Being cheap, fast & decentralized is NOT enough for a blockchain to win.
Blockchain nations that don’t have good “industrial policy” will lose.
7 industrial policies from nation states that layer 1 chains can adopt for exponential growth 👇
What’s “industrial policy”?
Anything a gov / public authority does to promote a country’s economic productions & steer them in a certain direction.
Why is it needed?
Laissez-faire fanboys want you to believe an economy only needs free market & absence of regulation to prosper.
Nonsense.
There’s not a single successful country in the world that grew its economy w/o active government intervention. None!
When an economy is poor, it has what entrepreneurs call a “cold start problem”— you have to bootstrap a self-sustaining ecosystem from zero.
Resources are limited. A country can’t invest in every activity at once. It needs to make concentrated bets in industries w/ most strategic importance. A smart public authority’s job is to steer national resources towards those bets. ’Tis what industrial policy is about.
Asian economies led by Japan, Singapore, Korea leapfrogged from 3rd world to 1st in one generation w/ deliberate industrial policies, while the West poured huge foreign aid $$ into Africa & Latin America w/ little to show for. Results speak for themselves.
What many don’t realize is Asia simply copied policies of US & Europe from long time ago— British mercantilism in 18th century, US industrial subsidies & tariffs from Alex Hamilton to Abraham Lincoln. US has a bevy of industrial policies even now, but nobody talks abt them.
What does it have to do w/ blockchains?
Public blockchains like Ethereum & Solana are ecosystems where economic production & exchanges happen. They’re countries in metaverse.
To grow their ecosystem, blockchain platforms need industrial policy as much as countries do. The former can learn much from the latter, which have hundreds of yrs of experience building economies.
7 common industrial policies of nation states & how they may apply to blockchains:
1. Subsidize strategic industries
A strategic industry is 1) high growth, 2) likely to thrive given your country’s fundamentals, 3) going to unlock other growth drivers in long run. Identify what those industries are & prioritize their development.
Example:
Successful Korean conglomerates— Hyundai, Samsung, LG, etc— grew from state support of priority industries (shipbuilding, automobile & consumer electronics) in 1960s. They got input subsidy, guaranteed loans & lower tax.
Blockchain equivalent:
Some industries are strategic for ANY chain, e.g. stablecoin & related products. Others’re strategic b/c they align w/ a chain’s unique advantage & help unlock other potential. E.g. Gaming, for chains w/ cheapest but not necessarily most secure txns.
There’re many ways for L1 chains to subsidize strategic industries. E.g. dev grants, txn fee rebates, sponsoring liquidity pools btw L1 & project tokens, providing validators for app-specific sub chains. There’re also qualitative support as in #6 below.
2. Attract foreign direct investments (FDI)
Foreign companies bring new capital, tech, consumer demand from their home country & create jobs. Lure them in w/ incentives, but make sure they collaborate w/, not crush, your domestic firms.
Example:
Special economic zones (SEZs) of China, where foreign firms are given tax holidays, pay lower utility bills & rents, & get other benefits if they set up joint ventures w/ local firms.
Blockchain equivalent:
New L1/L2 chains boost user numbers & liquidity by giving incentives to projects already successful on Ethereum & other chains to expand to their own ecosystem. ’Tis in fact one of the fastest ways for a chain to grow its “GDP”.
3. Protect firms from foreign competition
When domestic firms are young & weak, you temporarily lower their cost & price while raising the cost & price of their foreign competitors, to buy time for home firms to grow. Don’t overdo it or you create perverse incentives.
Example:
High import tariff, undervalued exchange rate, input subsidy & tax exemption are common tools for industrial protectionism.
In early stage of growth, countries like China expanded money supply a lot to keep currency value low, giving their firms short term price advantage at expense of domestic consumers. Once domestic demand was stronger, exchange rate policy was reversed to favor consumers.
Blockchain equivalent:
Anything a L1 does to give home-grown projects a temp cost/price advantage. An obvious lever is L1 native token price, i.e. exchange rate of home currency.
Yes txn cost is ultimately determined by network’s computational power required. But fees are denominated in L1 token & in short term fluctuates w/ token price. Increasing token “money supply” will moderate price appreciation & limit txn cost temporarily.
