Top 10 Reasons Crypto Is Here To Stay
Goldman Sachs recently released an interesting but ultimately misguided report on crypto: Digital Assets: Beauty Is Not In The Eye Of The Beholder. While there are some great data and thoughtful commentary throughout the paper, it is on balance negative on the asset class and there is a real sense one gets that they are out of touch with what is actually happening in crypto. There is this lingering sense throughout the report that Crypto remains the land of anarchists, libertarians, drug dealers and gamblers. And in many parts it reads a bit like the Wall Street reports on the Internet in the late 1990s or after the dotcom bubble burst that claimed that nothing much was going to change in the ‘real economy’ so don’t bother investing in Netflix or Amazon or Google.
While the report makes quite a compelling case for why it is virtually impossible to do a valuation analysis of crypto currencies, this misses the revolutionary changes that crypto is unlocking. Here are my top 10 revolutionary technologies and ideas being unleashed by crypto as we speak (most of which are ignored or underplayed in the report):
- DEFI: The value that currently lies in banks and exchanges around the world will leak over to blockchain-based financial instruments, businesses and coins in the coming months and years. Distributed finance (or Defi) is going to drive these businesses to the point that they will become a shadow of their former selves. The possibilities boggle the mind the more time one spends in Defi-land (see graphic above). Already there are stablecoins tracking fiat currencies, lending and leverage markets, AMMs & liquidity pools, derivatives, KYC-tech, Asset Tokenization/fractionalization, insurance products, prediction markets, infrastructure tech (like price Oracles), and of course the marketplaces and exchanges (like Coinbase) that connect all of these pieces together.
- NFTs: A significant percentage of the value of the creative industries that have a digital product (collectibles, music and video gaming in particular) is likely to flip to Non Fungible Tokens (NFTs) and this will be an extraordinary boon for creatives. A digital asset such as a song, a digital collectible or artwork or an in-game item currently is rented, not owned by the user. In the gaming industry alone, consumers spent US$100B on in-game items. Yet they can’t transfer that skin or weapon or crafting item or playing card out of that game. They can’t trade it or realize its potential rise in value. They can’t pass it on to their kids or gift it to a friend. NFTs change all of that. Another example is the music business, where just 12% of the $42B in annual music industry revenues go to the musicians and the rest to the intermediaries — NFTs will allow this ratio to flip because artists will be able to interact with fans in a secure and stateful economic way directly using blockchain technologies. For example, the band Disclosure made their NFT debut last month by producing a brand-new song live on Twitch, then immediately minting that track as a single-copy NFT and putting it up for auction. The piece, titled “N.F.T-N.R.G.,” sold the next day for roughly US$69,000, all of which went to Disclosure. Then there’s this: “DJ Sells First-Ever Crypto Albums, Earns $11 Million in a Day”.
- PAYMENTS: To transfer money internationally can cost from 1–6% in fees, depending on who you use. Using crypto, it is essentially free — the only cost is a few dollars for your gas to update your transfer on the ledger. It is also permissionless, instant, 100% digital/human-free, and secured by the cryptographic consensus protocols. If a business is sending $100,000 internationally, they could pay $1,000–3,0000 in fees for this privilege using banks (plus all the headaches and delays). Or they could do it instantly for $10 using a stablecoin like USDC, DAI or Tether. Same goes for B2B payments intra-country. You can use blockchain rails for free or pay a bank or credit card company 2–3% or more, not to mention the labor chasing bad and overdue debts. That all goes away with crypto. Once individuals and businesses awaken to this reality, the trickle will turn into a torrent.
- LAYER 2 SOLUTIONS: As I wrote recently in “Crypto & the Invention of Web3”, there is a wave of new startups coming that are solving the scaling, cost, privacy, and UI issues that are currently holding back mass adoption of blockchain technologies. As Delphi Digital recently pointed out, there are quite a few companies competing to dominate this new space. Once they have deployed and scaled, crypto will be ready for mainstream user adoption. Crypto wallets will become like email addresses: everyone will soon have one (and probably more than one).
- ETHEREUM: The one cryptocurrency to rule them all? Ethereum ranks second only to Bitcoin in market cap (at >$200B even after the recent declines) and has the security that comes from having thousands of independent validators/miners. But more importantly it has the top four on my list: payments, Defi, NFTs, and Layer 2s. The action in these areas are almost all happening on the Ethereum network. These four features are the engine that is fueling the protocol’s rise and will continue to drive fast growing demand for this blockchain protocol in particular.
- THE ENVIRONMENT: My prediction is that in 12–18 months the global warming/electricity consumption/CO2 emissions debate will be over. Whether it is proof of stake protocols or Layer 2 solutions like ImmutableX and Polygon, this problem is going away fast.
- DLTs: Many other traditional industries will begin using distributed ledger technologies (DLTs) for title tracking and transfer (e.g. as the report points out: As the Goldman report itself points out: “For example, A.P. Moller- Maersk, a Danish shipping company, uses the technology to track shipments, containers and documents around the world. Walmart uses the technology to track its food products in order to maintain safety standards and minimize risk of contamination. French luxury goods company LVMH uses the technology to track its own products and combat counterfeits. Hospitals have used it to keep track of COVID-19 vaccines.”
- DAOs: Distributed Autonomous Organizations (DAOs) are already starting to reinvent corporate governance and potentially startup funding as well. DAOs are crypto-native “Inc.” or “LLC” type corporations or non-profits. A16Z released an interesting podcast on the topic and Linda Xie from Scalar Capital wrote a good intro on Mirror. Anyone with an idea can start a company as a DAO and fund it in a matter of minutes (or seconds if you know what you’re doing). The odd thing here is that regulators haven’t caught up yet so it is unclear how these will be regulated in the future. Just one recent example makes the point. PleasrDAO raised $5.4M to buy a digital artwork. This was a group of people, most of whom had never met one another, who simply created a smart contract on Ethereum designed to pool their money and bid on a particular piece of art in a specific auction up to a set price or return the money. In other words, a DAO. Watch this space: there will be an explosion both of true innovation and ridiculous hype to come.
- ZK PROOFS: Zero Knowledge Proofs (ZKPs) are a bit of mathematical wizardry that allows you to prove that you know or have something without revealing what you know or have. NotBoring summarizes it well: “Every so often, a technology comes around with the right combination of promise, nebulousness, inscrutability, and abstractness to fully capture and incept the hive mind’s imagination. These technologies aren’t just going to change a few things; they’re going to change everything.” Think the Internet, the Cloud, Blockchains, mRNA. ZK Proofs are in that same category. NotBoring continues: “Our data is everywhere. Names, dates of birth, email addresses, credit card numbers, the addresses we have lived at in the last five years, our mothers’ maiden names… These are just a few of the near infinite bits of information on ourselves that we all fork over every day to companies, social media sites, customer service representatives, and sometimes (unwittingly) to scammers.” ZKPs integrated into the cryptographically secure blockchain environment will bring an end to this. Expect to hear a lot more on this topic.
- dAPPS: Much of the Internet will start advantaging itself of the distributed ledger and ‘statefulness’ of blockchains via dApps. More and more, the big Internet business categories will build Web3 “distributed applications” (dApps) on distributed ledger technologies. Examples already are appearing in categories like cloud file storage, DNS, web hosting, social networks, music distribution, browsing, audio/video calls, messaging, marketplaces, ticketing, home rental etc. (see image below for a bunch already happening and their Web2 counterparts)