we have interoperability with the value of internet layers that will facilitate the transfers in a way most people won’t realize what is going on under the hood. Just like everyone has an email address,  we all will have our own value addresses soon.

Isn’t the internet already complete?

The people building this infrastructure are the ones that realize the internet was never completed. One of the reasons that the internet looks the way it does is because the element of value was left out at inception. Thus today, we have a phenomenon where very few companies control the vast majority of information flow, and they’re the beneficiaries of that information. For example Facebook, their value for advertisement is very high as a network, and so they’ve been able to monetize it. The problem is that they’re the main beneficiaries and not their users. However, when you buy into a value network like Bitcoin, you’re buying a piece of that network. Hence, if the token you buy is an expression of the network incentives, then you will be a direct beneficiary as the network grows. That’s an inversion of the traditional Web 2.0 where a few internet aggregators like Google, Facebook, Amazon, etc. were the main beneficiaries of value flow. So, with the decentralization of cryptocurrencies, we will see a more democratic internet of value.

Will there be only one internet of value?

In a fully mature internet of value in the future, instead of the maximalistic idea of there being one ecosystem that represents value expression for all, I think each ecosystem will find its niche of a market or function and hyper-specialize. As Bitcoin is converting itself from a proto peer-to-peer money to a store-of-value and not a fast-changing network, it’s incumbent on that network to communicate to the outside world. Because of Bitcoin’s not-changing function, there is certainty about its future. From an investor standpoint, to participate in a network where there’s a lot of change also means that there’s a lot of uncertainty. The people who promote Bitcoin realized that, and so the best narrative in the BTC codebase is to maintain stability and emphasize security which is what will bring in the greatest inflows from the external world. So, instead of individual networks that exist all by themselves, they’re networks that exist in relation to other networks.

What is a switching cost?

If I grew up my whole life and I learned to transact in dollars, and I’ve never heard of Bitcoin before, it’s very frightening to me to give up dollars to buy something that I may not understand. I might see things in the media that are scary about how Bitcoin is used. However, I might also see that while Bitcoin is surging in price and it is becoming more stable. This might make me think that I could become a beneficiary of that growth too. So, at some price points, there’s enough motivation to incentivize people to bear those switching costs. When that happens, we will see outflows from fiat networks and inflows into the Bitcoin network. Once people go into the Bitcoin network, the switching costs to go to the other crypto networks are lowered because they’ve already learned what they need to learn about decentralized networks. So, we see that other networks become the beneficiary of Bitcoins growth, like Ethereum.

How important is tribalism in crypto?

I do look at these networks as very human, and I think these networks are very organic. Every organism has an immune system that is a defense against attack. So, tribalism is an expression of an organic system that’s trying to defend itself against so many different kinds of attacks, like attacks from the media that discourage people from entering, from competitor networks that are offering a similar value proposition, etc. This natural expression of people’s defenses against those attacks plays an important role in maintaining the network value as time goes on, in reinforcing it so it doesn’t deflate or trying to promote and grow it. As a result, it could yield a more effective, resilient, and competitive network in the future than the function they need to sell.

Interviewer , Editor : Lina Kamada


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