Black Swans & Skin in the Game: I’m Committing My First $10,000 in steemit Earnings For the Long Haul

Alright – I said it. It is immutably enshrined in the blockchain and the interwebz. And my transactions are visible to all of you. I just transferred my first $570 SMD to SP ( @ned and @dan, it would be nice to be able to see conversions in transit as everything disappears and we just pray to FinTech-Jesus it shows up as STEEM ) – I could have just cashed out and, I don’t know, bought a Roomba. I mean it would be nice to have a robot vacuuming my floors, but I’m a believer in this platform and that $570 could easily turn into $5,700, $57,000 or more as this thing catches on.

The creation of cryptocurrency and blockchain is one of those black swan events that few could have predicted – just ask all the early Bitcoin experimenters that saw their hobby turn into millions of dollars. If anyone has read Nassim Taleb, you’ll be familiar with the three concepts below:

Black swans – events that are unpredictable and have a huge influence on society. Think wars, financial crises, revolutions, and new inventions.

Anti-fragility – systems that are not only robust, but are made stronger from stressors. This is common in biological systems – think a forest that is burned by fire only to grow healthier out of the ashes. 

Optionality – this is a way of positioning yourself to have a huge upside with minimal downside. The best example of this is buying deep out of the money put or call options – you shell out small amounts of money that likely won’t pay off, but when one does, the payoff is huge.

Skin-in-the-game – Taleb argues that a lot of things in our society are broken because elites have found a way to extract optionality from society. Basically they can gain vast sums of money with little downside by giving out opinions that prove to be totally wrong. Taleb absolutely loathes academics because he argues they publish advice they don’t even follow, but get paid lots to do so, and aren’t impacted by the harm they cause.

I have a lot of respect for Nassim Taleb, even though he seems like a huge dick (I follow his Twitter feed). He nailed it with his black swan analysis before the financial crisis. This post is an attempt to take his principals, which have rewarded him richly and show why cryptos like STEEM will move many standard deviations away from the mean.

Computer code, particularly cryptocurreny, has anti-fragile properties – someone writes a virus or exploits a flaw, and coders fix it with better code. Blockchains and the programs built on top of them get better every time someone finds an exploit. Bitcoin and the ecosystem around it have had and currently has this same issue: hard forks, Mt. Gox, and the 1MB block size. The first two events, one pertaining directly to the code, the other to the ecosystem supporting Bitcoin, are unanimously agreed to have contributed to a stronger Bitcoin. The block size has caused heated debate and even caused one of the most prominent developers to abandon the project. But the fact that the code can be updated, and the ones voting on the change have significant financial skin in the game, leads me to believe that the community will work through this and make a stronger Bitcoin.

Cryptocurrency and its protocols are an invention I would consider a black swan. No one predicted it – there was no concerted government research to create a protocol that solved so many problems and could be applied to so many things. It was just invented by some dude(s) who thought the monetary system was fragile. Even as cool as Gavin Andresen and the earliest adopters thought Satoshi’s white paper was, none of them predicted those pieces of code would make them a fortune in a few years’ time. The first recorded transaction was 10,000 BTC for a pizza, worth about $6.5 million dollars today.

Steemit, in my opinion, is the first killer app for this technology outside of Bitcoin. Ethereum holds immense potential but I have not seen any applications truly earthshattering as of yet. Ripple is now an enterprise payment solution being sold to banks. Litecoin is a ‘me too’ currency. STEEM is the first to develop itself into an application for everyday users. The price has risen 2,000% since its launch – a financial black swan already for the earliest adopters. And the STEEM market cap is only about $250 million and has less than 50,000 users at the time of this post. There is an enormous upside still.

With respect to optionality, most cryptocurrenices of real technical value are probably selling for much less now than they will in the future. As applications are developed on top of the various protocols, the prices will rise. Given that most currencies/tokens are pretty cheap (and new ones are yet to be developed) even buying a small amount could have a large payoff. Sure, you may lose on a few, but the ones that pay off will see their value multiplied many times over. STEEM is particularly unique in that it is not requiring novice users to figure out how to 1) buy bitcoin 2) figure out how to convert at an exchange and 3) buy some exotic currency with dubious value. You just sign up and start posting and curating! This provides the ultimate optionality for its users – I make a few posts, I earn a few bucks, STEEM takes over reddit, and I’m rich. Boom. There is nothing to lose.

Lastly is skin in the game. I am going to attempt to not be on Nassim Taleb’s naughty list by just writing stuff and not having skin in the game. That would entail cashing out my SMD after each post. Taleb argues that the financial system, academia, government, etc. are all screwed up because they’ve evolved environments where people can take all sorts of risks but not absorb those mistakes directly. The incentives on this platform are in line with the community. Look at the wallets of @ned and @dan – they could power down a significant amount of SP and cash out. I mean, if I were in their shoes, it would be really tempting to take a million bucks off the table to be safe. But they are keeping skin in the game and have a huge incentive to make this anti-fragile-black-swan thing work. I’m not Ned or Dan rich and $5,000 worth of easily convertible SMD would be nice in fiat form right now. Rather than cashing out early – I’m going convert all my SMD until I have $10,000 worth of SP and then reassess. There. I said it. It’s on the blockchain.