Memecoins are the point

Cypherpunks wanted to change the world. We ended up with memecoins.

Our story begins with some very smart and idealistic developers, known as cypherpunks, creating a new technology know as a blockchain. Blockchains are databases, but decentralized. Advertised as being "censorship-proof," they reduce the possibility of users being subjugated to third-party interference.

Cypherpunks have always wanted their tamper-proof databases to flourish, go mainstream, and improve regular people's lives. A video from 2015 pans out from an interconnected power plant, grocery store, hospital and airplane before loftily declaring that Ethereum, one of today's largest blockchains, will be "the secure backbone for everything from e-commerce to the internet of things."

Some of you may remember another famous video from the mid-2010s, in which a young Vitalik Buterin, co-creator of Ethereum, challenged viewers: "What will you build on top of Ethereum?"

The world has responded. Forget interconnected power plants and grocery stores. The most popular thing being built on top of blockchains are memecoins. 

A memecoin is a pure gamble. These valueless tokens, typically created anonymously, usually have a mascot, or meme, loosely associated with them, some well-known examples being dogecoin, pepe, HarryPotterObamaSonic10Inu, gigachad and dogwifhat. A memecoin provides no dividends and leads to no productive activity. Its price depends entirely on subsequent players emerging to repurchase it at a higher price. The result is a hyper-volatile pyramid betting game.

via Twitter

Memecoins don't quite jive with the cypherpunk dream of creating a fairer system, one in which everything, including all of high-finance—and by that I mean banking, payments, insurance, and investments—has migrated over to blockchain nirvana. A memecoin is the epitome of low-finance. It belongs in the same gutter as some of the grimiest members of the financial world: lotteries, slots, chain letters, raffles, HYIPs, and other zero-sum games.

Cypherpunks and their fellow travelers are offended by memecoins. They want their blockchains to be used for more noble reasons:

• it’s sucking the energy out of crypto [link]
• it is a complete bastardisation. a total mockery, a clown show [link]
  
• things have hit an all-new bottom with 2024: racist, sexist, and other shitheaded memecoins which are merely a vehicle to transfer wealth from the many to the most obnoxious people on the planet [link]
  
• besides undermining the long-term vision of crypto that has kept so many of us in the space, memecoins aren't very technically interesting [link]

Buterin, too, gripes that "even the non-racist memecoins often seem to just go up and down in price and contribute nothing of value in their wake." Trying to find a silver-lining, he implores memecoin makers to donate a portion of their supply to charity, sort of like how raffles are used to fund good works. 

Cypherpunk's frustration with memecoins understandable. But I don't think the cypherpunks should be complaining. Guys, what exactly did you think your zero-rules financial substrates were going to be used for?! Memecoins are the point.

Memecoins as the fundamental unit of blockchains

People have a natural predilection to gamble, but gambling has a bad wrap and so many gambling games have been declared illegal. Memecoins are a great example of this, their presence being prohibited on society's official financial venues including its stock exchanges and commodity markets, as well as its casinos and online betting sites.

Up in Canada, which has historically been a haven for scummy finance, the closest you can get to floating a memecoin is by taking the junior gold route. Start by incorporating a gold exploration company, buy the rights to some worthless property in an isolated region of northern Canada, list the company on a junior stock exchange, promote your sham as the next big gold mine, and sell out to the latecomers. You're basically created a memecoin; a token based on nothing. 

But this is an arduous way to run a memecoin. You still need to disguise yourself as a regular firm, publish audited financial statements, and hire a board of directors, plus you'll have to provide your real name, which means potential lawsuits or criminal charges. A pure memecoin, say like dogwifhat, which isn't burdened by any of these costly real-world obligations, would never get permission to be listed, even on Canada's shadiest junior stock exchange.

Enter blockchains, which are inherently anarchic. Blockchains allow folks to deploy illegal and unregulated betting games without the authorities being able to step in and say: "Hey, you can't do that." With mainstream exchanges and casinos being closed off to them, it's no wonder that memecoins have come to dominate the new medium.

