So just what are the benefits of “crypto” anyway? Part 1
Part 1: Truly Global Markets
Depending where you stand on the political spectrum there are all kinds of benefits touted for Crypto but I’ve boiled them down to five for simplicity
- Truly Global Markets
- Truly Resilient Infrastructure
- Truly Transparent Finance & Services
- Truly Private Services & Data
- Fairer Finance (pensions / financial growth / inclusion)
This post discusses truly global markets, but also dives into some context points that will be helpful for future parts.
1. Truly Global Markets
“But Simon!” I hear you say “Markets are already global!”
Yes and no. It’s true, I can move my money around the world, but typically financial markets are local. They’re in the US, Europe or Asia. They revolve around large intermediaries and local regulations. This isn’t a criticism, it’s simply a historic fact; interoperability of (for example) global financial markets is a truly monumental challenge (and for many reasons not always desired).
Having standards that can cross organisational and sovereign boundaries can unlock economic activity, but it’s often counter-intuitive. We instinctively want that one central point for efficiency.
1.1 Global Infrastructure vs Local Infrastructure
Today; your finances revolve around your bank and moving bank is hard. Your identity revolves around your country of citizenship and moving country is hard. Your electricity revolves around fixed infrastructure and changing it is hard.
What the internet did for communications hasn’t made it to what we used to consider national infrastructure. We’re witnessing the emergence of a new type of infrastructure.
Crypto promises truly global “Internet Infrastructure”. This infrastructure rather than just serving one jurisdiction, would be an open platform usable by any.
We used to solve a problem by building the company that ran the network, if it’s the telco, the stock exchange or government department. These bodies solved a problem for their local market.
Internet Infrastructure, for truly global markets would be potentially supported by an entirely new business model. Just like asset managers today invest in roads, bridges and real estate, tomorrow they might invest in the Internet equivalent.
1.2 Benefits of Truly Global Markets
It’s not just you that has the issue of your money revolving around your bank that relies on local infrastructure. In financial markets, they revolve around fixed financial market infrastructures (FMIs) such as stock exchanges, depositories and custodians. These giants are responsible for how capital moves through the global financial system today.
These market actors evolved initially to solve a problem, and have been very successful in doing so. They create efficiency, fairness and transparency in the market that they operate. However, they typically took a paper process and built a digital equivalent.
This is an example where we built a company that ran the network. Contrast this with what happens with cryptoassets. I can buy a cryptoasset from anywhere that follows a set of software rules to connect to that network, and I can sell it anywhere else that follows a set of rules to connect to that network.
Anywhere is global. Anywhere is 24/7. Anywhere is a standard anyone can use.
This is quite different to the financial world today, where to talk at scale to any of the big global infrastructures is a multi year integration project costing millions (there are some good and bad reasons for this complexity). What if the asset were always the same shape, and the infrastructure (on some level) shared?
In crypto we’re already seeing the global formation of capital. Now imagine if financial markets ran that way?
1.3 Global Formation of Capital
Historically capital forms locally. If you’re looking to get investment for your company, or invest in something you do so in a central place. Hubs have evolved such as New York, London, Shanghai, Singapore and Frankfurt where specific types of investment and capital form.
This has some advantages, for example if I’m on the West Coast of the USA and I have a tech start-up idea, I’d be well placed to benefit not only from access to funding, but access to talent, mentors, VC’s with a track record and so on.
However if I found myself in Lagos, Santiago or Wellington I wouldn’t have the same access. Regardless of my talent, regardless of skill, regardless of the quality of product the access to capital is constrained by geography. This is not the case with communications. The Web 3.0 and Crypto movement’s have seen the rise of truly global projects, where an individual can work anywhere and contribute globally with software engineering or other skill sets.
The cost of this is that investors lose out on potentially high quality investments, and entrepreneurs lose access to capital.
Turning that on it’s head. If capital could form globally, not only would investor gain access to new investment opportunities and entrepreneurs gain access to capital; potentially the types of project that gain funding would change too.
1.3.1 Why Decentralisation Matters
Decentralisation Matters focuses on the idea that web 2.0 (e.g. Google, Facebook) businesses may have reached a scale in which the interests of the business and the interests of the user are now at odds. That the days of the internet giants are numbered because their business model reaches a point where it becomes adversarial to the interests of it’s users.
What’s more in the launch of their $300m dedicated crypto fund announcement, they go on to note that crypto is one of the next big three“mega trends” (alongside AI and Connected Devices). This is noteworthy because their last three were Cloud, Mobile and Social. (Heard of them?)
“Web 3.0” is an emerging term. If Web 2.0 was Google, Facebook and Amazon then Web 3.0 can be thought of as their decentralised equivalents that have no single owner or single organisational point of failure. This blog from Multicoin Capital goes into much more depth.
In addition “Crypto” has become a short hand term for the types of technologies and economies (e.g. coins) that support those technologies. e.g. platforms like Ethereum, NEO, Cardarno and tools built on them like Plasma, Polkadot, Cosmos (these aren’t household names, and maybe never will be but are significant projects in their own right).
