The Chain of Consensus: The Cartel Behind The Blockchain

by Mark Goodwin | Unlimited Hangout

The Cartel Economy

The free market and its ability to price goods and services is treated by many as an idealized bastion of truth in a world of perpetual government overreach. But like any arena, complete with buyers and sellers, producers and consumers, the rules and nature of the playing field often dictate the winners and losers. Markets simply cannot exist in a vacuum. While many market makers have tried novel ways to circumnavigate the status quo of regulation and naturally-occurring commodity distribution, the government’s current monopoly on setting the boundaries of how businesses can operate –– for example, the bylines and codes upheld by the United States’ regulatory arms –– remains the enabling environment for how markets operate globally. While jurisdictional arbitrage does exist, and many do attempt to blend and bend these rules via off-shore shell companies in tax-friendly nations, ultimately the largest regulatory bodies from the public sector play the de facto king when picking and rewarding certain private entities via irregularly applied anti-trust laws and supposed monopoly-busting legislation. With the advent of the retail speculative market in the form of ETFs, stock indexes and even cryptocurrency, the rules that uphold how financial service companies must treat customer access, customer data, and customers’ funds themselves have become a divining rod between the success and failure of the now-digital economy.

Despite the free market’s label, the market in practice is rarely equally accessible to new participants, especially that which surrounds the banking industry. Even if a new business is able to break ground, find seed funding, and bring a new product to market, more often than not they find themselves face-to-face with an incumbent titan in their very field that feeds off public sector lifelines in the form of bailouts, government contracts, and/or sometimes even regulatory grandfather clauses allowing their monopoly to persist. The government itself acts as a shapeshifter: with one hand generously feeding the cartels that have long fell in line with their policies, while, with the other, destroying the upstart challengers to this supposedly free market.

Herein lies the secret to the most successful entrepreneurial cartel of our era, the PayPal Mafia, on their near 30-year path to total domination of online payments in the U.S. regulatory system within the Network Age: find an under-explored domain and dominate it. Peter Thiel, the founder and first CEO of PayPal, has taken this idea a step further by actively labeling free market competition as bad for business, a key way to distinguish between actual free market libertarians and the cartel capitalists such as Thiel and his fellow PayPal Mafia brethren. This style of business led Germany’s Federal Cartel Office to investigate PayPal itself over “unfair business practices,” “including additional charges,” and “a requirement that merchants don’t offer goods or services at a lower price to customers opting for a cheaper payment processing company.” “Most business books tell you how you should compete more effectively and mine goes somewhat against that grain and tells you that you should not compete as a founder or entrepreneur,” claims Thiel. “Your aim should always be to create a creative monopoly in some new area that’s been unexplored and underdeveloped, I think that’s always the key to great companies.”

This concept is taken a step further in Thiel’s 2014 book, Zero to One, which he co-authored with Blake Masters:

“Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. So why do people believe that competition is healthy? The answer is that competition is not just an economic concept or a simple inconvenience that individuals and companies must deal with in the marketplace. More than anything else, competition is an ideology—the ideology—that pervades our society and distorts our thinking. We preach competition, internalize its necessity, and enact its commandments; and as a result, we trap ourselves within it—even though the more we compete, the less we gain… If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.”

– Peter Thiel, Zero to One

The previous piece in this series, The Chain of Issuance, left us at the crossroads of the founding of the Digital Federal Reserve, a moment all too similar to the founding of the actual Federal Reserve nearly a century ago. When the Federal Reserve was founded, the cartel(s) heading the monopolies of the day’s economic infrastructure, namely oil and steel, came together to influence the formation of the monopoly on publicly-issued currency. Today, the rise of Bitcoin and the cryptocurrency industry at large has once again brought the discussion of private-issued currency to the forefront, especially with the acknowledgement of the failure to identify and rein in rampant inflation in the world’s most widely used medium of exchange, the U.S. dollar. It should be of no surprise that the ventures and businesses strewn about the portfolios of the PayPal Mafia find themselves at the apex of this movement, especially with the cartel’s connection to the proliferation of U.S. dollar stablecoins such as Tether, USDC and the fastest growing stablecoin on the market, PayPal’s own PYSUD issued by Paxos.

The monopoly of publicly-issued currency has begun to erode, arguably fundamentally and fatally, but with its demise brings rise to a new group of would-be monopolizers hiding behind a facade of the decentralization theater in the greater blockchain space. Meet the new boss, same as the old boss.

Building The Digital Dollar

The first iteration of tokenized dollars on a blockchain, Tether’s USDT, was launched on a Bitcoin sidechain then-known as MasterCoin (now Omni Layer), by PayPal Merchant Advisory board member Brock Pierce and MasterCoin’s CTO Craig Sellars. In a press release at the time of its launch, the Master Protocol was described as a “Bitcoin blockchain currency layer”, which allows for “a plethora of new digital currencies and property sales” to be “created through the Bitcoin blockchain.” The concept of the Master Protocol was first articulated in J.R. Willett’s January 2012 white paper entitled The Second Bitcoin Whitepaper. The paper’s introduction summarizes its intent that “the existing bitcoin network can be used as a protocol layer, on top of which new currency layers with new rules can be built without changing the foundation” along with further claims that it will “financially benefit the entire bitcoin user community” and “richly reward early adopters of the new protocol.” The paper later states that the Master Protocol has the ability to “create tools to allow end users to create currency protocol layers which have a stable value”, including tokens “pegged to an external currency or commodity” and thereby allowing “users of these currencies” to “own stabilized virtual currency tied to U.S. dollars, Euros, ounces of gold, barrels of oil, etc.”

In a recent interview with Roundtable, Pierce told the story of the founding of Tether:

“At the time, Dan Larimer had a thing called BitShares and he created the first algorithmic stablecoin called BitUSD…Me and two of my partners were the largest holders of BitUSD, and we determined that we could break the buck relatively easily… In that analysis, we said that we needed to use an asset-backed system with a federation of banks holding digital dollars… I was chairman of MasterCoin, which was the first ICO. Craig Sellars was CTO. I said, ‘Craig, let’s build this thing,’ that’s how Tether got started.

In the original business plan, we talked about the concept of even CBDCs, and everything has transpired exactly as Craig and I had envisioned it. Tether’s doing over $50 trillion a year in transactional volume. It is the most traded cryptocurrency, and the U.S. dollar is the main trading pair… Bitcoin would not be where it is today, it probably would have one-tenth of the value, if we didn’t have a native digital dollar running on chain.”

Today, the majority of stablecoin issuance has moved from the Bitcoin blockchain to Ethereum, a fork of Bitcoin that enables smart contract functionality on the base layer of the protocol. Ethereum was conceptualized in 2013 by Vitalik Buterin, and eventually the Ethereum Foundation was born alongside founding members Gavin Wood, Charles Hoskinson, former Goldman Sach’s executive Joseph Lubin and others. Buterin, 20 years old at the time, was named a Thiel Fellow in 2014, while working “full-time on developing Ethereum, a peer-to-peer network that any application can use and access” thereby allowing “people to build advanced decentralized applications.” Ethereum held its ICO, or initial coin offering, in which early investors of the new network could exchange Bitcoin for Ether – the native currency of Ethereum – before the blockchain finally launched in 2015. Read Full Article >