Web3 and India: A Wrong Turn (Part 13)

Quotes – 1

A new world beckons. For every bull, there is a bear. For every one company that succeeds, there will be a hundred others that will fail. I saw it in the early days of the Internet also. Entrepreneurs are optimists, seeing the world through a lens of making things better. The ones who succeed show us a better way to do things; the ones who fail show us how not to do certain things. Web3 will also go through its ups and downs. But the inevitable trajectory is of progress and betterment, and that is why India needs to be a part of the ecosystem.

Here are a few quotes about the promise of Web3 and blockchains:

Chris Dixon:

Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs. The first telephone could only carry voices a mile or two. The leading telco of the time, Western Union, passed on acquiring the phone because they didn’t see how it could possibly be useful to businesses and railroads – their primary customers. What they failed to anticipate was how rapidly telephone technology and infrastructure would improve (technology adoption is usually non-linear due to so-called complementary network effects). The same was true of how mainframe companies viewed the PC (microcomputer), and how modern telecom companies

…This does not mean every product that looks like a toy will turn out to be the next big thing. To distinguish toys that are disruptive from toys that will remain just toys, you need to look at products as processes. Obviously, products get better inasmuch as the designer adds features, but this is a relatively weak force. Much more powerful are external forces: microchips getting cheaper, bandwidth becoming ubiquitous, mobile devices getting smarter, etc. For a product to be disruptive it needs to be designed to ride these changes up the utility curve.

Brian Solis:

The opportunity for innovation lies in what my colleague Henry King and I define as relationship transformation: it’s the “why” of technology, reimagining web3’s trajectory to design concepts, inventions, and businesses around user relationships, those between companies and assets and people, and also between people and communities. With relationship transformation, we can define how we use decentralized and trustless technologies to create new asset classes and productive, collaborative communities and platforms that turn users and consumers into stakeholders and owners.

We can reimagine every industry from finance and insurance to healthcare and education to gaming, media, and music to accounting and legal to politics and governance to royalties and loyalty programs to software and technology to retail, marketplaces, and consumer goods and everything in between.

Therein lies the vast opportunity: we get to create the future. We get to define not only the trajectory that we’re on but an entirely new trajectory altogether. We’re not just striving to avoid web3’s equivalent of Web 1.0’s dot bomb phase, or the ethics failure and data conundrum of Web 2.0 to get us through the hype cycle. We’re striving for an alternate path that gives web3 utility and meaning, one that builds an equitable community and offers a more sustainable impact while giving access, power, autonomy, and portability to users.

David Andolfatto and Fernando M. Martin: “These traditional forms of record-keeping are likely to be challenged by blockchain technology, which provides a very different model of information management and communication. Competitive pressures compel organizations and institutional arrangements to evolve in response to technological advances in data storage and communications. Consider, for example, how the telegraph, telephone, computer and internet have transformed the way people interact and organize themselves. Advances in blockchain technology are likely to generate even more dramatic changes, though what these may be remains highly uncertain.”

Thinks 608

Justin Smith writes about the emergence of the surveillance state post-Covid: “When I say the regime, I do not mean the French government or the U.S. government or any particular government or organization. I mean the global order that has emerged over the past, say, fifteen years, for which COVID-19 served more as the great leap forward than as the revolution itself. The new regime is as much a technological regime as it is a pandemic regime. It has as much to do with apps and trackers, and governmental and corporate interests in controlling them, as it does with viruses and aerosols and nasal swabs. Fluids and microbes combined with touchscreens and lithium batteries to form a vast apparatus of control, which will almost certainly survive beyond the end date of any epidemiological rationale for the state of exception that began in early 2020. The last great regime change happened after September 11, 2001, when terrorism and the pretext of its prevention began to reshape the contours of our public life. Of course, terrorism really does happen, yet the complex system of shoe removal, carry-on liquid rules, and all the other practices of twenty-first-century air travel long ago took on a reality of its own, sustaining itself quite apart from its efficacy in deterring attacks in the form of a massive jobs program for TSA agents and a gold mine of new entrepreneurial opportunities for vendors of travel-size toothpaste and antacids. The new regime might appropriately be imagined as an echo of the state of emergency that became permanent after 9/11, but now extended to the entirety of our social lives, rather than simply airports and other targets of potential terrorist interest.” [via Econlib]

Donald Boudreaux writes about the negative consequences of price ceilings: “No government intervention into a market economy is as certain to do damage as price controls. Market prices make possible the successful, productive coordination of the efforts of countless specialized workers and firms spread around the world. Market prices also coordinate the resulting massive flows of economic outputs with the demands of consumers. Every government-imposed control on prices reduces the effectiveness of this coordination.”

