Introducing Recursive Capital
Background
The profundity of the current human economic experience is not needed to deduce the evident reality that the current global financial system is severely broken; from being riddled with fragile central points of failure supported by centralized services, to unnecessary delays in transactions, frivolous fees, and other numerous related inefficiencies endemic in the global financial system.
These issues are not peculiar to the financial world alone, as the current centralized model of the Internet has provided large corporations the ability to infringe upon user privacy rights. This violation of rights coupled with the potential leakage of sensitive financial data and medical records can be, and has been, used by hackers, corporations, and even governments alike, both for profit and nefarious purposes such as blackmail.
The accelerated shift towards central bank driven cashless societies also brings with it several maladies mentioned below, as it necessitates the intermediation of value transfer between individuals:
- Increased trust in the intermediaries
- Potential censorship of transactions
- Permissioned transactions
- Financial surveillance
- No anonymity or privacy in data transfer
The aforementioned problems make it fairly trivial for transactions of such nature to be censored by governments as they can easily exert power and influence over these intermediaries. This also makes it possible for hackers to easily steal funds, as securing the money processed by these intermediaries are wholly dependent on the overall security of the underlying platforms and protocols, turning customer funds into vulnerable open treasure chests.
Currently, there are 1.7 billion financially excluded persons globally, about half of which are unbanked women in poor households in rural areas [1]. Costs associated with opening and maintaining a formal bank account at a financial institution are generally too high for these individuals, thus completely excluding them from the global economy.
Global Financial Architectural Flaws
The globalization of economies has benefited a great number of countries and has provided them with access to capital and other resources that would have otherwise been unavailable to them.
However, as with all interconnected systems, their inter-dependency would inadvertently form the basis of their stability. As such, a devastating catastrophe in one critical part of the system can easily bring about the collapse of the entire system. A more recent instance of such a phenomenon was the 2007 housing crisis that lead to the “Great Recession” in 2008, whose effects rippled beyond the shores of the Americas and into the rural parts of Africa and other corners of the globe.
It serves as a perfect example of the impact years of compounded suppressed risks in a system, through the integration of increasingly unstable elements, can have on the global economy at large. Millions of innocent individuals were affected globally, which sowed the societal seeds of mistrust and led to the complete loss of confidence in the banks and institutions that initiated the crisis.
Throughout the history of human civilization, no other period in history rivals the current level of global financial inequality we experience today. The centralized design of our global economic order fundamentally concentrates wealth around financial centres of the world, where the income distribution of global wealth is unevenly spread across economies. As a result, more readily accessible tools and services for wealth redistribution are required if we indeed aim to tip the scales of global wealth inequality.
The Open Internet
The Internet has gone through 2 major iterations since its inception; namely Web 1.0 and Web 2.0, and is currently in the process of a third transition — Web 3.0:
Web 1.0
The initial phase of the Internet provided the first opportunity for global information access, where walls of information could be posted online, and mail sent electronically anywhere in the world (via SMTP), effectively unifying global information communication.
Web 2.0
The general advancements in global computational power allied with the introduction of server farms initiated the transition of the web from an open static library to a centralized hub of interactive and dynamic web applications and sites. The resulting business model had at its core the exploitation of user data, as corporations began to monetize its use for profit.
Web 3.0
The increased mistrust in these large corporations, as a result of their continued privacy breaches and mass surveillance campaigns, has spurred numerous debates around rethinking how networks (specifically their protocols, businesses, and revenue models) underlying the Internet function and how user data is treated.
The preceding has led to calls for a revolutionary shift towards a more decentralized architecture that features the disintermediation of information access, user data security, and privacy at its core, in a global effort widely characterized as “Web 3.0.”
Unpacking Web 3.0
Looking at the current architecture of the web, it is evident that the exploitation of user data for profit is a feature not a bug, as the information exchange layer relies on the traditional client server model, where apps and services aiming to scale with increasing user demand require large amounts of computational power to serve the resources to the clients. This requirement is responsible for the shift towards installing server farms by large corporations, as users continue to demand for real-time information and cloud data storage. It is therefore natural for these corporations to erect guarded silos that provide exclusive user experience, and entire ecosystems around it. Hence, individuals become reliant on access to services hosted by these corporations, especially one’s hosting social networks as it is difficult to migrate to another platform with significantly inferior services, and even more so to convince their friends to make this arduous transition.
