A Thesis for Crypto Adoption
A reminder that WAGMI
Introduction
Lately, crypto markets have been at the mercy of the macroeconomic environment, Federal Reserve policy, and several black swan events that have acted strongly against short-term prices.
Crypto Twitter has become a shadow of its former self, with the same ‘how to survive a bear market’ threads being thrown around the echo chamber — making it incredibly difficult not to listen to the naysayers and ‘retire’ from Web 3 investing.
Having been in space long enough to see multiple cycles, I can assure you the short-term pain and doubts do not go away. Humans suffer from loss aversion — when we’re put in uncomfortable situations, the overriding need to shut shop and escape from whatever’s causing that pain can be overwhelming.
What I do understand, however — is that cycles come and go. Bull markets are followed by bear markets, and no matter what sandpit you’re playing in — equities, commodities, bonds, crypto, or even real estate, this time is definitely not different.
Coinbase recently drilled this point home to celebrate its 10th birthday with a genius advert showing screenshots since 2012 of ‘thought leaders’ proudly declaring “Crypto is dead”. This sends the message that just like so many other emerging technologies and markets, blockchain and crypto will have their ups and downs — but ultimately they are here to stay.
Anyone who’s sat through Paul Johnson’s masterpiece — Modern Times, will understand change takes time. Conviction is therefore needed to stay the course, and this post aims to do just that — revisit and retest my thesis for crypto adoption over the coming decade. In the following post, I will explain my core reasons for investing in the growth of cryptocurrency as an asset class. This is not meant to be exhaustive, but instead, touches on the main arguments I lean on when someone challenges my belief in the future of Web3.
Decentralization
This means different things to different people, however, the main points which resonate the most with me are ownership and immutability.
Having grown up as a ‘millennial’, I’ve witnessed first-hand a new paradigm of internet companies growing into global behemoths. At different times in my life, Bebo, Myspace, Twitter, Facebook, MSN (ASL bbe?), and Google have all played a large part in how I’ve come to interact with friends and the world around me.
In the early days, these platforms were fun. They added value to my life as the aforementioned companies rolled out features to win users. Over time, however — I’ve witnessed them hit terminal velocity and drastically shift their approach from positive-sum to zero-sum (as Chris Dixon writes in this essay).
These networks have generated massive value for shareholders by slowly but surely violating my privacy, collecting data, and turning me into a product that I do not own. This presents enormous conflicts of interest and misalignment of power between user and operator which often appears through other means.
Centralization presents the opportunity for large value sponsors to constantly change the rules of the game. Think Game stock ‘manipulation’, a company running sales through Facebook’s ever-changing terms and conditions, or an insurance firm refusing to pay out a claim because of some opaque clause in a contract.
The examples are endless but all have one thing in common — the centralized entity with the most bargaining power will almost always win. The current system enables this at the expense of users, however, we are slowly seeing the tides changing as people become more aware of the value of their time, attention, data, and the many ways in which current incumbents manipulate the rules to their detriment.
Imagine a future where the users of a network are also the owners. Value accrues to these users and smart contracts take the place of a corporate board — giving a fair and trustless overview of a protocol's rules’ which cannot be changed without mass consensus. In my opinion, removing the centralized entity from the equation is the best and only way to truly close this gap and encourage innovation in the long run.
Tokenization
With the decentralization argument at its core, I believe that at some point in the future, all commerce, assets, and systems will at least have embedded the option to tokenize.
Fractional ownership opens up vast opportunities for anyone to own a slice of the networks they use every day. This model enables users to be rewarded for participating in value development and paid directly proportionally to their time and effort. This facilitates exponential growth through network effects as incentives are perfectly aligned which results in positive feedback loops and innovation.
Tokenisation has slowly begun creeping into the mainstream (although currently from a low base), and rough forms of the approach such as shared property ownership and fractionalized shares already exist, however, the current incumbents continue to be plagued with all the classic issues associated with centralized operations. Where I’m most excited about the use of tokenized assets is when they can be placed truly on-chain and represent legal, official, and custodial forms of tradable real-world assets (RWAs). The successful implementation of blockchain technology with RWAs has the potential to disrupt a $20tn+ market through offering real solutions to liquidity, storage, trading, and origination market failures that currently exist.
Now we have a roadmap to tokenize products, entities, and services, and the applications are already — despite their infancy, seriously disrupting multiple markets and increasing the standard of living across the globe. Blockchain technology has been the first real innovation to allow us to tokenize arguably the most important facet of human existence — Time.
Whilst this seems far-fetched and conceptual, several protocols have already been attacking this problem with play/move to earn projects amassing huge near-term success. Whilst I don't believe anyone has really succeeded in creating a sustainable solution yet — the growth is moving in the right direction and picking up speed as innovators work within the space. The beauty of this tokenization narrative is that in order to really be adopted — horizontal and vertical chains need to be designed, created, and managed to build the infrastructure required to support this transition. We’ve not even scratched the surface.
Ownership
We’ve been programmed to believe that any fiat we hold in a bank belongs to us. That it exists in its full form and can be withdrawn with no capital controls. This is wrong.
The recent UST/Terra fallout helped reiterate to me the true importance of ownership. In the depths of this crisis where many ‘blue chip’ stablecoins looked like unpegging, I made the decision to move all capital off centralized exchanges into a non-custodial wallet protected by a ledger. This took me the best part of 10 minutes and I could do this only because I was the true owner of my cryptocurrency.
Banks use fractional reserve systems which means they operate with IOUs. Yes, there are regulations stipulating how much reserve capital they must hold but ultimately — they do not hold enough cash to facilitate mass withdrawals in case of a bank run or failure. The whole financial system as we know it revolves around a handful of institutions, how they process transactions and respond to government intervention.
All around the world, there are entities that can decide at any time to pause, cancel or reverse transactions for all kinds of reasons. This, unfortunately, is not reserved strictly for the ‘third world’ as we were harshly reminded by Canada which froze protestors' bank accounts, or Cyprus’s infamous ‘bank bail in’ in 2013 which forced depositors to part with their savings to save the over-leveraged banking system.
The growth of blockchain and specifically decentralized finance has allowed an alternative industry, focused on sovereignty to develop. It's now possible to have custody of your own capital, take our loans, lend cryptocurrency for favourable APRs and cross collateralize holdings without giving up ownership of your assets. This not only provides immense growth potential from a transaction point of view but also enables non-custodial applications to allow the facilitation of complex derivatives contracts for example.
The Bigger Picture
Sometimes, it's best to zoom out and look at current moves within the context of a multi-decade cycle. Despite the current pullback, a single Bitcoin is still around $20,000. The same people who slammed it all the way up from $3,000 are currently claiming ‘victory’ once again and will continue to do so every time a painful drawdown occurs.
If you believe in the merits of crypto as an asset class, take some time to understand your reasoning on a deeper level. This will be different for everyone but ultimately will allow you to stay the course.
Take Care,
Team Lithium x Jake