Read: The It Girl by Ruth Ware.

Web3 and India: A Wrong Turn (Part 12)

Freedom

There is the other side of the coin also. Skeptics claim that bitcoin is used for money laundering and ransomware. There are many bad uses of cryptocurrencies which offer (to a large extent) anonymity and untraceability. And so, “national interest” and “security” become the reasons why a new regulation is brought in. And rule by rule, a new industry is killed. Can crypto challenge fiat currencies? Perhaps. And maybe there should be competition if one looks at how central banks (especially, the US Fed) have printed trillions of dollars in the past 15 years and debased currencies by creating rampant inflation. Every action has a reaction, and entrepreneurship and technological innovation cannot be stopped. Yes, there will be the wrong uses also, but that is true for almost anything.

The doomsday scenarios forecast by so-called experts find favour with risk-averse policymakers – most of whom have lived in rent-free accommodation all their life, and have little interaction or understanding of the real world. They have no skin in the game. No one is going to hold them accountable for their actions. They do not pay a price for their bad policies. It requires bold and visionary political leadership to rise above the short-sightedness and anti-business sentiment so prevalent in policymakers worldwide.

India has such an opportunity with Web3. It should lead the world by “unlocking Web3.” All it needs is a decade or so of permissionless innovation. Entrepreneurs are the ones who will drive wealth creation and enlarge the pie for all; governments only do redistribution and are mostly engaged in shrinking the pie with their bad policies. Web3 and its ecosystem of gaming, metaverse, DAOs and the likes is uncharted territory. That is why it should be left alone. A commitment needs to be made by government officials that no obstacles will be put in the path of entrepreneurs. For the first time, India has a mix of entrepreneurs, investors and capital who can help build out new industries. What they need is freedom.

Web3 offers India an opportunity to lead. There are many inefficiencies that it can solve. Centralisation has failed in many areas like land records, agricultural marketplaces, education, healthcare, digitisation of kirana stores, and so on. Maybe Web3 and its decentralised approach can work. In a way, ONDC (Open Network for Digital Commerce) is a decentralised initiative – it is Web3-like without the underlying crypto framework.

India has much catching up to do in the world. It needs sustained growth of 10% and higher for a generation to create prosperity. That is not going to happen through government subsidies which tax the rich and distribute via welfare schemes to the poor. India needs its entrepreneurs to solve problems and flourish. This is the realisation that still doesn’t exist in policymakers.

Web3 is a test for India. We missed the Web 1.0 and 2.0 waves that created trillions of dollars in wealth and made lives better. We cannot afford to miss another one. Political leadership is about not just making new policies, but also knowing when to step back. Let’s not send Indian entrepreneurs to foreign shores – like was done by another set of political leaders 50-60 years ago.

Thinks 607

The Economist on how to preserve secrets in a quantum age: “The existing encryption standards that underpin just about every online exchange of information are a bit of gnarly mathematics designed to be well-nigh impossible for today’s computers to crack without just the right arithmetical key. But nist’s scientists have not been pondering today’s machines. They worry about a coming era of quantum computers…A more promising approach would be to identify new classes of mathematical problems that even quantum machines would struggle to crack. This was NIST’s task. In 2016 it launched a competition to find worthy algorithms for “post-quantum cryptography” (pqc), receiving 82  submissions from 25 countries. After three rounds of sifting and valiant searches for vulnerabilities by independent cryptographers, four winning techniques and four backup approaches have emerged.”

Emmanuel Roman of Pimco: : “Overconfidence is one of the great sins of mankind — and fund managers. It’s easy to build a narrative where you say I have seen this before…It’s very hard to escape [our biases] sometimes . . . and that’s why thinking through portfolio construction and risk and debating it with people of different backgrounds and age groups is very important . . . And not just people in your own mould.”