These are significant reasons why individuals readily accept unfavorable user agreements in a rush to join the online extension of their social circles, as viable alternatives are missing, and even if present would require enough benefits to justify the switching costs.
These issues, as already discussed, form the status quo of the current Web 2.0. Therefore, to solve these problems, it would require the creation of entirely new ecosystems that make the models above impossible to recreate, that is, an ecosystem that would appropriately give control back to the individual.
At the core of the Web 3.0 vision is the goal of providing a global decentralized information layer built atop the Internet that would ensure online sovereignty.
Online Sovereignty
The incumbent form of the web is riddled with systemic issues that mainly stem from a lack of support for individual privacy, anonymity and thus autonomy. To fix these, there are increasing efforts underway by projects around the world, who are building protocols that provide this, such as Protocol Labs’ IPFS platform.
In talking about online sovereignty, we are mainly talking about two things:
- Data sovereignty
- Financial agency
To properly ensure users don’t become the product or victim, these new protocols, apps, and services must have embedded within them, the notion of user data protection and should enable the creation of an open censorship resistant monetary layer, and a variety of interoperable monetary networks that would facilitate true global financial participation.
Data Sovereignty
To effectively secure user data over the internet against hackers or corporate exploitation, we need better rules for how we interact, communicate, and handle this data over the Internet. The creation of next generation protocols for secure and privacy-preserving communication of data is of paramount importance, as without it individuals would continue to be products and their data treated as assets instead of the other way round.
To achieve this level of data protection we must ensure the following:
- Online Privacy
- Encryption as a Right
- Data Integrity, Ownership, and Authentication as a Copyright Layer
Online Privacy
There is no doubt that the campaign to sway public perception on privacy, from a necessary tool against oppression and exploitation, to one associated with concealing illegalities and bad behaviour has been somewhat successful. Throughout history oppressive regimes have tried to instill in its citizens a lack of interest in reclaiming their right to privacy as they proceed to infringe on all their other rights, including human rights.
The right to privacy is the first right that is taken by oppressive states seeking to control and limit individual freedom of thought and expression.
At the turn of the century, as Internet adoption was gaining ground, certain groups of individuals — known as cypherpunks — who understood the power of erecting a global information pipeline sought to actively ensure user privacy was protected on the Internet.
“We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. People have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not allow for strong privacy, but electronic technologies do.”
— Eric Hughes (A Cypherpunk’s Manifesto)
Their idea was that to ensure user privacy going forward they would have to create cryptography tools that would make it possible to do so on the Internet.
This was in no way an exaggerated stance, as at the time the US Government considered cryptography software as “weapons” and tried, although ultimately failed, to ban the sale and distribution of such software through the Clipper Chip and other regulatory techniques.
Anonymity provides users the ability to freely express their views online as the risk of tying their identities to their views is not possible, or at the very least very difficult. Users of tools such as Tor, VPNs, and protocols that embed anonymity in their data relay layer are afforded the opportunity to freely share information on the Internet, to either expose damning information as is the case for whistleblowers and journalists, or to express dissident views in authoritarian regimes.
Encryption as a Right
Unfortunately the current perception around privacy is one that involves unfounded notions of seeking the ability to perpetuate illegalities or wrong doing, as opposed to the power to safeguard one’s information against exploitation by corporations for profit, state censorship of individual thought and expression, and a host of related issues.
It is only when freedoms are taken that their importance is noticed.
Privacy is inherently a right of rights, one in which lays the foundation for other freedoms and rights. If an individual’s right to privacy is taken, it is fairly trivial to also curtail their freedom of thought.
For example, governments in central bank driven cashless societies can exert pressure on intermediaries to suspend support for any transaction made by an individual, essentially stripping them of financial agency, and ultimately freedom, as the individual must now suppress any and all thought crimes to avoid being financially silenced.
“Privacy is an important right because it is a necessary condition for other rights such as freedom and personal autonomy. There is thus a relationship between privacy, freedom and human dignity. Respecting a person’s privacy is to acknowledge such a person’s right to freedom and to recognize that individual as an autonomous human being.”