If your blockchain doesn't experience a constant stream of memecoin issuance, it's effectively dead. Hordes of crazy gamblers buying and the selling meaningless, non-productive coins is a sign of a flourishing and fertile censorship-resistant financial medium. Sleezy promoters competing to draw attention to their favorite memecoin on social media isn't "sucking the energy" out of crypto; it's the whole point of crypto.

Source: Twitter

As for the cypherpunk idealists complaining about memecoins, they need to accept the fact that blockchains will probably never become the "backbone of everything." Instead, blockchains will continue to serve as a major hub for grimy low-finance; stuff like memecoins and ponzis that can't make the jump to official venues. Many of these low-finance services will be illegal or shady or distasteful, because those are precisely the things that need protection from third-party interference. (And to be fair, certain banned low-finance services can be quite useful.) If you're going to hock censorship-resistance to the world, don't grumble about who shows up at the table.

Memecoins have sometimes been described as a potential gateway drug or Trojan horse for broader adoption of blockchains. "Once they try dogwifhat, they won't be able to resist my quadratic voting project." But that's just wishful thinking. Serious and "respectable" high-finance services, say like insurance and banking—the stuff we all need for day-to-day life—are by necessity legal and thus welcome on mainstream habitats, and so these services and their users need never gravitate to the same rule-free substratum that memecoins have.

What will you build on top of blockchains? Memecoins. Memecoins are the fundamental financial unit of crypto.

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P.S. I must be running out of material because I wrote an early version of this post back in 2018 for Breakermag

The magnificent Swiss 10-centime coin

The Swiss 10-centime coin has a lot to teach us about monetary economics.

On its face, the Swiss 10-centime (rappen in German) looks like a pretty unremarkable coin. It's the second-lowest value Swiss coin, the Swiss version of America's lowly nickel, the sort of coin that many people might prefer to throw in a jar and forget about. But I recently learnt via @alea on Twitter that the 10-centime has the distinction of being the oldest original coin in circulation, its size, design and composition remaining unchanged since 1879.

Below are the 1879 and 2023 versions. They're exactly the same.

It's the stability of the coin's composition in particular that strikes me. Since its debut almost 150 years ago, the 10-centime has contained three grams of cupronickel—75% copper and 25% nickel. The only exception was from 1932 to 1939, when it was made of pure nickel. 

The U.S. five-cent coin, or the "nickel," has also had a remarkably long period of stability. Debuting in 1866 as a five gram cupronickel coin comprised of 75% copper and 25% nickel, the nickel has maintained the same metal content throughout its entire existence (except for the wartime five-cent coin), although unlike the 10-centime it has undergone a few decorative changes.

What makes the enduring stability of the Swiss 10-centime and the American nickel so unique is that it runs contra to the dominant coinage timeline, which typically involves a series of changes to a coin's metallic content over time. The main reason that coin compositions have been prone to change is that the global economy has generally been characterized by inflation, or a rising price level. With coins, this has had the unfortunate effect of steadily pushing the market value of their metal content higher, to the point that it eventually exceeds the coin's face value.

When this happens Gresham's law takes hold. It becomes profitable for speculators to melt the coin down in order to sell it as raw metal, the coin disappearing from circulation. Gresham's law, you may recall, is the dictum that when the official value of a monetary instrument is set too low, then it will be hoarded or exported, the "good" money being driven out leaving only what remains – the "bad" money – to circulate in its place. As a result, coin shortages occur and it becomes harder for the consumers and retailers to conduct basic commerce. 

In the early 1960s, for instance, a big rise in the price of silver led to hoarding of U.S. dimes and quarters, which at the time were 90% silver and 10% copper.

Source: New York Times (1964)

To prevent coins from being tossed into the melting pot and causing shortages, governments have typically reminted them out of cheaper material once their metal value approaches their face value. That's indeed what the U.S. monetary authorities did in 1965 with the Coinage Act, when they decided to henceforth mint new dimes and quarters out of cupronickel rather than silver.

Another reason for the regular alterations in coin metal content is to protect the mint's profits, which typically flow through to the government. Buying raw metal is one of a mint's largest costs, so when metal price rise, mint officials search around for cheaper types of metal. Either that or they reduce the size of the coin itself.