1.3.1.1 An example Decentralised Twitter
For a glimpse at the future contrast Peepeth with Twitter.
Twitter is a centralised platform supported by advertising. Launched in 2006 and seen as a weird toy for nerds at first, it gained traction by 2009. Twitter gained notoriety as a force for open communication in the Arab Spring movement of 2010; now it’s known as much for hate speech and Eth scams. Users complain of twitter being slow to respond to concerns, and the network relies on Twitter Inc to solve any problems that arise. Initially anyone could built their own twitter client and twitter apps, but twitter shut down those services as it looked to scale it’s advertising propositions.
Peepeth is a decentralised app that runs on the Ethereum network and uses IPFS for decentralised file storage. It launched in 2018 and could probably be fairly described as a toy for nerds. There’s no one central set of computers, company or organisation that runs it. It looks and feels a lot like twitter, except slower, a little harder to use (unless you’re Web 3.0 browser savvy) and with less users (1,800 at the time of writing). You pay for every transaction you make, which at first sounds almost silly. Why would I pay for something I can get for “free”?
Well; is twitter free?
With Web 2.0 services the user is the product being sold (you’re data is being sold to advertisers). And; as Chris Dixon argued, the advertising motive may become hostile to users at a certain scale.
1.3.2 Is Decentralisation Realistic?
There are plenty out there who see centralisation as an inevitable force for efficiency, and I have no doubt what we’re calling “decentralisation” will change, morph and grow in the coming decade. But, I just can’t escape the idea that new incentives and the potential for new business models for permissionless innovation will become table stakes as the technology matures.
(I was listening to a podcast earlier where a VC recalled looking at a pitch for something a lot like youtube in 1999. The idea wasn’t wrong but the infrastructure wasn’t ready. Could we be in a similar phase with crypto?).
Bringing this back to Global Capital Formation, you can imagine a number of outcomes.
- The “decentralised” services struggle to scale and the Web 2.0 platforms continue to dominate (e.g. Google and Facebook remain dominant)
- The Web 2.0 platforms begin to leverage the decentralised technologies and continue to dominate (e.g. Google and Facebook start to use crypto)
- Web 3.0 alternatives to those winner take all platforms emerge (e.g. Decentralised Facebook, Decentralised Uber, Decentralised Airbnb)
- Web 3.0 doesn’t compete with Web 2.0 but builds entirely new business models (e.g. P2P energy, digitally unique art (NFT’s) and a new class of financial markets and supply chain solutions).
If outcome #1 happens, and Web 3.0 never appears then c’est la vie all of this crypto stuff was a nice flash in the pan. There is certainly a mainstream school of thought that suggests anything that can be done with a decentralised technology is better, cheaper and faster without it.
Ultimately however, without one central service to rule them all, the efficiency of centralisation, in aggregate becomes inefficiency. In other words, when there are lots of centralised bodies, the efficiency of centralisation is never truly achieved. We just create one more middleman. In the digital world we have “platform” companies, but they too are challenged by their business model to evolve away from exploiting data to something new.
It is likely in my view that Web 3.0 technologies will evolve beyond toys, gimmicks or get rich schemes. Whilst the early uses are experimental, the amount of capital and talent deployed at solving problems with these technologies at a minimum would brute force capability into existence.
As always the real question is will decentralisation solve a problem that needs solving. Which brings us back to Global Capital Formation.
1.3.3 Why Decentralisation creates Global Capital Formation
The interesting thing all crypto networks have in common is that they have no one central point to integrate to. There’s no one rule maker, just a set of software rules and off you go*.
(*Of course cryptonetwork governance is an entirely different prospect but that’s aside from the point)
This effectively means wherever you are in the world, you have arguably the same access to what that network offers as anyone else. Whilst cryptoassets may not be easy to use from a consumer perspective, they are truly global, as are many of the projects built on or around those cryptoassets and crypto networks.
Whilst the height of the 2017 cryptoasset bubble can be fairly blamed on a speculative bubble, the long term interest of venture capitalists and institutional investors cannot. Whilst the source of funds for early crypto projects wasn’t all technically savvy retail investors much of it was.
The “Web 3.0” movement cannot easily be tied to one location. Whilst there are clear hubs (e.g. Zug in Switzerland, Berlin, Vancouver, Silicon Valley, London and New York), many of the key projects have globally distributed teams. Contributors from around the world are drawn to a project.
It used to be that the Infrastructure we used was local, and so the capital was constrained. Interoperability between finance or commerce infrastructures is limited and built on top of decades old technology. Decentralised may not yet be as fast or as capable as centralised infrastructure, but that may not always be the case.
I can buy a Bitcoin from anywhere in the world, and I can exchange it for Eth at many venues. This property applied to the rest of the economy is a compelling prospect.
If we could do for contracts, property and commerce what the internet did for email, global trade could be materially benefited.
1.4 What’s preventing Web 3.0 and Crypto from scaling today
We have to remember this tech is still very early. Whilst the bull market of 2017 appeared mainstream, recent statistics showed that less than 10% of Europeans owned any cryptoassets. Another poll from Gallup found that 2% of investors own crypto, but a further 25% are curious or interested.