— (TECHNOLOGY AS A THREAT TO PRIVACY: Ethical Challenges to the Information Profession)
Therefore, encryption as both a tool against oppression and exploitation is a matter of rights, and in an increasingly digital world where financial exploitation of individual data is a mainstay, there is an imminent need for “dissident technologies” as individuals would need tools and services that provide the ability to securely transfer and/or store information on the Internet.
Users in safeguarding their information must seek out services that offer end-to-end encryption, where data is encrypted and stored on remote servers, ultimately making this data useless to hackers in the event of any data breaches. An additional step would be to use decentralized P2P messaging systems such as XMPP which offer multi-end-to-multi-end encryption (OMEMO), “allowing messages to be synchronized securely across multiple clients,” and do not feature a central server, as individuals can run their own XMPP servers, thus cutting out the risks of a centralized point of failure.
Traditional cloud computing services and platforms also suffer from having central points of failure, as hackers perform all sorts of attacks such as side channel attacks to gain access to user data stored in the cloud. To properly secure user data against these scenarios, decentralized cloud computing platforms that safeguard user data are needed. Currently, decentralized cloud computing platforms like Blockstack provide this and many other services such as BNS.
Data Integrity, Ownership, and Authentication as a Copyright Layer
The cheap replicability of data is a fundamental property of information systems, however, this also means data traveling over the wire can easily be plagiarized or outright copied, making copyright management on the Internet intrinsically difficult. Nevertheless, this unique property has been somewhat solved with the advent of Public Key Cryptography (PKC).
PKC provides individuals with the ability to perform integrity checks using mathematical functions to verify the integrity of data received against a known identity — the public key. The provision of two distinct linked keys, one private and one public, makes it possible to use the former to sign messages and the latter to prove the integrity of the messages.
This is done by verifying the accompanying signature against the target public key, if it checks out it is “assumed” that the data was the original one sent by the holder of the private key associated with that public key. Data cannot be modified nor corrupted during transfer over the wire without being detected. This effectively proves the intended target is indeed on the other side, curtailing potential “man-in-the-middle attacks.”
The right to decide whether or not to monetize user data, private or otherwise, should be left in the hands of the issuer of said data i.e. the user. More broadly, it should be up to individuals whether they would like to monetize their content. This shift has tremendous effects on online sovereignty especially for content creators. But beyond that, it is of almost equal importance that the monetization scheme be one were there are little to no middlemen, as they introduce unnecessary friction and charge fees that could have otherwise gone to the creator.
Content creators have a hard time monetizing their content as platform fees, and other related exogenous costs make it nearly infeasible as a viable income stream. However, individuals seeking a more favourable revenue sharing service can use P2P marketplaces that securely facilitate commerce between creators and buyers without the involvement of intermediaries (e.g. Origin Protocol and Open Bazaar).
Financial Agency and Money in the Digital World
The Internet brought about 2 fundamental changes to the world, it has:
- Laid the pipeline for a unified global communication channel
- Facilitated instant global access to knowledge and information
This has provided the necessary architecture to connect individuals and world economies, allowing them to seamlessly share information across borders, with the attendant effect of democratizing access to information, knowledge, and data.
Fundamentally, global finance is a system that facilitates transfer of financial information — money.
There has been a rediscovery of financial coordination, as database management systems can be used to maintain ledgers of transactions, which in turn can be used to track both the money supply and the ownership of money all over a single medium — the Internet.
The Internet acts as a unified global information pipeline, which is currently used by more than half of the world’s population (3.9 billion or ~51.2% as of 2018) [2], and can be used to coordinate financial activities accurately, instantly, and more importantly, globally.
Crypto Assets
“The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A.”
- Milton Friedman
Bitcoin and other platforms such as Stellar and Ethereum provide decentralized infrastructures that can host ad hoc systems that leverage the power of these open networks, to create, for example, micropayment networks.
These ad hoc networks could then be used for financial services such as crowdfunding and commerce. The Bitcoin network especially allows individuals to use an open, borderless, and censorship-resistant money — bitcoin — to perform regular commercial activities or to preserve wealth.
If these open platforms are properly utilized, it can facilitate the creation of entirely new financial networks that act as a vehicle for connecting individuals over a unified global market using locally available tools and services, such as crypto wallets. This would greatly foster financial inclusion, as it would provide the unbanked with a cheaper option to participate in the wider global economy.