After commodity prices boomed in the 1970s, the 10-centime coin's smaller cousin, the Swiss 5-centime – produced from two grams of cupronickel since 1879 – was replaced by an aluminum-bronze version made of 92% copper, 6% aluminum, and 2% nickel. Nickel is a relatively pricey metal, so subbing it out with cheaper materials not only prevented the 5-centime coin from ever reaching its melting point, but also protected the Swissmint's profits.

Canada's 5-cent coin has gone through even more compositional changes than Switzerland's 5-centime. Beginning life in 1858 as a sterling silver coin, the five cent coin was diluted to 80% silver in 1919, got converted to pure nickel in 1922, then cupronickel in 1982, and finally became 94.5% steel in 1999—steel being by far the cheapest of these materials.

Monetary headroom

The 10-centime coin has avoided these transformations. You can see why in the chart below, which illustrates the market value of the nickel and copper making up the 10-centime going back to its original minting in 1879.

When it was created in 1879, the 10-centime had just 1.2 centimes worth of cupronickel in it. That effectively gave the coin a massive amount of metallic "headroom," or space between its metal content and its face value—8.8 centime's worth.

Zoom forward 150 years or so to 2024 and the market value of this three grams of cupronickel has more than doubled from 1.2 centimes to 2.8 centimes. That's a big jump, but still far below – 7.2 centime's worth – the coin's ten-centime face value. Given that plenty of headroom remains, Gresham's law won't be kicking in any time soon. I'd hazard that the cupronickel 10-centime has a few more decades of life, unless the Swiss give up on using cash before then and simply cancel their coinage altogether.

The 10-centime's fat amount of historic headroom isn't the only factor driving its endurance. Another factor has been the relative strength of the franc, Switzerland's monetary unit, composed of 100 centimes. To illustrate this, let's take a look at its competitor, the American five-cent piece.

Not worth a nickel

Below, I've charted out the market value of the five-cent coin's cupronickel content going back to its introduction in 1866.

Back in 1879, when the Swiss 10-centime was introduced, the U.S. nickel had just 0.4¢ worth of copper and nickel in it, giving it a massive 4.6¢ worth of monetary headroom. But over the decades that headroom has been entirely eaten up by inflation. In 2006 the nickel's metallic content exploded above its face value for the first time, and again in 2011. Since 2020 this state of affairs seems to have become permanent, with the value of the metal currently clocking in at 5.5 cents, around fourteen-times higher than 1879.

The high price of the nickel's metal content has been eating into the U.S. Mint's profits. The chart below shows the amount of seigniorage, or profit, that each coin provides to the mint. Seigniorage is the difference between the face value and cost of producing coinage.

Source: US Mint 2023 annual report

As you can see, in 2023 the U.S. Mint lost an incredible $93 million producing nickels! It hasn't made a profit on the five-cent coin in almost twenty years. That the nickel's metal mix hasn't been updated despite almost two decades of consecutive losses indicates bureaucratic failure. Something at the U.S. Mint is broken.

At the same time, we are seeing signs of the nickel falling prey to Gresham's law as hoarders remove them from circulation. A few years ago, investment manager Kyle Bass, who made his fame shorting various mortgage-related instruments during the 2008 credit crisis, bought 20 million nickels in anticipation of eventually melting them down and selling them for more than their face value. In a conversation with me on Twitter, Bass confirms he still keeps the nickels at a storage facility.

I do other business with the storage facility. My agreement is in basis points of value (less than 25bps) and not sq ft.

— 🇺🇸 Kyle Bass 🇹🇼 (@Jkylebass) February 27, 2024

No doubt other speculators have adopted the same strategy. As metal prices inevitably continue to rise, expect serous shortages of nickels going forward, unless the U.S. Mint finally decides to do something about the problem.

Let's bring the 10-centime back into the conversation. By all rights, the 10-centime should have had a much shorter life than the U.S. nickel. In 1879, the nickel was the more valuable of the two coins by a long shot. At the time, the going exchange rate was one U.S. cent to five Swiss centimes, which means a nickel was worth around 25-centimes. Given that it was worth so much more, the nickel had a much wider region of monetary headroom, and so it seemed destined to enjoy a much longer period of time before its metal value caught up to it and Gresham's law kicked in.

But not so. The less valuable centime has proven more enduring.

