Unleashing the Power of AI and Crypto: Paving the Way for a Hyper-Financialized Future

REFERENCE AT THE END OF THIS POST

Introduction

In the ever-evolving landscape of finance, we are witnessing a seismic shift towards a hyper-financialized future. This transformation is set to culminate at the intersection of two revolutionary technologies: Artificial Intelligence (AI) and Cryptocurrency (Crypto). Together, they promise to revolutionize the way we coordinate and manage our economic activities, bringing about a new era of market-based coordination across society.

The Rise of Hyper-Financialization

Hyper-financialization is a term used to describe the process of financializing everything that can be financialized. It's a phenomenon driven by the increasing use of markets as a tool for coordination and decision-making. However, the full potential of markets has been stifled by the high overhead costs associated with interacting with them. This has limited the types of assets that can be effectively traded and managed within market systems.

Crypto has emerged as a game-changer in this regard. It provides a more efficient, autonomous market infrastructure by codifying key functions like market making and settlement. This brings down costs and expands the range of assets compatible with markets. By reducing the friction and overhead costs, Crypto makes it possible to leverage markets for a broader set of societal functions.

The Role of AI in Market Efficiency

While Crypto has introduced more efficient market infrastructure, there are still inefficiencies that persist around human participation. Interacting with markets requires manual effort, introduces individual biases, and relies on limited mental processing relative to AI capabilities. This friction increases the overhead of interacting with markets and leads to suboptimal coordination.

AI, on the other hand, can act as highly capable agents that reduce these market inefficiencies through prediction, automation, and personalization at large scale and sophistication. This further chips away at the overhead of interacting with markets and slowly expands the scope of what markets can be used for.

The Impact of AI-Crypto Convergence

The convergence of AI and Crypto will lead to an explosion of novel financial markets for a wider range of societal functions. This will allow us to use markets, the greatest coordination mechanism we have, for a broader set of society's functions.

As AI agents that interact with markets become more capable, the scope of valuable asymmetric information we can access broadens. This allows markets to distinguish true signals from noise more adeptly. This will especially benefit long-tail, niche financial markets, such as those in which you can trade not just in company stocks, but in niche markets around every subdivision within a company.

For example, imagine a person possessing asymmetric knowledge about the truck division of a large car company. Investing in the whole company creates extraneous noise, because the investor has to account for the uncertainty they have around the rest of the company. However, if one could invest in only the truck division, which they know more about, the information revealed through that investment has higher signal-to-noise. In short, granularity incentivizes people to reveal more targeted information, leading to greater market efficiency, less noise, and lower overhead.

The Future of Governance and Decision-Making

In a hyper-financialized world, voting could be replaced by prediction markets to determine policies (futarchy). People would bet on which policies they expect to best achieve agreed-upon metrics, with the market prices determining implementation. This is positioned as an alternative to traditional voting which has limitations in aggregating preferences.

New Forms of Credentials and Signaling

In an increasingly specialized world, the article suggests that granular markets, such as trading shares in someone's specific niche abilities, could provide more precise and accurate signals of a person's skills in certain areas. This could replace the current reliance on credentials like educational degrees or past employers, which can be noisy indicators of competence.

The Riskless Society and Hedging

With advanced AI and expanded markets, the article envisions a future where you could financially hedge against almost any uncertainty, such as business risks, career trajectories, or artistic success. By trading in markets related to rival companies, similar professionals, or adjacent artists, you could insure against potential failures. Taken to the extreme, this could theoretically approach economist Kenneth Arrow's hypothetical "riskless society."

For instance, you could purchase "luck insurance" to hedge against the unpredictability in business outcomes, career trajectories, artistic success, and more. This could include:

• Business luck insurance: Acquire rival startups' tokens so their success benefits you
• Career luck insurance: Swap equity in your child's earning potential
• Artistic luck insurance: Mutually back similar artists.

In these ways, the exponential growth of financial markets inches us closer to Kenneth Arrow's hypothetical vision of a riskless society: one where markets can insure against virtually any probabilistic event.

Potential Challenges and Drawbacks

While the article focuses primarily on the potential benefits, it's worth considering the risks and limitations of hyper-financialization as well. Concerns could include the societal impacts of marketizing more aspects of life, the complexity and abstraction of some of these proposed markets, the distributional effects and potential for increased inequality, and the challenges of governance and regulation in such a system.

Conclusion

The combination of Crypto's efficient infrastructure and AI's analytical capabilities will allow the use of increasingly sophisticated markets for coordination across a much broader scope of societal functions, enabling a hyper-financialized future. Key aspects include expansion of prediction markets, futarchy governance, granular signaling mechanisms, and the ability to hedge virtually any risk. However, it's important to critically examine these ideas and consider potential drawbacks alongside the proposed benefits.

As we move towards a hyper-financialized future, it's crucial to be prepared for a world where markets play an even larger role in our lives. This transformation will fundamentally reshape the way we coordinate economic activity and make decisions, and it's essential that we understand the implications and challenges that come with it.

Source

How AI-Crypto Will Lead to a Hyper-Financialized Future

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