The US Dollar: A Proof of Violence Network

On dominant motivations and hard power that begets soft power

Dec 15, 2023

The US dollar is both a currency and a network. This network has gained dominance because it has shown proof of something.

In crypto, showing proof of an activity is commonplace: Proof of Work (PoW), Proof of Stake (PoS), etc..

The US Dollar has displayed Proof of Violence (PoV).

However the USD isn't only predicated on violence, it also provides value; crypto detracts from the latter.

Proof of Violence (PoV)

Unlike PoW or PoS, which must show proof constantly, PoV doesn’t need to prove itself often; in fact violence that needs to frequently demonstrate itself is an indicator of weak abilities. Overwhelming force is rarely challenged or tested. Peace is found through strength; when peace is breached, that typically means strength is lacking.

The PoV the US displayed in WW2 and thereafter with NATO and the petrodollar have allowed it to set up the worldwide financial system as the rails for USD supremacy.

However violence alone isn’t enough to sustain this network. Kinetic force is costly to deploy and not globally scalable. What was introduced with a gun is now maintained through reliability and value.

USD’s PoV is a two-part process: violence to establish it, then value to maintain it.

Said differently: the US used hard power (military violence) to gain the right to make the rules, then it used soft power (financial and economic influence and control) to sustain its empire.

Winning WW2 allowed the US to assert geopolitical and financial dominion via institutions and standards it created. Bretton Woods and such. The US wields tactics like dollar diplomacy, the petrodollar, financial sanctions, SWIFT, and “international” institutions like the World Bank and IMF to exert its will without drawing blood.

The petrodollar is the most prominent example of PoV. The petrodollar was an agreement with the Saudis to only price their oil in dollars; they agreed to this in exchange for US military protection of the kingdom. This turned the USD into a Schelling Point for global commerce and created massive international demand for dollars, as the world’s most critical commodity (oil) could only be procured with dollars.

The petrodollar may be the single most-impactful victory for the proliferation of the US dollar. It’s a manifest display of Proof of Violence: the US will use its violence to protect you, and in exchange you will use its dollars.

Violence to Establish, Value to Maintain

The US-led financial system provides real value to the world. Coercion does not work forever; it’s inferior to aligned incentives and positive reinforcement. Carrots are what build the best human coordination, not sticks.

The US facilitated dollar preeminence with violence, and maintained it with powerful economic network effects and property right laws. Give credit where it's due, the US dollar is certainly not backed by nothing (US military + US economy > gold), and it has been of significant utility for the world.

What do USD network effects look like: there is roughly as much dollar-denominated debt from other countries (foreign nations issuing sovereign debt payable in dollars) as there is US government debt. This means other countries issue USD debt in roughly similar proportion to the US itself. This creates a **massive** demand for the currency.

However, violence was integral to USD ascension. It can’t be overstated how much the US's World War 2 victory allowed it to essentially remake the global order in a way that aligned with its economic interests and preferences, then allowed it to thrive by having a legitimately fantastic economy, the best rule of law, and most-credible government framework securing it all.

Use of USD as a reserve currency (which isn’t an official designation, it just means the market has converged on your currency for trade) reflects this relative stability and affirms the global community mostly agrees. Revealed preference says… we like the dollar.

From Violence to Value

While the violence capacity of the US remains, the value provided by the dollar is being actively subverted. Enter: crypto.

Claims of the USD’s demise have been ongoing for decades, and I am not going to make this prediction. However I am saying the value provided by the USD is going to be incrementally disrupted and decremented by the global, permissionless offerings of P2P financial networks that is DeFi.

DeFi stands for decentralized finance, it’s the financial rails of crypto, it’s a parallel financial system that exists beyond US jurisdiction. I discuss this in detail here: The Fourth Industrial Revolution and Its Consequences Will Be a Delight for the Human Race.

DeFi creates alternative financial infrastructure that allows international trade, lending, and investment to occur without touching USD-denominated, US-controlled systems. As these networks grow, they enable countries facing US sanctions or unfavorable conditions to conduct commerce outside the American-enabled financial system, gradually degrading the cornerstone of American financial power.

