The rise of non-custodial products
Recently I came across this quote by Eric Schmidt about web3 and Bitcoin in particular:
“The ability to create something which is not duplicable in the digital world has enormous value. Lots of people will build businesses on top of that.”
There are two things that are implicated by this quote which I find interesting. The notion that web3 protocols introduced the concept of digital assets which are not duplicable and digitally unique and that this is something people will build businesses on top of.
As we all know, it all really started 10 years ago with Bitcoin introducing what I like to refer to as ownership without possession. While one bitcoin is fungible but overall limited in total supply, it is unique in the sense that ownership can’t be compromised — no central authority can take this asset away from you, censor it or keep you from sending it to someone else, with the obvious exception of getting access to your private key of course.
Fast forward ten years to 2019, we see this notion being replicated into different areas and verticals of today’s web. The most prominent example probably being Ethereum with its native token ETH. While Ether gives you access to the protocol’s utility, running smart contract computation on a decentralized general purpose “world-computer”, your ETH holdings can’t be compromised either (let’s forget about buggy smart contracts for a second here), they remain within your control for as long as you want. The same applies to more narrow web3 protocols like Maker with regard to DAI or Augur with regard to REP and the respective shares in those prediction markets in which you trade.
If we turn towards the application layer, we see that this enables a new set of products being built on top of these incorruptible (and stateful) protocols. Founding and developer teams are flocking into this new design space building a new generation of products and applications not hosted on AWS or deployed on iOS or Android but built with a different mental model.
A tale of stateful protocols and non-custodial applications
My favorite example is Flux (www.flux.market)*, which is building a decentralized peer-2-peer marketplace for derivatives on startups. Once it’s live later this year, I can go to Flux and trade with other people on various startup-related things, e.g. whether Airbnb is going public by the end of 2019 or Mark Zuckerberg resigning from Facebook within the next 18 months.
Flux is essentially a combination of smart contracts with a product stack which is fully built on decentralized infrastructure, utilizing a combination of Ethereum (as a base layer), Augur (to trade in prediction markets), potentially Maker (to be able to use DAI in trades) and 0x (for their off-chain order book).
The interesting aspect of a product structured like Flux is that it introduces something I like to refer to as a non-custodial product. Flux lets me trade on startups with other people like any other social trading app would do — but Flux doesn’t hold any credit card details, it doesn’t hold any funds or deposits to trade with, in fact, it actually doesn’t have any custody over any of my assets whatsoever. If Flux would go out of business, I would still have ownership and control over my shares which I traded in prediction markets on the Augur protocol and I could access them through another interface. I could even build an interface myself if I’m not happy with the user experience that the team at Flux created.
This obviously presents us with a whole new set of questions around value capture across different layers of the stack, but strongly believe that there will always be value captured where there is high proximity to the end user, even (more so) without having custody over her or his assets.
That being said, I believe we are witnessing the beginning of yet another developer-driven shift in the way we architect, distribute and publish applications on the web with founders starting to establish a different mental model. This is not limited to all the exciting things that are happening in the open/decentralized finance space. We see the same phenomena in other areas of web3, like non-custodial games on the Ethereum blockchain or non-custodial photo applications like Textile and I’m more than positive that this is all just the beginning of a fundamentally different, long and exciting journey.
*I’m a shareholder in Flux.
