The Breakdown - 12 Big-Picture Power Shifts to Watch in 2022

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, January 2nd, 2022. Welcome to the new year. You've survived 2021. and the next 365, or I guess four days at this point, are laid out before you to do what you will to achieve, what you want to achieve, let's get after it.

Starting point is 00:00:48 Originally, this was going to be my last end-of-year extravaganza show, but because of this ridiculous wave of COVID that is hitting everyone, I had some interviews cancel at the last minute. But I think it works out, because something I've been feeling is that I really, wanted to revisit the tagline of the show that you hear every episode, this idea that the breakdown is about big picture power shifts. That remains the dominant framework that I think in terms of. And so what I wanted to do today to kick off the new year was maybe a set of framework for some

Starting point is 00:01:23 of the big picture power shifts that I'm watching in 2022. Before I do that, though, a little bit of housekeeping. First of all, you'll notice that I have some new sponsors. Before I get into the new folks, I want to thank Nidig for the six awesome months that we just had, where they were the sole sponsor of the show. Nidig is one of the leading lights of the Bitcoin industry, and I have absolutely no doubt that a huge number of people are going to discover Bitcoin for the first time this year because of the infrastructure that Nidig helped built last year. I've loved having them as a sponsor, and those guys have a permanent invite back on the show anytime they want. At the same time, it gives me huge pleasure to welcome three new sponsors.

Starting point is 00:02:09 First up, Nexo is back as a sponsor of The Breakdown. These guys were one of my longest running sponsors before Nidig, and I've always been thrilled to share them with you. These guys are one of the innovators in the space of helping your crypto assets and your digital assets do more work for you without you having to ever end your hoddling. And that is something that we approve of mightily over here at the breakdown. So big welcome back to Nexo as a sponsor of The Breakdown. Next, I'm thrilled to welcome ABRA, a crypto investment app that makes it so much easier for people to engage with this asset class.

Starting point is 00:02:43 I'm almost positive you've heard Bill Barhitt their founders speak, including on this show before. And so it's great to have Abra join the sponsor list as well. Finally, I'm excited to welcome FTX as a sponsor of the Breakdown. Those of you guys who listen to me regularly know that in addition to hosting the breakdown, I work with FTX on their marketing. This is a company that I have a lot of confidence in, not only in terms of what it does in the crypto industry, but also in terms of its mission orientation and its determination to leave the world a better place than it found it.

Starting point is 00:03:15 There will be a lot more of a chance to talk about each of these sponsors in the days and weeks to come, but for now, welcome to the show. Finally, before we get into our main topic, if you want to join the breakdown community and help the show, there are two things you can do. First, ratings and reviews on Apple or Spotify, wherever you can rate and review podcasts make a huge difference. Helps new people discover the show. Really, really appreciate it every time you guys do that. Second, we have a growing and really fun dynamic community of people on Discord. The Breakers Discord is listed in the show notes.

Starting point is 00:03:49 It's on my Twitter profile at NLW, and we would love to live. love to see you there. But let's now get into the meat of this show. 12 power shifts I'm watching in 2022. And we start with number one, the Fed versus the stock market. Last year, the dominant conversation in macroeconomics was about inflation. It was about whether the Fed would be able to stick with this idea of inflation being transitory and something that they could just wait out, or whether they would have to reverse Dovish monetary policy. The stock market was taking the other side of the Fed's bet. Basically, throughout the year, and especially after May, really said,

Starting point is 00:04:29 we don't believe that you're going to be able to keep this cheap money train going forever. By the end of the year, of course, it looked like the stock market's assessment of things was correct, as the Fed had shifted away entirely from the language of transitory and was preparing markets for not only an accelerated taper of asset purchases, but also of the potential for three rate hikes in 2022. Now, the question and why I view this as a power battle that I'm watching is that I think the stock market likes that the Fed isn't completely letting inflation run hot, but also might have a counterreaction if the Fed goes too hawkish too fast. This is, of course, the Goldilocks Challenge for Jerome Powell and

Starting point is 00:05:05 Co, and they think it's going to be a defining issue of markets for 2022. Speaking of defining issues of 2022, second on the power shift that I'm watching, comes in the form of U.S. midterm elections. There are a couple dimensions to this I want to explore. First of all, it's very common when one party pushes out the other in the presidential to have a counterlash in the midterm elections and to see the party that was pushed out regained some ground. Democrats have had a hard time pushing their agenda through. Build back better, still isn't clear about what's actually going to make it into law, and all in all, it's a very stale-maity moment that feels like it could swing in the Republican's direction. In this, though, one of the things that I am watching most

Starting point is 00:05:45 closely is how the crypto industry will or won't play a role. The crypto industry had something of a political awakening last year when it realized that it might need to use its considerable voice, its considerable organizing capacity, and frankly, its considerable wealth to try to shape the political discourse around issues that matter to it. We're already seeing candidates take on the crypto mantle from both sides of the aisle, and one of the predictions that you heard a couple of times in my end of your extravaganza was that we were going to see fundraising Dow's as a major feature of this election cycle. If we do, it might signal a power shift not only in terms of who's in power, but in terms of how that power is met it out. Number three, stable coins versus CBDCs. This goes