The underlying infrastructure is still slow when compared to the centralised services we know and love (e.g. Medium, Twitter, Facebook). Many of the products being built on the new Web 3.0 infrastructure are early, have limited use and required the user to be sophisticated. Web 3.0 and Crypto hasn’t yet had it’s iPhone moment and it’s hard to say when and if it will.
Change in crypto is slow. Once a major platform like Bitcoin or Ethereum is live, upgrades potentially threaten billions of dollars of real world value. Community consensus is often harder to achieve than the consensus the networks reach.
There are many competitor platforms, and the quickest way to get rich in crypto is to release your own network instead of adding value to an existing network. All of this experimentation may be good over the long term, but in the short term, it means there is no clear winning platform for the world to galvanise behind (although there are some clear leaders).
Despite all of this, Facebook are now seriously investigating Web 3.0, the CEO of twitter is famously a fan of Bitcoin and it looks as if regulators are unlikely to ban crypto, opting instead to provide guidelines for legitimate use.
It’s also important to remember, it wasn’t Microsoft that killed Blockbuster Video, it was Netflix. Often the killer app from the future is harnessed by organisations that don’t exist yet. And, perhaps, crypto communities may grow like existing projects such as Wikipedia, where managing a community is much more about how you manage the people than the software.
1.5 The Road to Global Infrastructure and Truly Global Markets
It’s important to note that the entire global financial market and world trade doesn’t exist on Web 3.0 tech today, in fact most of it doesn’t exist in something the big internet companies would recognise (Web 2.0; cloud).
We still tend to refer to digital markets with a prefix (“e-commerce”, “e-sports”). Some things lost that moniker, for example “going online” seems antiquated when we’re always connected.
What I’m suggesting is it’s likely that the world of truly global markets and commerce will exist alongside the traditional markets for some time, perhaps generations without some great obvious inflection point moment in the short term.
In fact; it’s already happening
Crypto can be used for payments, and there are crypto markets (possibly driven more by speculation than real use) that exist alongside the existing world of analogue financial services. Perhaps the most interesting point where that comes together is the concept of “Security Tokens”.
1.5.1 “Security Tokens”
The term “Security Tokens” is an emerging term used to define the offering of either:
a) Some sort of new fangled crypto token in a way that is 100%, belts and braces, compliant with existing laws
b) An existing financial contract but using a “token” to represent that agreement and manage it’s recording and transfer
Both of these are interesting for different reasons
a) The new token economy: Offers new claims on a balance sheet (in English; new ways for entrepreneurs to raise money) beyond the traditional options. Traditionally it was debt or equity. There’s plenty of good writing out there about what this could mean, but this is a subject that’s worthy of a blog post in and of itself.
b) Existing assets as tokens: Todd Mcdonald from R3 summed up the challenge quite neatly in this blog post. Assets today (houses, contracts the whole lot) are represented as a depository receipt. Like a paper receipt that gets mailed to many places, ensuring that is kept up to date with the right owners is a logistical nightmare. The crypto world doesn’t have this challenge, it’s pretty clear which wallet owns which Bitcoin.
Both of these subjects warrant much more research and discussion, but I’d recommend checking out projects like
Among many more to get a flavour of what this could mean.
1.5.2 Capital Markets 2.0
Maya Zehavi for some time has been talking about “Capital Markets 2.0” (there’s a lot of 2.0, and 3.0 in this post, but stay with me).
One of the challenges with markets and commerce today is not only that they’re local, but that they’re digitized and not digital. They digitized the paper process, they digitzed the asset and then they centralised various bits of the financial market to try and keep up with all of the PDF’s, XML files and countless other standards.
It’s still very early, but we’re witnessing the beginning of truly digital assets. Truly digital asset classes. Truly digital financial markets. My suspicion is representing assets as tokens will be the start of this, and natively digital asset classes (e.g. Music, Video and Video Games) will be at the leading edge of this.
What happens then to the old assets, and how do we transform those asset classes? Well that’s a great question…
1.6 Conclusions
As you can tell there’s a hodge podge of ideas and concepts in this blog post. If nothing else writing it down has been useful for me to try and understand it all better. If you read it all; well done!
The convergence of these macro trends is interesting
- Centralisation doesn’t work for financial markets because you can’t centralise balance sheets without centralising risk and jurisdiction
- The internet giant / platform company business model is running into problems
- The crypto world is weird and incredible small compared to financial markets, but there might be magic in there
- Pay attention to token standards (e.g. ERC20, ERC721) and how they interface with markets and commerce
Global markets could opportunities for
- Entrepreneurs to get access to global capital pools
- Investors to get access to global projects / investment opportunities
- Financial markets to rethink market structure around tokens
Health warning: There are a ton of problems to overcome before we get there, and there are risks to manage new and old. More to follow, but do find me on twitter to keep the conversation moving :)
1.7 Future posts
We dive into
- Truly Resilient Infrastructure
- Truly Transparent Finance & Services
- Truly Private Services & Data
- Fairer Finance (pensions / financial growth / inclusion)