As I hinted earlier, the reason for this is the Swiss franc's extraordinary strength over the last century. Below I've plotted out the long-term franc-to-dollar exchange rate.

In 1880, one dollar was worth 5.18 francs. Today, a dollar is worth less than a franc. Put differently, the purchasing power of the Swiss franc and its centime subdivisions has improved by a factor of five relative to the dollar's purchasing power. And so the value of the cupronickel embedded in the 10-centime coin hasn't inflated nearly as fast as the value of cupronickel in the U.S. 5-cent piece. That's why Kyle Bass isn't hoarding lowly 10-centime coins.

The U.S. Mint is belatedly scrambling to make changes to the metal content of the nickel. In its 2022 report to Congress, it asked legislators for the authority to mint an updated five-cent coin made of 80% copper and 20% nickel, the idea being to reduce costs by using more of the red metal, which is the cheaper of the two. Either that or use an alloy known as C99750T-M, which is composed of 51% copper, 14% nickel, the remaining being cheaper-cost metals zinc (33%) and manganese (2%).

In the end, the nickel and 10-centime tell two very different stories. One, a coin that’s run out of headroom, becoming a financial liability for a mint that seems mired in bureaucratic inefficiency. The other, a relic of stability, quietly enduring in a world of change.

A glass half-full take on Caucasus sanctions evasion

Ed Conway of Sky News recently published a very good investigation on sanctions evasion being carried out through the Caucasus. He visits the Lars border crossing between Georgia and Russia to document how smugglers are openly moving British and German luxury cars into Russia, in contravention of sanctions on Russian luxury car imports.

In a subsequent interview, Conway describes this as the the "most depressing" bit of journalism he has ever worked on. He agrees with his host that the west's sanctions are "performative," in that they are simply there to make Western voters feel good, but in reality achieve very little. He concludes: "The toughest sanctions regime in history, is anything but..."

For anyone who supports Ukraine's cause, this is all difficult to watch. However, I think that Conway has arrived at a glass half-empty interpretation of the details of his own reporting. What follows is my glass-half-full take on Conway's visit to the Caucasus. What I'm hoping to convey – using the details from his video – is that we (i.e. the West) are doing ok. Yep, we could be doing better (and hopefully will), but let's take heart at what we've achieved to date.

Conway tracks two new Range Rovers being smuggled from Tbilisi, Georgia's capital, northwards to the Lars border crossing with Russia. Prior to Conway making contact with them, the Range Rovers have already been on a circuitous trek. Manufactured in Solihull, UK in 2024, we learn that the vehicles were originally shipped by Jaguar Land Rover to a dealer in a country that does not share a border with Russia, so not Georgia, but perhaps Turkey or the Emirates. Thus the first leg of their journey would have involved a long trip in a container ship or RORO cargo ship from England to Dubai or Istanbul.

In the second leg, the smugglers who acquired the car in Turkey or UAE paid for it to be shipped to Georgia, either by boat or overland.

In the third leg, which is the only leg that Conway observes, two single trucks can be seen transporting each Range Rover through Georgia to the Lars border crossing along a skinny winding road. The Range Rovers are deposited in a parking lot next to a "forlorn" cafe on the Georgia side of the border (the parking lot appears to have no security), and after a few days a new driver is paid to take the car to the Russia side and leave it there. 

The parking lot where sanctioned luxury cars are stored at the Georgia-Russia border

Now the fourth leg begins. Another driver is contracted to bring the vehicle to its final destination in Russia. This last leg is no small trip, with the biggest Russian markets, Moscow and Saint Petersburg, at a distance of 1,800 km and 2,500 km respectively from the border.  

These successive legs add up to an arduous trip. The shipping bill is likely quite large. To boot, along each leg of this journey additional paper work must be completed, insurance purchased, border officials bribed, storage fees paid, transit license plates acquired, and taxes levied. It is Western sanctions that have imposed this haphazard shipping burden and jungle of administration on Russia's trade in Range Rovers.

But compared to what? Understanding the burden we've imposed on Russia requires that we compare the current state of affairs to the one that was taken away; namely, the highly-developed patterns of trade that existed before sanctions were deployed in 2022. As economists like to say, it's the opportunity cost, or the value of the next-best alternative, that represents the true burden of the sanctions on Russia.

