I. Crypto is Eating the World
“The Blob” is a 1950s science fiction thriller about an alien entity that crashes to earth and starts swallowing everything in its path.
Crypto is the modern-day blob, event horizon, or “rabbit-hole” to choose your metaphor — a one-way door that may be poised to transform how we live, work, and play.
Some facts. Crypto is attracting the most VC investment of any category, raising a record $30 Bn in 2021. OpenSea, an NFT marketplace, raised at a $13 Bn valuation. (The company had less than 50 employees a few months ago.)
There’s a Cambrian explosion of projects and communities seeking to transform social interactions, gaming, banking and more.
This post is a brief “highlights reel” on topics to give you a taste of what’s happening and why this time is different — we’ve come a long way since the ICO debacle of 2017.
We’ll touch on:
· Blockchain Gaming
· Web 3.0
In this article, I’ll define each category, share the current state, and envision a future state incorporating crypto.
II. Stablecoins — A New Way to Send Money
Think of stablecoins as “digital dollars”. Stablecoins are digital tokens of real-world currencies. The stablecoin’s value is pegged to a dollar (or pick your currency or commodity of choice).
Stablecoins make it easy to send or receive money in a peer-to-peer manner without any “intermediation”. No pesky lines, limited hours of operations, or wire authorization phone calls.
Major networks such as Visa are already testing the settlement of transactions on Ethereum. Terra, a decentralized stablecoin, partnered with South Korea’s biggest payment processor, BCcard, to launch a debit card on Terra’s CHAI dApp.
Stablecoins create an opportunity to reduce the transaction (interchange) fees ranging from 2–3% charged to merchants. That’s a big deal — most mom-and-pop retailers operate with razor-thin net profit margins (about ~1%).
Stablecoins lower the cost of FX — why pay 7% to the likes of Western Union just to deal with cumbersome lines and paperwork?
Coupled with DeFi protocols, stablecoins also enable users to earn yields of 3–8% or more for providing liquidity.
Trying to use PayPal to send money to someone on Zelle or Google Pay? Good luck. Web 2.0 platforms operate within “walled gardens” to keep users confined to their closed ecosystems.
Instead, imagine a future where you can send money to anyone, anywhere, and any time.
III. Blockchain Gaming — Creating New Economies
Blockchain gaming is another hot sector of crypto.
First off, the gaming sector is a large, global market. The primary market is valued at $200 Bn; the secondary market of resales is valued at $50 Bn (smaller due to restrictions). The market’s dominant players include Epic Games, Activision Blizzard (recently acquired by Microsoft for $69 Bn), and Electronic Arts.
A brief case study on one of the category-leading blockchain games: Axie Infinity. Released in March 2018, the game quickly gained adoption and established its own virtual economy.
Crypto is spilling into the real world. Some players in the Philippines have started to make a living playing the game during the pandemic. Small businesses have started accepting Axie Infinity’s in-game currency as payment.
But don’t quit your job just yet (these average earnings from gaming are still less than minimum wage in developing countries).
So why is this unique?
The game introduces a new business model called Play-to-Earn.
The game generates revenue by charging a 4.25% “take rate” on player-to-player transactions.
This flips the in-game payments model on its head — traditionally, game developers received all proceeds from in-game transactions. The developers ruled over in-game items.
Here, 95% of revenues go to the players.
The new model is the internet of ownership (see Section VI. Web 3.0 — The Internet of User Ownership). Users are rewarded for their attention/participation in the game.
Furthermore, the player’s accomplishments, credentials, and resume are stored on the blockchain — no more need for multiple rounds of interviews that may lead nowhere.
Gone are the games of yesterday where if you turned off the computer or deleted the software, your work disappeared. Games will no longer be distributed in the traditional model where software is sold up-front, via subscription, or where developers run the stores selling in-game items (like artifacts, power-ups, etc.).
Instead, the emphasis shifts to growing a digital economy, one owned by its players. The “take rate” for developers are lower, but the model expands the pie for everyone.
These games have several unique characteristics:
Incumbents are taking note. Ubisoft has announced plans to develop blockchain games.
IV. NFTs — A Digital Representations of Assets “On Chain”
What’s an NFT? An NFT is a “non-fungible token”. A non-fungible token is a digital representation of an asset that cannot be easily substituted for something else.
A Bitcoin or a share of a stock is fungible. A baseball card or CryptoPunk is not.
The NFT represents a claim to the asset and any rights, including claims on future cash flows. It can be bought or sold between parties on a blockchain without intermediation (avoiding 7% broker commissions).
NFTs run on blockchains that are “Turing Complete”. Such machines can solve any computation problem when given enough time, processing power, and instructions.
This makes NFTs programmable. The age of intelligent NFTs is coming.
The compelling part of the vision lies in removing friction from transactions.
How does this make my life easier? Anyone who has bought a house is familiar with the myriad intermediaries and reams of documentation involved.