Richard Fulmer counters socialists’ claims about capitalism. Part 1 and Part 2. One of the claims of socialists is that capitalism creates inequality. The response: “Nature creates inequality. Different socioeconomic systems reward different natural inequalities – intelligence, physical health, strength, and beauty – by the incentives they create. Capitalism rewards the “bourgeois values” at which the left sneers: thrift, honesty, persistence, hard work, prudence, tolerance, and civility. Socialism rewards ruthlessness. Material inequality is the inescapable result of material progress. If a new product is created, it cannot possibly be instantly and simultaneously distributed to every person on earth. So, the first time someone invented something – the stone hammer, perhaps – inequality instantly appeared in the world. To demand complete material equality is to demand an end to material progress.”

Web3 and India: A Wrong Turn (Part 11)

Promise

In the early days of the Internet, its promise was thought to be in democratising access to information. No longer was one limited by geography and what was available in the vicinity of where one lived. What I did with IndiaWorld was something similar. Indian newspapers and magazines would take 7-10 days to reach the US. The Internet enabled me to publish news and make it available to anyone with an Internet connection the next instant. Then, entrepreneurs like Jeff Bezos realised that as they made information about products (books to begin with) available, they could also build a distribution system to ship products anywhere and drive ecommerce. Later, came the social networks and OTT platforms and myriad other ideas building on the foundation of the Internet. While many ideas failed, entrepreneurs learnt rapidly from both successes and failures of others to keep improving the technology (“know-how”) and make lives better. The early pioneers of the Internet could not have imagined today’s world – and it has been less than three decades.

When I returned from the US in 1992 to set up base as an entrepreneur in India, it was very difficult to get new computers in India – one had to import them. I remember importing a Sun Microsystems Unix workstation – I had to classify my company as a software export entity and create a room in the office as a “bonded warehouse”. The computer could not be moved out of that room and was subject to inspection by a government official at any time. Import duties were high. Once when I had bought a new iPhone in the US, I was stopped by customs officials who assessed its value to be higher than what I was allowed and therefore had to pay duty.

For a while, I thought we had gone past that era. But when the core beliefs are not about economic freedom but of economic control, the next bad regulation is not far away. Sometimes, it is not just the regulation, but the threat of impending controls and constraints that kills entrepreneurship.

Policymakers would do well to remember Milton Friedman: “Government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens from crimes against themselves or their property. When government– in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost come in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.”

Web3 is a new world that’s getting created. No one even knows how it is going to play out. Cryptocurrencies, DeFi and NFTs are just the start. Despite the recent ‘crypto winter’, there is massive capital flowing into the space attracting the smartest minds to solve the toughest problems. New infrastructure to support Web3 is being built and improved. Entrepreneurs are thinking about problems to solve and investors are willing to back many of them. For once, India was not a laggard. But that is going to change. Once again, Indian policymakers are killing a nascent industry. None of them will pay the price; that will be borne by billions of Indians who will be unable to benefit easily from the promise of new innovations. Phrases like ‘Digital India’ have little meaning when the real enablers are blocked.

Thinks 606

Vitalik Buterin reviews Balaji’s new book “The Network State.” Balaji: “A network state is a highly aligned online community with a capacity for collective action that crowdfunds territory around the world and eventually gains diplomatic recognition from pre-existing states.” Vitalik’s conclusion: “Network states, with some modifications that push for more democratic governance and positive relationships with the communities that surround them, plus some other way to help everyone else? That is a vision that I can get behind.”

Lant Pritchett: “The question of how best to mitigate the worst consequences of the lack of development in places where it has yet to emerge is a charity question. As people engaged in development (particularly–but not exclusively–those of us born in richer countries) we should however, never assume that “effective anti-poverty programs” circumscribes the wishes, wants, and goals of developing countries and their populations or that these programs should be at the center of the development research–or action–agenda. As development scholars like Bill Easterly and Angus Deaton point out, “we” should not confuse the limited things that “we” can pragmatically do with what “they” need and want.”

Abhisek Mukherjee: “Management consulting is expensive. The median billing range for India-bred consulting firms and the Big Four is 0.7-1 million per consultant-month. For international firms like Accenture, this range can be 1.5-2 million. For MBB (McKinsey, BCG, Bain,) the range is 2.5 million plus, and can cross 5 million per consultant-month (Indian arms of MNCs often pay global rates.) This translates to gross margins of more than 50%. Given this increasing need for consulting services and the high costs, many companies attempt to build consulting teams in-house. At its core, management consulting requires three things: One, top talent. Two, access to information sources such as research reports and expert networks (e.g., GLG—Gerson Lehrman Group.) Three, institutional knowledge on domains and problem-solving methods.”