US soft power is going to be increasingly undermined by crypto networks: these are financial transactions that exist beyond US sanction or oversight.

This is a major reason why American regulators and politicians dislike crypto, and rationally so. It’s totally reasonable to dislike an upstart encroaching on your financial territory. As DeFi gains power, the US necessarily loses it. Economics is not a zero-sum game, but power is.

From the state's perspective, DeFi is not neutral, it's an active antagonist, steadily siphoning both economic flows and governance mechanisms from the traditional financial architecture that underpins US hegemony. Don’t sympathize with the state, empathize, you’d hate us too.

On an aside: while crypto is a form of currency competition, it does not spell the end of fiat currencies. So long as a nation demands taxes be paid in its own coin, the fiat currency will persist. Crypto bros would be wise to not be so disillusioned to believe their blockchains mean the state can’t compel you to tithe in a specific asset when it has a gun to your head. Taxes are violently imposed. Crypto doesn’t change this.

This slow erosion of US soft power will eventually bring about the need to refresh the initial PoV (violence). If you’re not providing enough value to keep people using your greatest export (USD) then you’re going to have to violently impose it on them like you did after WW2.

I’m not particularly bullish on the US military’s abilities to do this all over again in an increasingly multi-polar world.

The US and its Decaying Violence Hegemony

While the US maintains overwhelming superiority in traditional warfare, modern conflicts have evolved to neutralize this advantage. Adversaries now engage primarily through proxy wars (Ukraine, Syria) or guerilla tactics (Vietnam, Afghanistan). This is known as 4th-generation warfare: a style of combat that allows conventionally weaker opponents a fighting chance against superpowers.

Modern conflicts have shown the US to be incompetent combating the guerilla, wasting trillions and US lives in its futility. Iraq, Vietnam, Afghanistan, Ukraine, Syria…. what objectives were achieved here? How much did the US squander while accomplishing nothing? These are not exceptions, they are part of a clear trend of ineptitude in 4th-generation domains.

Warfare that’s not between traditional powers is now a hybrid of 4th and 5th-gen warfare: which is to say guerilla-style physical war and non-kinetic, manipulative psychological operations. The US/NATO does not have a global monopoly on this kind of combat, in fact they’ve shown to be increasingly maladroit about it. Men with guns still call the shots, but the way those guns are used has evolved.

I believe these military failures are almost entirely because the US doesn’t fight wars for survival or major gain anymore, like it did in World Wars or battles for territory (eg. the Mexican-American War). Its contemporary fights are for maintenance and furtherance of soft power; the US doesn’t fight for its life, it fights for... regional influence? Who cares? Clearly not the US military.

In wars like Vietnam, Afghanistan, Syria, etc. the US has been pitted against adversaries that are either fighting for their homeland or something they passionately believe in. That’s a dominant motivation to wage war: you’re not fighting for geopolitical influence, you’re fighting to survive.

A dominant motivation sustains your will to fight, and the US almost never has this anymore in relation to its foe. To the US, every war is a power game; for the guerilla, the war is to protect his home or religious beliefs; which of these motivations is less likely to quit? Unless you’re willing to unleash overwhelming military energy, the dominant motivation wins.

The US has shown repeated reluctance to use the degree of violence necessary to win modern conflicts, that’s because it’s not fighting for its life, just its opinions.

Concluding

I’m not foretelling the fall of the US or the dollar. What I am predicting is that DeFi parallel financial systems will continually decrement US soft power by undermining USD network effects. DeFi is the antithesis of Bretton Woods, and it’s growing by the day.

When this transition completes, the US will resemble something like the UK with a 2nd amendment: comfortable, prosperous, yet stripped of its once-unquestioned ability to bend global affairs to its will with a financial decree.

The value the USD must continually provide will be eroded as DeFi proliferates. And the PoV that requires occasional Fourth Turning-style refreshing to reestablish itself is not the US-led monopoly it once was.

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