Not saying ’tis the best way to do industrial policy. There’re many other considerations given reflexive nature of crypto adoption. But it’s a tool.
4. Sponsor research & development
Funding basic research is the most acceptable form of industrial policy in the West b/c of popularity of market fundamentalism.
Example:
US gov agencies like NASA, NIH, NIST & even CIA invested in creating most breakthrough techs in past century. As Michael Lind put it in Land of Promise: An Economic History of US: “few private VCs can match the remarkable record of success of Uncle Sam.”
Blockchain equivalent:
You may think it makes sense for blockchain platforms to fund basic research in cryptography, scaling decentralized ledger, etc.
But blockchain nations are still small & poor, thus should do what small countries do— lobby big & rich countries like the US to fund academic R&D in these areas, & focus own resources in applied research directly targeting own protocol.
(BTW, like this so far? I write about ideas on investment, macro and human potential. Subscribe to my newsletter for updates.)
5. Invest in “public goods”
Public goods: any product that benefits entire economy but the said benefit can’t be fully monetized by firm/entity that provides it, leading to under supply of such goods if left to market mechanism.
Wherever mkt fails, the state’s better be good at picking up the slack, or entire ecosystem suffers.
Example:
Education & infrastructure like roads, ports & broadband internet. These are provisioned by the state in most countries largely b/c of their public-good nature.
Blockchain equivalent:
A few basic public goods for L1/L2 chains:
1.) Bridge: fast & secure moving of liquidity cross chain
2.) AMM: give home-grown project tokens liquidity
3) Dev tooling: libraries & frameworks to lower dev costs & standardize inter-project communication
4) Dev training: build supply of human capital that projects can hire
Platforms need to invest in 1) & 2) starting day 1, and in 3) & 4) as soon as there’s some adoption since they take a long time to see payoff.
6. Build public-private partnerships
Often the state has a development priority, but private sector is better equipped to execute on it. That’s where public-private partnerships (PPP) come in.
Example:
Many infrastructure around world are funded by gov & built by private firms. In some countries the state is minority shareholder of private firms in key industries, helping latter w/ entering foreign mkts, securing raw materials etc while benefiting from their growth.
Blockchain equivalent:
L1/L2 platforms can have own investment funds to take stake in private projects built in ecosystem & offer qualitative support aside from monetary incentives. It complements implementation of #1 – #5 above.
7. Create institutional apparatus for industrial policy
Behind good industrial policies are smart people & quality institution. A country needs to allocate the best & brightest of its public sector to hustle on behalf of its private sector.
Example:
MITI (Ministry of Int’l Trade & Industry) was Japan’s industrial policy mastermind. Was crucial in helping domestic conglomerates grow. A Japanese prime minister’s resume usually needed to include a stint as head of MITI b/f they could be tasked to run the country.
Blockchain equivalent:
Marketing & biz dev team of a L1/L2 platform is the MITI of a blockchain nation.
These teams need to be equipped w/ visionary & resourceful people, & have a mandate much beyond sh*tposting & ads— to design support for strategic industries, identify growth opportunities & facilitate collab of projects, among other things.
Obv platforms don’t want to dominate their ecosystem so much to crowd out private projects. But it’s naive to think a blockchain nation can magically blossom on good tech alone w/o strategic direction esp at early stage.
And as an investor you should prob care abt execution of a chain’s industrial policy as much as you care abt the tech.
4 Comments
Hi Tascha excellent article like always and thank you. IMO I think that #TRON DAO ecosystem is positioning itself to be a country in the metaverse like Ethereum & Solana out in the west. My question is: Do you think that the TRON DAO has the ability to perform these “7 Industrial Policy Tactics” that you mentioned in this article in Blockchain like Nation states? And can Justin Sun be the ZC Binance?
This is really thoughtful. Using protectionist measures on L1/L2 and seeing them as a nation state. How would leaders come into power to make these changes and create a path forward? Is this where DAOs come in?
Thanks Tascha. I’m learning a lot from ur posting and videos
Is crypto gaming dead for the time being? Defi Kingdoms so close to $0 now – we can only hold and hope for a revival. Are you still confident? Sorry I tried asking this question a few times. You are the only academic person I know of who had invested in it …:)