Web3 and India: A Wrong Turn (Part 10)

Technology

India is a poor country. At $2,000 annual per capita, we are a long way to being wealthy. India should be looking to adopt the newest technologies. This can only happen if entrepreneurs are given the freedom to innovate. Unfortunately, the history of Indian policy-making has been one of interventions. Every intervention creates obstacles for entrepreneurs driven by the profit motive – and profits can only come if they offer something that consumers are willing to pay for. Web3 is one of those technologies where India’s policymakers have got it wrong. With a definition so wide as to almost put a stop to all Web3 activity (tokens are at the heart of Web3’s ownership model), Indian policymakers will make it impossible for a Web3 company to do business in the country.

Atanu Dey explains technology thus: “Our lives are immersed in technology. More accurately, we are immersed in the products of technology. But what is technology? The simplest broad definition is that technology is “know how.” More precisely, technology is about knowing how to do something…We use technology. By that we mean, we use the products of technology. Since technology is “know how”, and “know how” is essentially ideas, the products of technology are “embodied ideas.” Technology products are ideas given a physical form, or made incarnate…Technology gets transmitted from person to person through the transmission of ideas. Ideas are what in economics are known as “non-rival goods”, as opposed to “private goods.” Non-rival goods can be shared without reducing the quantity available. We both can’t eat the same apple: which makes apples a private good. But if I have an idea and I share it with you, we both will have the idea. If there are 10 people each of whom has one idea, and they share the ideas among themselves, then each person will have 10 ideas.”

Entrepreneurs have transformed the world around us. In an as-yet-unpublished essay, Atanu writes:

People invent technology. And the number of people who have ever lived grows with time. Therefore, our flow of technological inventions per unit of time grows. And with the increasing flow of technology, the rate of growth of the stock of technology grows with time.

There’s a positive feedback loop in this process. The greater stock of technology enables more people to spend more time developing technology, which in turn increases the flow (and stock) of technology, which goes full circle and allows more people to devote to developing technology.

Economic growth — the growth in the amount of useful stuff produced by people — is both a cause and a consequence of technology. It is because of our present state of our technology that the earth can support a population of nearly 8 billion people at the level of material prosperity we have today. That would have been impossible any time in the past because they just did not have the knowledge we have.

It is this world of technology that Indians need to be part of. When policymakers introduce legislation, taxation or regulation to curb its use, they hurt and impoverish their people. This is where India’s policymakers have made a wrong turn with Web3.

Thinks 605

Bloomberg: “Crypto is not an asset class. Stocks and bonds have cash flows. Commodities have industrial uses. Digital tokens have nothing but sentiment. Someday, they might prove useful as representations of assets, making transactions cheaper and more reliable. As things stand, buying them is pure speculation, not investment. They’re worth no more than you’re willing to lose, and certainly have no place in pension funds or retirement accounts…Perhaps the speculative frenzy surrounding crypto will eventually give way to the development of truly valuable applications, as happened with the internet.”

The New Founders America Needs: Bari Weiss spoke to the first students at The University of Austin. “We have to get more fundamental, more foundational. We have to get beyond the tired and rotted out ideas about left and right and ask: What are the virtues and values that have made America and the West the best, freest, most enlightened, most tolerant of minorities, most open to new ideas, most innovative places in the history of the world? The Founders that granted us independence from an older tyranny bequeathed to us a world-transforming set of ideas that, nearly 250 years later, still feel radical, especially in the last decade.  I believe that after the un-American revolution we are still living through, a new generation of founders will lead us out by looking to those same bedrock principles…While the original Declaration of Independence had one call to action, I have ten.”