Democratized Global Financial System
The Internet democratized information, however, Bitcoin is attempting to democratize global finance, by providing wider global access to financial services. This would greatly help level the playing field for all stakeholders across economies.
A Nigerian farmer could receive a loan from a Canadian, invest in a rice mill startup in the Philippines and pay for her car — all through a synthesis of decentralized financial services.
The decentralized technologies built around Bitcoin provide a more advanced level of security and privacy, devoid of single points of failure. Individuals would now have full custody of their funds to do as they deem fit. If attackers seek to steel these funds, they would need to gain access to the private keys, which if secured properly, could be impossible.
Unlike traditional banking transactions, the transactions on these platforms are permissionless, immutable, and thus nearly impossible to reverse. By effectively acting as an entirely separate financial system, Bitcoin provides individuals with the opportunity to hedge against unfavourable economic situations, such as hyperinflation and government manipulation, by storing their wealth in a decentralized financial haven — bitcoin.
The growing number of apps and services built around these systems continue to bring increasingly intuitive user interfaces to provide a seamless experience, without all the systemic complexities inherent in traditional financial services. It also connects individuals to relatively inexpensive financial services such as loans, grants, etc. through specialized tokens and cryptoassets.
Global Micro Payments
Financial transactions between individuals are usually of small amounts — i.e. micropayments, which means, the decentralized financial systems built on top of Bitcoin and other crypto platforms must be able to facilitate these forms of transactions.
At the moment, there are a few ad hoc networks that are built on these platform such as Bitcoin’s Lightning Network, which provides a system for global instant, low fee micropayments, with no middlemen, as the transactions are then settled on the Bitcoin blockchain.
The built-in programmability of these platforms also opens up the opportunity for developers to program business logic into low cost interoperable financial services. This could also even facilitate Machine-to-Machine payments, making online service payments such as Netflix subscriptions seamless as we continue to shift towards increasingly personalized Internet-connected devices.
By using ad hoc networks, such as the Lightning Network, individuals are now in charge of how much of their personal information in a transaction is available to the outside world. At the moment, it even provides them with protection against privacy-invading analyses such as common-input-ownership heuristic, address reuse, and change address detection.
A Hybrid Global Financial System
Centralized systems still form the core of our current global financial system, and to naively assert that this reality would become completely extinct is unfounded, as trust is an innate human attribute, and individuals would more likely continue to outsource protection and storage of their funds to third party custodians.
A sudden deprecation of existing centralized financial structures such as banks is highly unlikely, and a more realistic scenario is the synthesis of these traditional financial structures and the crypto economy, featuring a financial system that allows individuals access to asset havens like Bitcoin, while still providing access to conventional centralized financial systems of yore.
This hybrid system would provide greater financial flexibility for individuals, as they are given the option to opt into whichever financial system they wish to. This system, although not fully decentralized, could see the global democratization of finance.
Present Drawbacks in Crypto
Though there are numerous benefits that crypto introduces, it is not without its drawbacks. They are as follows:
- Price Volatility: Bitcoin, the largest cryptocurrency by shear market cap, continues to suffer from wild price swings, which has negative effects on short term investments. Nearly all other cryptocurrencies are positively correlated to Bitcoin, hence, they also suffer from these sporadic price changes, especially those with significantly smaller market caps.
- Regulation: Cryptoassets, compared to traditional asset classes, are still relatively new and have very little to no applicable legal or regulatory framework. The absence of regulation in most jurisdictions means there is no assurance on risks associated with cryptoasset technologies, consumer/investor protection for cryptoassets, their impact on financial stability, and other related financial products, especially in the case of loss of funds due to hacks.
- Operational Risks: The shift from financial institutions bearing the responsibility of securing funds of individuals is still alien to most people, and even developers, as it is in stark contrast to the current financial system. Hence, there are still issues around the proper implementation of the secure storage of cryptocurrencies against hackers, and securely managing and backing up private keys, mnemonics, and passphrases.
Other drawbacks currently being experienced include:
- Low adoption of cryptocurrencies worldwide.
- Infant and inadequately tested financial instruments and services.
- Underlying platforms and protocols are still maturing.
Regulating Cryptoassets
The creation of secondary markets requires compliance with existing regulatory bodies to provide:
- Investor and consumer protection against loss of funds (mostly due to hacks), and secure storage of assets such as Bitcoin.