Starting point is 00:06:27 back to something I spent a lot of time at the end of last year reflecting on. I had sort of thought that CBDCs were going to be a major point of conversation in 2021, but frankly, they weren't. All of that oxygen was sucked out of the room by stable coins that weren't official digital fiat, but were digital representations of fiat. If you look at how much the leading actual central bank digital currency, China's digital yuan is used versus something like tether, it's not even in the same orbit. We also at the end of the year saw the first battles where states that were looking to adopt different currencies other than their own were choosing between something like China's

Starting point is 00:07:02 yuan versus something like USDT or another non-sovereign stable coin. And then of course there's the U.S. where the president's working group on stable coins was effectively grappling with how to deal with the fact that this technology was clearly something that had product market fit and that people wanted with their own plans or ambitions or even considerations of a digital dollar. I think this battle is going to be something that plays out a lot more this year. Speaking of dollars in battles number four on this power shifts I'm watching list is not a new one, but it's something that seems to be coming to a head. It's China and Russia versus the dollar. These are the economies that have the biggest entrenched interest in moving the world

Starting point is 00:07:40 off of a U.S. dollar-based system. They've taken proactive actions to do that, pricing commodities in either Russian rubles or Chinese yuan, using their spheres of influence like China's Belt and Road to try to push that settlement currency, reserve currency shift away. But the dollar is a hard monarch to dethrone. And I wonder to what extent digital dollars in the form of things like USDC and USDT actually give the dollar a new edge to compete on against this geopolitical pressure. I don't expect full-blown currency warfare on this front, but I do think that that simmering tide of trying to get out of the dollar's orbit and sphere of influence is going to continue to accelerate. But then, of course, there is a whole other dimension to all of this monetary

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Starting point is 00:10:27 But it is notable that for the first time in 2021, a sovereign nation chose to make this non-sovereign, uncontrollable currency legal tender. That is, as power-shifty as power-shifty gets, and I am watching carefully to see how this plays out in 2022. What are the other countries considering making that same game theoretical move? Are there central banks who, even if not, interested in replacing their fiat currencies, are thinking about putting Bitcoin on the books? I'm not even going to go much deeper on this because I think it's going to be such a recurring theme this year,

Starting point is 00:11:05 but you can't deny that Bitcoin versus Fiat is lurking as one of the biggest potential power shifts of the year and beyond. Speaking of Bitcoin in El Salvador, I asked folks on my Twitter what they thought I should include in these big picture power shifts I'm watching next year, and one that stood out was the IMF versus El Salvador, or really the IMF versus Bitcoin bonds. So you'll remember, El Salvador reached out to the IMF and the World Bank in the wake of their Bitcoin Legal Tender decision and tried to get their help with implementation and other issues only to be rebuffed. A few months later, when it was time for El Salvador to negotiate another loan from the IMF, they instead chose to sell Bitcoin-backed bonds. Now, there were plenty of folks who said that this was just

Starting point is 00:11:47 worse than the other types of El Salvador in debt that was available on the markets, Matt Levine, notable among them, but that doesn't really matter if there's a market that's willing to give you better terms because you're invested in the same thing they're invested in, which is, of course, Bitcoin. I think the thing that matters to me from this heuristic of power shifts is that did you expect in 2022 for the IMF to have actual practical consideration for where emerging markets might turn for loans? I certainly didn't, but you better believe that's something that I'm going to be paying attention to in the year to come. So those are all big kind of macro picture things, and now we're going to transition a little bit more into the micro, into the crypto industry. And in a lot of

Starting point is 00:12:25 ways, I think the way that I would frame this whole power shift idea and how it relates to the crypto industry is that, to me, Bitcoin is clearly in the role of big picture power shift. It is having a disruptive effect right now in the markets, in a macro landscape. You can't ignore it. Everything else going on in crypto is competing to be in a similar position. Much of it has very disruptive aspirational goals and is trying to break out of this industry subsection to have the impact in the world that it actually believes that it can have. I think even if not all those disruptions will come to be what the people invested in those ecosystems want them to be, they're still worth paying attention to from this framework of power. So number seven on the list of shifts that I'm watching in 2022 is Bitcoin D5

Starting point is 00:13:10 versus other DFi. For this, I'm not using the framework of Bitcoin as DFi because it's a permissionless decentralized currency, which I think is a reasonable argument. Instead, what I'm talking about is the sort of smart contract powered protocols and systems that create interesting, open, permissionless financial primitives. Now, already you could argue there is a Bitcoin Defi where people are using wrapped Bitcoin as the base layer asset for defy systems. However, if 2021 is any indication, there's going to be a lot more attempts to have Bitcoin native defy in the year to come. First, Taproot expands some of the capacities we have for that. Second, there are already protocols building some of this sort of functionality on Bitcoin like stacks.