What Russia has lost is the full expertise and capital of Western logistics being brought to bear on the problem of bringing Range Rovers as cheaply and rapidly as possible from Jaguar Land Rover manufacturing plants to Russian buyers. This involved Range Rovers being loaded en masse into highly-efficient RORO cargo ships in the UK and sent – not along a circuitous route passing through the Suez Canal or around the Cape of Good Hope – but by the shortest passage possible, the Baltic Sea.

In the pre-sanctions era, vehicles destined for Russian buyers were unloaded at the Port of Saint Petersburg, Russia's second-largest city, or next door at the massive Port of Ust-Luga. So the goods passed through customs just once, rather than multiple times. These two Baltic ports are purpose-built for handling large amounts of vehicles as efficiently as possible. From there the Range Rovers were transferred to their final Russian destination – not piece-meal, as appears to be the case with the Lars crossing – but in batches via dedicated rail infrastructure and multi-level car haulers. 

Illicit Range Rovers being transported one-by-one via flat bed truck to the Georgia-Russia border

Thanks to sanctions, Russia's first-choice trade route – optimized over many years of trial and error – no longer exists. It's been replaced by an improvised Rube Goldberg trade route involving two much longer sea journeys followed by a crappy single-lane road wending its way through the mountains of Georgia to a border crossing that was never designed to handle large volumes of trade. Once across the border, the contraband cars must be on-shipped using rail or road infrastructure that pales in comparison to the significant economies of scale that characterize the Saint Petersburg/Moscow hub. This is plainly an awful fix.

There's another new cost that needs to be factored in, too: the risk of being caught. Given that it is likely that the dealer in the Emirates or Turkey is part of the sanctions evasion conspiracy, they run the risk of having their dealership status being revoked should Jaguar Land Rover catch them. The dealer will therefore only sell to Russians or other Russian-linked third-parties if the price offered is a high one, enough to compensate them for the risk of losing their franchise.

This extra risk premium, combined with all the additional transportation and intermediation costs listed above, gets embedded into the final all-in price that folks in Moscow will have to pay for a new Range Rover. How high is this price? Certainly much higher than before sanctions were applied. Stephanie Baker, author of Punishing Putin, found in her reporting that western cars in Moscow showrooms were being sold for twice as much as in the U.S. The Times describes luxury Bentleys selling in Moscow for about £400,000 plus £50,000 in VAT—the same model costs just £250,000 in the UK.

Think of this extra price wedge as a sanctions tax on rich Russian car buyers. So yes, cars are squeaking through the West's sanctions blockade, as Conway's reporting reveals, but let's not forget that this comes at a big cost.

A 2,000 km drive from Tbilisi to Moscow

The sanctions tax includes another component. A car is not just a one-time purchase. It represents a commitment to make long chain of repairs and tune-ups over its lifetime. Since the new Range Rovers in Conway's video are illicit, they won't qualify for any dealership support. The warranty is probably void, too. Telematic upgrades provided by Jaguar Land Rover servers in the UK have likely been turned off. Furthermore, since Jaguar Land Rover no longer sends parts to the Russian market, all replacement parts will have to be smuggled over the border, the cost of ongoing car servicing ballooning.

So in the end, voters in the West can take at least some pride from what western sanctions have achieved. By sanctioning luxury cars, we've forced Russian elites to divert more of their finite wealth to paying for circuitous, awkward, and risky pathways into Russia. This means these elites have less left over for other things.

Now, that doesn't mean western voters can relax, and Conway's reporting is good fodder for galvanizing voters to ask their representatives for further action. While sanctions have made the pathway for Range Rovers and other goods into Russia a long and winding one, we need to keep making it even longer and more awkward.

For instance, Conway's video teaches us that there is just one way road connecting Russia to Georgia. What a fantastic chokepoint for western sanctions to target! By working more closely with Georgian authorities, the U.S. and its allies may be able to induce them to add a number of frictions to the Lars border crossing, thus forcing car smugglers to divert contraband vehicles to even more roundabout trade routes, the end result being Russian elites paying an ever higher price.