NFTs may be able to shake up real estate in the same Uber upended the cab industry. Michael Arrington (TechCrunch Founder) auctioned off his NFT-minted apartment this past summer. (It’s not easy to move each counties’ titling process on-chain; that said Uber faced a similar challenge with various Taxi and Limousine Commissions.)
Moving those transactions onto the blockchain and using NFTs improves the customer experience — lower fees and faster transaction speeds.
NFTs are just part of the broader trend in tokenization. Real-world assets are moving on-chain, including shares in private companies. This brings liquidity to a previously illiquid (before IPO) asset class. The next Google will have its shares on a blockchain.
NFTs are at the center of work and leisure… activities humans have done for thousands of years.
IV. NFTs — Transforming How Creatives Engage and Earn
Today, NFTs have exploded in the digital art category. The category today represents $41 Bn of (mostly) digital art.
Celebrities including Paris Hilton, Eminem, and Tom Brady are buying or minting NFTs.
Digital Art is starting to shape culture. Pak, RTFKT, pplpleaser, and other creatives producers are re-shaping digital art.
Musicians are using NFTs to re-engage with their fan base in new ways. NFTs can serve as credentials for exclusive access to the artist, content, and collectibles. Curious Addys’ Trading Club grants tokenholders invites to private channels within its Discord server.
The community lives and vibes online — not just at the last concert.
NFTs are also re-shaping distribution. Historically, if a music artist created a song, he or she lost as much as 80% of the economics to intermediaries — record labels, publishers, distributors, and so forth. New artists failed to capture the bulk of the value that they’ve created.
Now, for the first time, creators can capture the bulk of the economic gains from secondary sales through NFTs.
Creators are utilizing NFTs and smart contracts to distribute their music and their artwork. The artist can set economic terms in a smart contract that functionally acts as the musician’s agent/manager — securing the royalties without losing a large percentage to middlemen.
Imagine for instance an artist directly distributing music to their fanbase via a Twitter post.
Listeners connect their digital wallets to the artist’s site or streaming platform to purchase the song itself, or even a single stream of the track.
By receiving payments on-chain via smart contracts, the artist can also access new, more flexible payment options.
For example, payment streams can be liquefied via a DeFi protocol to serve as a Bowie Bond. The artist could receive a one-time cash payment upfront in exchange for a share of future sales from his/her work.
NFTs are a creative and powerful new tool for creators to have enduring claim on their work.
V. Defi — Earning High Yield Savings through DeFi
DeFi is decentralized finance. Users deposit money and take out loans by interacting with a blockchain protocol rather than a bank.
This presents opportunities for both savers and banks.
We live in a world with negative real interest rates. Last year, we saw inflation rise to 6.8%, the highest year-over-year in decades. The typical megabank offers a paltry .05% in savings to customers.
DeFi creates an alternative for savers that’s very attractive as compared to what they can get from the banking system.
As a saver, you can earn 3% to 8% (or more) for lending (on a fully secured basis). A saver can lend on a decentralized blockchain, say Ethereum or Solana. On these protocols, users skip the steps in loan origination, underwriting, and administration. This enables savers to act like a bank without the overhead to then capture more in interest income.
DeFi also represents a great opportunity for FinTechs and Community Banks. Community Banks are struggling to remain relevant in an increasingly digital world. They, like their Global Bank counterparts, face technical debt (operating on decades-old infrastructure) that hinders innovation. On the other hand, FinTechs deliver a modern, digital banking experience, but lack deposits.
There’s an opportunity for both players to make DeFi accessible to their end customer. Community banks and FinTechs can serve as distribution channels to bring the “killer app” — high yield savings — to the masses.
Imagine going to your local bank and seeing a new option for a savings account providing interest rates that are multiples of current offerings. Or earning meaningful interest on your cash balances in the app you use to send money to friends.
A lot of work remains on the regulatory front surrounding consumer lending laws, collection of information on credit applicants (Regulation B), and FDIC insurance on deposits. However, if done correctly, these changes will significantly transform the financial system while ensuring the existing consumer protections remain.
VI. Metaverse — Shifting Our Experiences Online
What is the metaverse? The concept has existed for a while in the form of science fiction titles like “Snow Crash” and “Ready Player One”, or video games such as Second Life.
The metaverse is a virtual reality where individuals wear digital identities (avatars) that are virtual manifestations of the user. The user can act pseudo-anonymously. Form guilds or tribes. They can own digital property and sell goods or services for income.
Facebook’s rebranding to Meta has brought the concept to the fore. Mark Zuckerberg correctly bet on mobile as the successor to the desktop and is now making the same calculation on the metaverse. He sees it as the successor to the mobile internet. In fact, he’s not the only one… Big Tech is racing towards the metaverse.
In fact, Sotheby’s opened a virtual gallery and Barbados is opening a diplomatic embassy on Decentraland. Last December, real-estate developer Jamestown Associates hosted a virtual New Year’s party on the platform, recreating Times Square on the metaverse.
