(Dado Ruvic / Reuters)
W.income to the Capital Note, a newsletter about economics, finance and economics. On the menu today: a new social networking protocol, Jim Simons retiring, Tesla in China, and the Twitter activist campaign that didn’t exist. Follow this link to sign up for the Capital Note.
Platforms vs. Protocols
Jack Dorsey, CEO of Twitter, posted a long thread yesterday explaining his company’s decision to ban Donald Trump. “I’m not celebrating and I’m not proud of the decision,” he noted, but Twitter “faced an extraordinary and unsustainable circumstance that forced us to focus all of our actions on public safety.”
Dorsey expresses borderline regret about the decision, but appears to have surrendered to the reality that an Internet operated by a handful of large corporations will tend towards censorship and other forms of control. First, the content policy of large social networks is quasi-democratic. If one side wants censorship and the other doesn’t, the company has to evaluate the two options based on how much revenue it will lose in both scenarios.
Second, large digital platforms are easy targets for regulators. While it’s tempting to think of tech CEOs as overlords, keep in mind that they make decisions largely at the behest of politicians. The Democrats won the election and they have the reins of a huge regulatory apparatus in their hands. While the Capitol riots were the immediate catalyst for the deplatformation of Trump and a handful of corporations, it is no coincidence that they emerged after Democratic victories in the Georgian Senate runoff election.
So Dorsey, who in many ways embodies the Cypherpunk dream of a free and open internet, is now in the unlikely role of Censor in Chief, as I wrote earlier this week:
Dorsey, a yogi with a nose ring and an incredibly long beard, spent his youth writing emo poetry under the pseudonym JakDaemon. (“In the beginning there was Jack. And Jack had a groove.”) In his résumé he was described as a “grassroots hacker” involved in a “chaotic cruise of crypto-anarchy, pseudonym associations, 4 o’clock hacks, and virus dispatch and reputation taggers “lived, temporary autonomous zones, colony / clan workforces, urban cores and corporate disruptions. “
His Twitter bio with the label “#Bitcoin” is proof of his commitment to a decentralized payment system. In the past few days, Dorsey has also used his Twitter account to promote Signal, an encrypted messaging app with the express aim of defying censorship. In his capacity as CEO of payment company Square, Dorsey is campaigning against FinCEN’s proposed regulations for cryptocurrencies. Square’s statement on the proposed regulation argued that “people should be able to participate simply and fairly in financial systems”.
But Dorsey has a trick up his sleeve. On the Twitter thread above, he referred to a new company called Blue Sky, which is known as the “open decentralized standard for social media.” Although little information has been released about Blue Sky, it appears to be a blockchain-based social networking protocol.
In an introduction entitled “Protocols instead of platforms” (well worth reading), tech blogger Mike Masnick explains:
The early Internet included many different protocols – instructions and standards that anyone could use to create a compatible interface. Email uses Simple Mail Transfer Protocol (SMTP). The chat was carried out via IRC (Internet Relay Chat). Usenet served as a distributed discussion system with NNTP (Network News Transfer Protocol). The World Wide Web itself was its own protocol: HyperText Transfer Protocol or HTTP.
In the past few decades, however, the internet has evolved not around creating new protocols, but rather controlled platforms that are privately owned. These can function in a similar way to the previous protocols but are controlled by a single entity. This has happened for a number of reasons. Obviously, a single entity that controls a platform can benefit from it. In addition, a single entity can often result in new features, upgrades, bug fixes, and the like being introduced much faster to grow the user base.
Think of a protocol as the procedure you follow to send a letter or package. You write the recipient’s name, address, city, state, and zip code on the envelope and put it in a mailbox. Similarly, network protocols are essentially widely used methods of transferring data between users. The platform, on the other hand, is like the postal service (or FedEx, UPS, etc.).
Because of the “winner takes all” functions of the digital economy, new social networks will have problems competing with dominant companies like Facebook and Twitter. Perhaps the way out is not a new social network, but a new internet as a whole.
On the Internet
Hedge fund legend Jim Simons retires as chairman of Renaissance Technologies:
“I think it’s time: this transition has taken many years and Peter Brown, our new chairman, is more than ready to take responsibility,” Simons said in a statement. The move comes at a difficult time for Renaissance, which has struggled to manage market volatility since the coronavirus pandemic began. The Renaissance Institutional Equities Fund was down nearly 20 percent through 2020, while the Renaissance Institutional Diversified Alpha was down 31 percent, according to data from companies close to the company.
Michael Strain warns Biden against asking too much in business negotiations:
The biggest problem with what is known about Biden’s upcoming proposal is his plan to increase the generosity of direct controls for people who passed last month from $ 600 to $ 2,000.
These controls would be less generous for people with higher incomes. But many would still go into six-figure households, and some would even go into families making more than $ 300,000 a year. In addition, the checks are to be sent to all households with incomes below an upper limit, including those who have not experienced any loss of employment.
The Promises and Dangers of Tesla’s China Deal:
In early 2019, Musk and a multitude of dignitaries gathered in a muddy field in the Lingang New Area, a development zone an hour and a half drive from central Shanghai. He took the stage behind a white Tesla-branded lectern and marked the occasion with a characteristic exaggeration. The factory in which the company laid the foundation was “perhaps the most advanced” on the planet. In addition, “we think that with the resources here we can build the Shanghai Gigafactory in record time.”
He then went to Beijing, where every move was followed by Chinese fans on social media. Many of them were delighted with his decision to dine at one of the city’s better known hot-pot restaurants. The highlight of the trip was an audience with Premier Li Keqiang. “I love China,” said Musk when they met, and delivered a soundbite that was raved about by the state media. It quickly became clear that China loved him back, and not just because Li replied that Musk could get permanent residence.
I’ve been thinking a lot lately about Elliott Management’s activist campaign against Twitter. Earlier this year, the fund got involved in Twitter and attempted to remove Dorsey on the grounds that his role as CEO of Square was a conflict of interest:
Mr. Dorsey divides his time between Twitter and Square Inc., a financial technology company that he also co-founded and that he also serves as CEO. His separate duties have raised questions about his ability to properly focus on the issues Twitter is facing, where he has often been a more straightforward leader than some of his Silicon Valley counterparts.
As always, some share buybacks can’t fix anything:
Twitter and Elliott reached an agreement in March in which the company agreed to appoint two directors and commit to share buybacks worth $ 2 billion. The agreement also included the formation of the new committee to investigate the conduct of Twitter, creating a trial period for Mr. Dorsey to prove himself to the new investors.
The committee was chaired by Patrick Pichette, former Google CFO who was named senior independent director of Twitter earlier this year. Jesse Cohn, Elliott’s head of US equity activism, and Egon Durban, co-CEO and managing partner of Silver Lake, also served on the committee.
The timing of Elliott’s withdrawal from Twitter – right at the start of the COVID-19 panic – suggests that the campaign may have ended differently in various circumstances. In fact, Dorsey’s stake in Square is worth about 14 times as much as his stake in Twitter. And Square, whose segment with the highest turnover is Bitcoin trading (albeit with small margins), is in some ways the opposite of Twitter: its business model depends on an increasing decentralization of the banking system.
If I were inclined to invent conspiracy theories, I might even suspect that Dorsey is deliberately sabotaging Twitter to empower Square.
Follow this link to sign up for the Capital Note.