- Flexible exit options to realize gains from Bitcoin holdings, dividends from ETFs, etc.
- Exposure to a variety of digital assets — like Bitcoin — to institutional investors and mutual/private equity funds and retail investors.
- Reduced systemic risks, and volatility inherent in primary markets, such as the cryptocurrency market.
- Legal framework for the operation of financial products and services.
Additionally, these new capital flows can be used to invest back into the economy, to aid in infrastructural development, health care services, education, and to also provide the necessary capital for funding promising ventures, which would consequently create more jobs and provide investors with the opportunity to participate in the wider global economy. This essentially provides both the private and public sector access to additional capital, thereby enhancing the competitiveness of African countries as global investment destinations, for both foreign and domestic investors.
Recursive Capital
Recursive Capital is a crypto investment firm that provides seed and early-stage VC funding towards the development of the Web 3.0 ecosystem, with an emphasis on emerging technologies that catalyze the evolution of Africa’s digital economy. We invest in founders building critical Web 3.0 infrastructure related to:
- Next-generation payment rails for emerging crypto assets.
- Secure, scalable, privacy-preserving protocols and decentralized apps.
- Bitcoin-related products, protocols, and applications.
Vision
We are devoted to transforming Africa’s emerging digital economy to unlock new economic opportunities by funding and building the critical infrastructure for Web 3.0 via:
- Next-generation protocols
- Crypto asset products
- Decentralized applications
Mission
We are committed to investing in technical teams and communities developing innovative solutions that address user experience, scalability, privacy, and interoperability in decentralized protocols and applications.
Conclusion
Africa’s Digital Economy
The global proliferation of smartphones, especially in less developed parts of the world, introduces the opportunity to onboard individuals onto the Internet. The intense global market competition in the smartphone space continues to drive the prices of these devices lower, further increasing the number of individuals who can afford it. These cheap devices also benefit from the higher computational power that allows them to run increasingly complex apps. This unique synthesis of cheap yet powerful devices lays the foundation for endless possibilities for financial innovation going forward.
In recent times, we have seen a global increase in mobile penetration in Africa, which is providing those without formal financial accounts the ability to engage in day-to-day commercial activities using mobile money. The existing shift from traditional bank accounts to mobile money wallets lays the groundwork for future crypto adoption as an electronic supplement to mobile money. The lack of internet infrastructure across the continent provides both a challenge and opportunity for crypto adoption, as we are open to innovate ways of re-architecting Africa’s nascent digital financial ecosystem (via mesh networks and other media).
Cryptocurrencies such as Bitcoin provide an open, decentralized, censorship-resistant, low transaction fee, inclusive financial monetary network, and wealth preservation technology. The existing mistrust and lack of confidence millennials have developed in the global banking system has inevitably prompted their willingness to experiment with Bitcoin as a wealth preservation mechanism. Africa already accounts for approximately 3 million subscribers on Paxful, a leading peer-to-peer finance platform for trading bitcoin. The synchronicity of the steady growth in smartphone penetration on the African continent [3], its untapped pool of talented developers, allied with the fact that 60% of Africa’s population is below the age of 25 [4], Bitcoin (and other cryptocurrencies) provide unprecedented opportunities for radical financial innovation, inclusion, and services (e.g. remittance) on the youthful continent.
The Future
At Recursive Capital, we are fully devoted to the cause of accelerating mass adoption of Web 3.0 services and acknowledge the importance capital plays in funding great companies and transforming communities. We are however very careful to point out that capital does not, in of itself, create ideas nor innovation, as such, we continue to ensure we point out that our nascent community of founders and innovators remain the biggest asset on the African continent, as we seek to merely play our role in assisting these ambitious individuals in leapfrogging the continent forward into the 21st century.
As we proceed to funding the evolution of Web 3.0 focused protocols, applications, services, and the ecosystem in general, we do so with the aim of integrating these technological advances in the background of average user applications. We are still in the embryonic stage of Web 3.0 development, and the next 10 years will prove decisive in shaping the type of future we want for our ailing continent.
We therefore fully believe that crypto is a natural and logical progression in our monetary evolution, and the potential benefits that are inherent in the wider Web 3.0 ecosystem such as data sovereignty would represent a tremendous shift in our society going forward.
Disclosure
Recursive Capital and individuals involved in writing this content have direct or indirect exposure to Bitcoin.
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