Daily Balajisms - Digital death
Digital gold or digital death. Zero-to-one or one-to-zero.
According to Balaji Srinivasan, the internet increases variance, and has transformed constants into variables. This can lead to a digital death, where even a venerable institution like the Silicon Valley Bank can be subject to a digital bank run and perish within a day.
It’s like the opposite of “zero-to-one”. And the whole Western-dominated financial system might experience this “one-to-zero” moment of a sudden digital death. We are lucky to have bitcoin as a digital gold, because renminbi as the next global reserve currency is a dystopian option.
Group chats are upstream of Twitter, and Twitter is upstream of what Balaji calls the downstream media. When news of the SVB's downfall hit Twitter, it was too late to wire money out. The digital bank run had already started on group chats, and within hours, more than $40 billion had been moved out of the bank.
Due to the small amount of cash reserves held by small banks in the US (around 6% of their deposits) and larger banks (10%), they are unable to withstand the impact of rapid digital bank runs.
The hierarchical relationship between group chats and Twitter, with group chats being upstream and less filtered, implies that communitarianism can overcome attentionalism, which itself has been shown to surpass capitalism. Within a close-knit and high-trust community, vital information can spread faster than within the global fight club of Twitter, where the noosphere argues.
The legacy financial system is not digitally-native, and as a result, it is a half-analog and half-digital solution. This scanner stage of digitalization is not sufficient to keep up with the innovations in fintech and crypto.
Balaji Srinivasan uses a metaphor involving Gmail to describe the current state of the banking system. He suggests imagining that your email is printed out on the backend and sent via Pony Express by horse, which takes two days, before being scanned and uploaded to the cloud.
Analog regulators woke up in a digital world. Regulators are struggling to keep up with the digital world, and Balaji Srinivasan suggests that we need competition between smart regulators instead of global harmonization. Mimetic behavior and global harmonization can lead to similar insolvency problems faced by many Western banks after binging on US Treasuries.
The current global economic and political system can be metaphorically represented by a wooden bowl filled with marbles. As the bowl experiences more shocks and hits, while its walls become thinner and shorter, eventually causing some marbles to fly out instead of returning to their attractor basin.
The question is where these marbles will land, and there are two possible scenarios: Bitcoin as a digitally native form of money with the use case of digital gold, which is an optimistic outcome, or the adoption of the Chinese yuan by more countries, which is a more dystopian scenario.
Balaji refers to the three most powerful attractors of today as NYT vs CCP vs BTC. Or USD vs RMB vs BTC in case of dominant financial systems today. In today's volatile world, both sovereigns and individuals must choose between getting into digital gold or facing the risk of digital death.
In summary, the internet has transformed the banking industry and legacy banks must adapt to keep up with the innovations in fintech and crypto. Regulators must also be proactive and embrace competition to avoid being left behind in a rapidly evolving digital world.