99 to 1

There’s a somewhat common anecdote that’s floated in the cryptocurrency industry around the distribution of institutional and retail trading volume. In traditional finance as we know it, the ratio of institutional volume to retail volume is approximately 99 to 1. That is, for every $1 traded by an every day person, there’s $99 of institutional trading—be it through high frequency trading, block trading desks, exotic financial products and the like.

When trying to extrapolate the future of cryptocurrency—an inherently financial tool—it’s not unreasonable to say that the same will hold true in the future. We should be able to say that within a few years, 99% of trading activity will be driven by institutions and 1% will be people like you and I. For the most part, this is the running assumption of many entrepreneurs, existing crypto-businesses, analysts and twitter-thinkers in the industry. The wave of new products and regulated offerings squarely aimed at institutions like custody and tokenized securities is proof of this trend.

There are a couple interesting questions that come up when thinking about institutional cryptocurrency:

  • Who will these institutions be?
  • What will their activity look like?
  • Will this activity resemble traditional finance?

Trying to answer these questions with certainty is probably impossible given how early in the industry it is, but it’s worth trying.

This is because your opinion on what institutional activity looks like in the world of cryptocurrency and it’s extent has wide ranging implications on what the make up of the products and services will and the utility they deliver. Cryptocurrency with existing banks being the customers is a completely different world than cryptocurrency with people as using it day to day.

Will it be 99 to 1?

Taking a step back

It’ll be useful to reiterate the definition of Institution to understand what I’m getting at here. An institution is a structure/organization/group that is “stable, valued, and has recurring patterns of behavior”. Institutions emerge in systems where economies of scale lead to a more efficient system at large. Institutions are often disrupted by new technologies, since the underlying structures of a system fundamentally change, and therefore new efficiencies emerge in different places at the gain of the larger system.

That is, institutions arise, develop and function in a pattern of social self-organization beyond conscious intentions of the individuals involved [wikipedia].

Cryptocurrency is heralded as one of the largest paradigm shifts since the internet itself. Given that, the story of how internet changed the world of news and media may give us some clues as to how cryptocurrency will change the world of value—and by extension the institutions of the finance system as we know it.

News and media is one of many aspects of the internet as we know it today. Internet is about the creation, storing and transfer of information. This is what news and media specializes in. But as we know, news and media isn’t the be all and end all. It’s just a means to an end.

Similarly, cryptocurrency is about the world of value, but that doesn’t mean that finance is the be all and end all. It is just a means to an end. Ultimately, we will get to a point where people will be “trading” cryptocurrency without even realizing it. They won’t be speculating, they’ll be buying or selling an object/service for the sake of the object/service. I.e. they are buying a CryptoKitty or voting in a poll or curating a list or staking in a VR game contest where the world is based on the blockchain.

So… will it be 99 to 1?

Let’s compare the internet’s disruption of news and media with cryptocurrency and the traditional financial system to try and find some answers to this question:

No

The institutions we see today in the traditional financial system did not emerge from the new structures created from cryptocurrency.

The newspapers of the media industry did not become the Facebook or Twitter of social media. Many of them successfully transitioned to become internet bound institutions like the New York Times, Wired and CNN to name a few. But they compete against a new breed of internet natives like Youtube Vloggers, Instagram Influencers, Twitter thought leaders, Medium writers and Facebook pages. New age media organizations popped up like Vox and Buzzfeed that emulate the business model of pre-internet news organizations, but it looks vastly different in practice in today’s system.

Think of the amount of information created by you and I from posts on social media, messages, emails and beyond. This long tail of information is enormous, and is many orders of magnitude larger than what was created by news media organizations prior to the internet.

The institutions of today will not be the institutions of tomorrow.

The lower costs associated with an online-only format creates opportunities for small news businesses. No longer are these publishers drowned in a sea of printing equipment, paper and distribution routes. For a modest investment, start-up news sites have the opportunity to emerge and have their voices heard. Even a single reporter operating by himself has a viable medium to publish internationally. This opportunity was virtually unheard of before the Internet.

Yes

The institutions that emerged from the internet and their activity is absolutely 99 to 1.

But the shape is different, as the institutions of the internet are platforms like Facebook, Twitter, Youtube, Instagram and the like. They democratized access and made it free* to create, distribute and store any information and media people around the world created.

“In choosing to use the historical size of the taxi and limousine market, Damodaran is making an implicit assumption that the future will look quite like the past.”

— Bill Gurley in his piece How to Miss By a Mile: An Alternative Look at Uber’s Potential Market Size

Extrapolating out for cryptocurrency, new institutions will emerge from the new system, and they will find economies of scale and efficiencies that tend towards being dominant contributors to the networks.

