Digital Assets Expectations: Composability to unleash economic activity

My takeaways from the first episode of Bitstamp Talks which was focused on Digital Asset expectations with a diverse group of speakers out of Asia.

Henri Arslanian — PwC ➣ Simon Cowell — Zebedee ➣ Takatoshi Shibayama — Copper ➣ Andrew Leelarthaepin — Bitstamp

The full webinar is here.

Composability, which is increasingly talked about in the blockchain world, is an innovation with huge potential. For all of us coming from the financial services sector, living and breathing its platformification and digitalization which we call Fintech, I suggest we start thinking of the Composability via smart contracts and permissionless or permissioned blockchains as the next generation of Embedded Finance and beyond.

Listening to the first Bitstamp Talks webinar on the topic of DeFi Expectations, this insight was born.

Embedded Finance is enabling already new business models and redefining the scope of businesses. Composability via smart contracts has shown the first scalable use case with DeFi. Think of Lego blocks of wallets, automated market maker (AMM) liquidity pools, staking, and lending processes working together. A business model that is sustainable because of the design of incentives (hybrid tokens) and its openness that can build large digital communities and share value creation. A business model that has reduced monopolistic rent-seeking and increased value sharing.

The next foreseeable use case can be a genuine virtual economy seeded by the already huge global gamers economy. The 3.2 billion people that play games and are already a large global community, currently operate in walled gardens. All activity is within the apps and the games, but not linked yet to the traditional economy. As Simon from Zebedee said, if you think of Zebedee as Stripe for the blockchain world, you see how all the payment activity that goes on in the gaming world can be linked to actual economic activity. Think of these innovations as designing money and payment rails that are native for pure software economic activity — in plain words for real-time, any size, 24/7, location independent, and programmable. In traditional language think micropayments, cross border, and money/value that can expire or can only be used for specific transactions or offers rewards tied to certain objectives.

We need tools to connect the pure software economies to the physical or traditional economies. This is another type of circular economy that is being built and we need infrastructure that is fit for this purpose.

While in traditional Fintech we are focused on building communities via affinity or niche banking (e.g. for immigrants, for teenagers, for LGBT, for gig workers, etc.), crypto/blockchain and certainly DeFi have already shown us how to build fast large digital communities. Just look at the DAO communities on Discord. Over 4,000 and growing, of leaderless digital communities of different sizes that hold over $8 Billion in their Treasuries. [1] Look at the 3+ billion gamer community and their social activity (e.g. 60 million messages per day on Roblox!). No wonder crypto exchanges are striking deals with the entertainment industry, from esports to gaming. Bitstamp specifically, just signed a 3yr deal of $6 million with Guild Esports, a 3yr old professional gaming company co-owned by British soccer star David Beckham [2] , and a deal with esports team Immortals. [3] Both include innovation initiatives that will explore different use cases. As Henri Arslanian pointed out in his overview, there are 6 significant and different use cases that should be on our radar screen- From institutional adoption of crypto, the rise of Stablecoins, and the exploration of CBDCs, Defi and NFTs, and last but not least Web3.

None of us knows which of these will dominate in the short or medium term. What we do know is that over 90% of banks, e-payment providers or financial services surveyed by ComplyAdvantage [4] are interested in offering crypto business services. 95% of regulators are focusing on crypto and many are hiring staff for this domain. Stablecoins have grown to $180+ billion from just $5 billion 2yrs ago. CBDCs are being considered by 80+% of Central Banks. The total value locked in Defi is $70+ billion from $630 million 2 years ago (TVL peaked in mid November 2021, at around $110 billion).

NFTs In 2020 the market size was estimated at $232 Million and in 2021 it was valued at $22 Billion.

Web3 google search trends tell the story about the increasing popularity of the term and the confusion of it with the Metaverse which is just a small part of the potential.

Takatoshi Shibayama from Copper, a top custodian, described the breadth of services that institutional clients are requiring. Custodians are not just about offering secure ways to manage private keys. They are offering secure and efficient ways to move funds on and off exchanges, to stake digital assets, to access Defi and OTC liquidity, and to optimize blockchain fees in off-chain ways.

Andrew Leelarthaepin from Bitstamp expects increased activity in Asia Pacific as banks have started their journey into the new asset class. In 2021, DBS Singapore already started offering custodial and crypto services to its clients. In Australia, Commonwealth bank will allow users to trade crypto on its app. Siam Commercial Bank (SCB) in Thailand acquired 51% stake in Bitkub which is Thailand`s largest cryptocurrency platform. And Union Bank of the Philippines also announced custodial and crypto trading services too.

And for those that (rightly so or rather `not surprisingly`) have concerns over coin pumping, NFT overpricing, and fads, I would say that there are several (if not many) specific Fads and scams out there. But I echo what the speakers agreed on, that the sector is not a FAD.

Let’s keep in mind that we have entered in the second decade of crypto and towards the end of this decade, there will be enough people-adults that have natively grown up with crypto and thus will create new businesses, new economies and new governance with the audacity that only a native can summon.

Bitstamp is the oldest regulated crypto exchange and celebrated its 10yr anniversary last year. Its new Bitstamp Talks series is a space to understand the evolving field with a broad and diverse focus on current and emerging innovations, challenges, and trends.

Composability is core to the next evolution of business models that links pure virtual economic activity to the traditional one which is hybrid and evolving. We are just seeing glimpses of the potential. Stay tuned as the relative openness that the crypto world has unleashed, will change everything.

Getting involved in the crypto asset class is a great business learning opportunity. In general, interacting with open-source technology offers great opportunities to help especially financial businesses in their transformation into the world of advanced technologies.

The Bitstamp full webinar recording can be found here and a mashup of highlights can be found here. Consider subscribing to the series as exciting thought leadership style talks will continue (here).

Bitstamp is my client but the perspectives in this article are mine. This article is part of a content series on crypto industry trends.

📌 Listen also to my conversation on the institutional adoption wave in crypto with Mel Tsiaprazis, Bitstamp`s Chief Commercial Officer `Adulthood in Crypto` https://youtu.be/xuNfreeYUcQ

[1] DAOs Aren’t A Fad — They’re A Platform

[2] Guild Esports Signs $6M Deal With Bitstamp https://buff.ly/36BfEOf

[3] Bitstamp teams up with Immortals esports team in crypto deal https://buff.ly/3horD3Z

[4] See page 4 of the Annual ComplyAdvantage report on the State of Financial Crime https://complyadvantage.com/insights/the-state-of-financial-crime-2022/

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