Starting point is 00:13:49 Third, you have, of course, Jack Dorsey leaving his role in Twitter. It seems in part to build exactly this sort of thing via a new division at Square. How much will the sound money monetary premium of Bitcoin attract Defi to it once the tooling starts to become available. Speaking of Defi, number eight on my list of power shifts I'm watching is DeFi versus KYC. And what I mean, of course, is that if anything in the crypto space outside of stable coins seems to be headed for a regulatory reckoning, it is, of course, DFI. The language that politicians are using this is extremely aggressive in many cases. And really the question in some ways is whether the version of DeFi that we see that

Starting point is 00:14:29 has no relationship really with the KYC AML Bank Secrecy Act regime can survive in mainstream U.S. society or whether it will be shunted out? Will the story of 2022 be permission defy where you have to KYC to use these protocols? And if that is the case, what is the value proposition outside of something like censorship resistance? There are plenty of possible answers to that, but there's certainly going to be questions that I think are forced this year. Moving to a different part of the crypto space, let's talk about NFTs for a second. I want to talk about them in two contexts. The first is NFTs and Web3 games, which include all the Play to Earn games and things like that,

Starting point is 00:15:07 versus the traditional gaming sector. Last year, of course, was a breakout for the whole Play to Earn NFT-powered gaming movement. Axi Infinity was the poster child for this, but there were many, many others, with a lot more in incubation by the end of the year. The traditional gaming space for its part is no big fan of NFTs. Remember when Ubisoft announced that they were going to incorporate NFTs in 2020, a title, there was so much backlash that they had to walk it back. Now, I've tried to wrap my head around it. It seems like some of it's environmental. It seems like some of its people holding a

Starting point is 00:15:40 grudge that crypto mining has made graphic cards much more expensive and harder to acquire for the last decade. But whatever the case, given how big an industry gaming is, and given how much human time is devoted to it, I think it's going to be fascinating to see how that plays out. There's also certainly a lot of investors in this space who are making a bet that this is going to be a serious area to watch. A second power shift around NFTs that I'm watching in 2022, and this is probably a little ambitious and personal, is NFTs versus record labels. And by record labels, I mean really the whole music industry complex. When I first covered NFTs on this show, it was in the context of their potential disruption to a music industry model, which is largely exploitative and hugely problematic for

Starting point is 00:16:21 nearly everyone except the biggest, biggest superstars in the space. It's no surprise to me that some of the earliest adopter of NFTs were, in fact, musicians who had lived inside this system and seen just the crazy power disequilibrium between them and their labels and the other representation that they had and the other gatekeepers they had to access in order to play around in the music space. Now they have a mechanism to go directly to their fans, to incorporate their fans in the upside of what they do, although, of course, we may have, speaking of regulations, some more securities consideration for what that might mean, but regardless, I think the idea that NFTs represent a fundamental potential power shift in the music industry is something that I'm not

Starting point is 00:17:02 only watching but actively rooting on, and I hope sees some traction in 2022. 11th, on this list of power shifts I'm watching in 2022 is Daos versus other forms of capital formation. I've talked a lot about Daos. It was a big subject for the end of your extravaganza. To me, they just make sense in the context of something that exists as an internet native organizing force. Now, I kind of think that 2022 is going to see a lot of it overcomplication in DAOs. There will be a lot of false starts and missteps and really frustrating moments of people rediscovering the problems of human coordination and discovering or perhaps better remembering that a token won't solve the messiness of any sort of human

Starting point is 00:17:44 democratic organization. At the same time, I also think that we'll probably get some examples of extremely lightweight, hyperproductive capital formation and capital deployment DAWs that have very specific mandates, very specific goals, very few decisions, and a lot more just raw group power manifested through money. I think that could be pretty game-changing in a variety of ways, and so it's certainly something that I'm keeping an eye on and will likely end up being dragged into in some way, shape, or form. Finally, number 12, got to close it out with Web 2 versus Web 3. One of the hallmarks of the end of 2021 was investors who had missed almost all of the crypto movement rising their heads up to try to take a dump on whatever they thought Web3 was.

Starting point is 00:18:30 Now, I don't personally feel like I'm in a position where I have to defend Web 3 against the onslaught. I do think, of course, that you have to examine people's motivations, and in the same way that perhaps you should be wary of people shilling a protocol that they own lots of, you should also be wary of people who see their livelihood being disrupted right out from under their eyes. How you weigh, how those incentives play in people's opinions, and where you come out between them is ultimately your own opinion, but it does feel to me like there is a confrontation coming between the models that made Web2 work and the models that Web 3 is trying to develop. I think this one was an inevitable clash and is going to be going on in some cases within a single

Starting point is 00:19:08 organization. Can Facebook or now meta really be a Web3 native company or will it always be Web 2 looking to own and extract as much as it can while giving lip service to the ideals of decentralization and any other principle that seems to matter for the folks who are most invested in Web 3. I don't know the answer, but I know that it's going to be a big part of 2022, and it's certainly something we're going to come back to. All right, guys, there it is. 12 power shifts I'm watching in 2022. Let me know what yours are. Come join the Discord and jump into the conversation. Hit me up on Twitter at NLW. It's going to be a fun year, and I'm glad to have you here hanging out as we dive into it.

Starting point is 00:19:51 Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - 12 Big-Picture Power Shifts to Watch in 2022

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