This is a generational shift. Anyone with kids that play or interact with Roblox, TikTok, or Snapchat will recognize that younger generations are spending 65% of their time online in these new mediums.
The metaverse represents a bet that social and professional experience will continue to shift online.
These platforms are a different audience and mode of expression. We will continue to see the proliferation of specialized, niche metaverses focused on specific communities — the possibilities are vast. Instead of there being one large, monolithic social media company serving as the single platform capturing our attention, there will be many metaverses, each interconnected with the other.
As a bank or as a FinTech company, when you look at the Metaverse, you see homes being bought and sold for $75,000 apiece. You see virtual galleries, shopping malls, and lounges. We call this “single family residential” and “commercial real estate” — the bread and butter of what banks lend against. And these assets are moving onto the metaverse.
The metaverse will require its own infrastructure to unlock commerce, lending, and other financial services. To start, the new system will need credible asset appraisals/valuations, risk management, and liquidity.
A strategist from Bank of America has already acknowledged the opportunity in the metaverse, and forward-thinking companies will lay the foundation for what’s to come.
Metaverse is the digital frontier that brings community, identities, and assets together on-chain.
VII. Web 3.0 — The Internet of User Ownership
There’s no question that all the big tech companies are under fire. Think back to the Equifax Credit Card breach in 2017. Large corporations are failing to securely store the consumer data they’ve collected. Consumers are fed up.
Big Tech is selling customer data through cookies, mining, email, search history, and IP addresses. They monetize this data through ads, causing consumers to give up privacy.
Algorithms run amok and the perception of censorship has eroded consumer trust in Big Tech.
An example. Gmail is a Web2 service. The service is monetized by ad targeting. The email is also subject to “3rd Party Data Access Rules”.
Web3 email services are decentralized — they are not controlled or owned by FAANG — or any centralized entity. The email is not subject to censorship — even from a sovereign.
The data is secured by the blockchain. The service runs autonomously on a blockchain.
In this world, if a user wants to send you an ad (‘spam’), they might have to pay you ETH tokens to purchase access to your inbox. The user is in control and rewarded for their attention. Brave Browser is already putting this into practice with BAT, or Basic Attention Token.
This is Web3. Web3 is centered around the values of self-sovereignty and user control. Users control whom they give their data to and can revoke those privileges. Users can demand compensation for the monetization of their data.
In Web3, users are in control of their identities. Identities are linked to virtual wallets — individuals may have multiple or even pseudo identities.
Users can opt-in to sharing their information with a website by connecting a wallet. Quite different from the websites of today that may be collecting a user’s information without his/her knowledge.
A user’s “reputation” — the history of their behavior and transactions — can be tracked on-chain. This digital breadcrumb provides an immutable record of accomplishments. Imagine a digital resume that is verifiable without the need for a background check.
Users can leverage a social graph to bring credit for one’s accomplishments and connections from one website to every other site on the internet. Or in other words, an on-chain “proof” of “work”. This opens up the opportunity to “liquify” access to talent and create more freedom for how people work, including working for DAOs for bounties (credits to Balaji Srinivasan for the idea).
Web3 is a new permissionless, programmable model that brings users back to the roots of the internet.
VIII. Internet of Things (IoT) — Upending Traditional Distribution Models
The Internet of Things (IoT) describes a network of inter-connected devices that exchange data over the internet.
Thanks to developments such as 5G and RFID, smart devices with sensors and microchips and everyday devices including household appliances can communicate with each other.
For example, coffee subscription company Bottomless offers a scale that can automatically order new beans when it senses that the current batch is running low.
Combined with a decentralized blockchain network, IoT has the potential to deliver more convenience to consumers lives.
IoT can also upend traditional distribution models with cryptoeconomics.
Helium is a wireless 5G network powered and owned by its users. Hotspot owners connect their devices to the network to provide coverage and earn tokens for performing this service. Helium currently operates in 75 countries and over 5,000 cities and has over 400,000 hotspots.
Helium is successfully building a community-based 5G network that one day might rival the scope of Verizon or AT&T at a fraction of the cost.
Why does this matter? New forms of distribution are emerging.
The Kickstarter model, where a product concept is pre-sold and customer funds are used to build the product, is becoming more prevalent due to tokeneconomics.
Arweave, is a decentralized data storage protocol, where users funded developments. These “utility tokens” are then used to purchase functionality upon platform launch.
IoT together with crypto has significant potential. The proliferation of autonomous devices: driverless cars, wearables, and smart home technology will open news ways of living and working.
IX. The Change Ahead
Crypto is spilling into the real world.
We are becoming more connected than ever.
Assets are moving on-chain. At the same time, experiences are becoming increasingly digital. Web3 and the metaverse are accelerating these trends.
New models of creating, ownership, and engagement are getting traction. It’s still very early days and crypto remains a “work in progress”.
That said, the trend is clear. Crypto is changing how we spend, save, borrow, play and work.
The blockchain is The Blob: crypto is eating the world.