Nassim Taleb: “We’re living in Adam Smith’s world where this pencil is made by people who have never met one another and don’t even know that their contribution is going towards the pencil, except for one. We’re living in that world. Thanks to some globalization. And, of course, it’s going to have its limits. Nobody really wants autarchy. So, what we’re disagreeing about is the degree of the limits of that globalization; but nobody wants to go back to autarchy. So, when people say, ‘I’m against globalization,’ they usually mean ‘I would like it reduced in some places to–exactly–to be managed better.’ But, globalization visibly is the name of the game today. “

Web3 and India: A Wrong Turn (Part 9)

India – 2

The Indian bureaucrat’s innovation in the crypto regulation game has been to define a category called “virtual digital asset” (VDA) and then tax it heavily to the point where every incentive to transact is taken away. From Bloomberg: “On July 1, a tax deductible at source of 1% on all digital-asset transfers above a certain size takes effect despite industry warnings that it will sap liquidity. That’s on top of an existing 30% rate on income from such assets plus a proposed value-added tax increase that’s making its way through the bureaucracy. The government also doesn’t permit offsetting of trading losses on cryptocurrencies, treating them differently from stocks and bonds.” If that wasn’t enough to kill the golden goose, there’s more: “Adding to the pain, crypto exchanges have been largely cut off from the regular banking system since mid-April. That’s when India’s ubiquitous United Payments Interface was made unavailable to them without explanation, prompting some banks and payment gateways to also cut off service, which in turn meant traders couldn’t top up their accounts with cash.”

The definition of VDA is explained in this note from E&Y

Limb A

  • It means any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called,
  • Providing a digital representation of value which is exchanged with or without consideration,
  • With the promise or representation of having inherent value or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to investment scheme; and
  • It can be transferred, stored, or traded electronically.

Limb B

  • A NFT or any other token of similar nature, by whatever name called. But NFT itself is defined to mean such digital asset as the CG (Central Government) may, by notification in the Official Gazette, specify

Limb C

  • any other digital asset, as the CG may, by notification in the Official Gazette, specify

Of course, Indian and foreign currency is excluded from the above.

And as so often happens, there came an exclusion list:

  • Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
  • Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
  • Subscription to websites or platforms or application

Another clarification was issued: “The CG has notified that a “token” which fulfils the definition of VDA under Limb A shall be NFT. But it shall not include a NFT whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.”

VDA and the concomitant crypto regulation is now a bureaucrat’s delight and an entrepreneur’s nightmare. The ostensible targets were the cryptocurrencies and crypto exchanges. The Indian government succeeded; trading in alternate currencies has now almost ground to a halt.

The side-effect of this is going to be that any Web3/crypto company with a token as its model will not be able to operate in India. They will simply domicile themselves outside India. And Indians will figure out a way – like they always have – to participate. Black money and smuggling were the answer to high taxation and bans in the India of the 1970s. Governments will never learn. The phrase “laissez faire” which literally means “let go” does not exist in their dictionaries.

So, where does India go from here? What are the Web3 opportunities in India? What about Indian entrepreneurs wanting to build Web3 businesses?

Thinks 604

FT on vertical farming: “The benefits touted by vertical farmers are manifold. Without having to worry about outdoor scourges such as pests, flooding or drought — “externalities”, as [Irving] Fain calls them — Bowery’s scientists can choose from a wider and tastier variety of cultivars that might never otherwise make it to a grocery store. The indoor environment allows them to grow crops without pesticides or herbicides — and with 90 per cent less water than is used in traditional farming. In a closed loop, the moisture that growing plants emit is sucked up by dehumidifiers and recycled for irrigation. With rows of crops piled one on top of another, several storeys high, vertical farms can produce many times more per acre than a comparable greenhouse — let alone a traditional field. And, because vertical farms can, in theory, be located just about anywhere, produce can be grown in an industrial park beside New York City rather than having to truck it across the country. That means it can be shifted from a cutting machine to a store shelf in hours — not days.”

Caleb Fuller: “To be a successful student of economics, therefore, one must come ready to understand the world—not to judge it. My experience with teaching Econ 101 suggests that “judging” is the single most relevant barrier to understanding. Potential learners on both the ideological left and the right stand ready to condemn the world for a host of real and perceived deviations from perfection. Such an attitude short-circuits any meaningful attempt to understand why the world is the way it is. Cultivating a healthy curiosity is the antidote.”

WSJ: “Psychologists believe it’s possible to boost optimism with practice. Their recommendation: Aim to feel optimistic part of the time. Unless we were born with the sunniest of dispositions, full-time optimism may be impossible to achieve. It’s also not ideal. Negative emotions are important sometimes because they help us identify what is wrong and motivate us to seek change. “We don’t want to bury our heads in the sand,” says Dana McMakin, associate professor of psychology at Florida International University, who studies how to increase positive thinking. “Yet at the same time, we want to take breaks from worry to build resiliency so we can take on the world.””