Like the internet, the institutions that represent the majority of the activity in the system could be the ones that allow for the creation, distribution and storage of value. That could range from the platforms that let you mint and create non-fungible tokens at will, Ethereum browsers like Toshi that help you send and receive tokens from your own wallet, and finally DAOs and blockchain networks themselves coordinating to achieve some shared goal.

What will these institutions in cryptocurrency actually look like? I’m not sure. But here’s a very brief list of places to look:

Non Fungible Tokens (NFTs): NFTs let you tokenize arbitrary information, and importantly track ownership of that information. It is the symbiosis of value and information. It’s starting with CryptoKitties, but the ability for seamless user generated [content+value] and the easy exchange of this via marketplaces like Rarebits and OpenSea look very much like the early days of social media platforms. Platforms that let users generate NFTs and associate them with their identities have the potential to disrupt social media itself. Post Coming Soon™.

Financial Primitives: protocol based financial services that anyone holding tokens can access. Extremely cheap, global and trustless. Financial primitives will allow finance to precipitate into places not possible before. This is my favorite example to highlight just how quickly this gets weird:

I can’t wait to take out a @DharmaProtocol loan to buy more @CryptoKitties, trade @dydxprotocol options contracts to hedge breeding risk and trade @SetProtocol indexes of various kitty attributes to get broad exposure.

The Collateralized Pet Obligation (Pun credit to Alex Sieke)

Cryptoeconomic Primitives: the institutions and platforms of cryptocurrency will likely utilize discreet cryptoecononic systems and their tokens — known as cryptoeconomic primitives — as part of their feature set to curate and coordinate people, information and value. It will make it trivial for any developer to assemble different economies and governance systems out of the box with their latest application. Programming competing groups of people and machines will get a whole lot easier Post Already Written™

Identity and the Browser: the browser helps every day people view and access the internet. Your online identity is currently hosted with multiple centralized entities who mine it for profit. Your identity is separated from the browser, and leads to a clunky experience of signing in everywhere you go and uncertainty over who gets access to your data and when. Projects like uPort, ERC725+ERC735 and Urbit let you regain control of your identity. In browsers like Toshi and plugins like Metamask, you can simply rock up to any dApp and use it straight away without signing up or signing in. The platforms and services you use will personalize based on the assets in your wallet. Merging the browser + identity will reshape how people move around the web. Separately, the creation of an onchain identity will inevitably lead to a tokenized self—unclear if this is a good thing or not.

Relays and Trading Protocols: being able to trustlessly exchange cryptocurrencies will be necessary for almost all decentralized app. The ability to buy and sell directly from your own wallet is an innovation which is critical to move the industry from the investment phase to the utility phase. Relay technology and trading protocols dropped the cost to facilitate the exchange of cryptocurrencies by orders of magnitude, since custody is left with the user and settlement is deferred to the blockchain. The drop in cost, plus ease of development means will see the exchange of value happen in places it wasn’t possible before.

¯\_(ツ)_/¯

The institutions that emerge from cryptocurrency will absolutely be 99 to 1.

Maybe

Existing, incumbent institutions absolutely have the chance to pivot and adapt to this new cryptocurrency system. Many will survive, many won’t. None will be leaders within the system. They can and will be large, but they will likely be participants not facilitators. I still read the the New York Times, but it’s often through Facebook and Twitter.

For products and platforms in cryptocurrency looking to bootstrap their new business and platforms, turning to the existing institutions of finance as customers will only get you so far. You will not be successful tailoring your product to meet the needs of the existing system 1-to-1.

You’ll need to look for the new, emerging institutions borne out of the system. You will need to solve the crypto-natives problems and offer them value to be successful in a cryptocurrency enabled world. If the internet is anything to go by, the crypto-natives will be everyone, more or less.

The institutions ones that existed before cryptocurrency must adapt to survive, and will be a part of the 99-to-1, but they will not be the behemoths they once were.

Final thoughts

It is too early to say what the Facebook’s and Google’s that will emerge from cryptocurrency will be, and that is an extremely exciting prospect. We are so early—the base protocols, infrastructure and design patterns are only being figured out right now.

Each new advancement compounding off the other and giving us a glimpse into the empowering world of cryptocurrency.

Where will these crypto-native institutions emerge? and what will the 99 to 1 look like? Time will tell. But in the meantime, build for the system you want.

¯\_(ツ)_/¯

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Cofounder of Zora

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Cofounder of Zora

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