This post is aimed at “buidlers”, to those in the Blockchain community who use a Bear Market to build solutions and to those who invest in those solution builders.
Update Edit: Note date written (in the depths of the Crypto bear market.
You can take these mega waves to the bank. More specifically you can take them to investors. These are trends that that are inevitable and we show why. This post also shows the dams that are holding back these waves today. Entrepreneurs look at these dams as their problems to solve by creating the sluice gates that let the water flow in a useful, controlled and profitable way; our analysis includes our view on the market pressure points where the dam could break first. We also show the picks and shovels that are being used to build these sluice gates.
In each of these waves there are ventures who are building solutions. The sluice gates are under construction. This list is based on observations in the real world, not theory. Which ventures will win will depend on their execution capability, but we are confident that each wave will produce at least one big winner.
Wave 1: Decentralized Exchanges
- What: A Centralised Exchange is an artefact of Legacy Finance and the Centralised Internet. If we went in that direction we would end with a duopoly like NYSE/NASDAQ. There are already hundreds of Decentralized Exchanges. The logic of decentralisation is that every wallet can exchange with another wallet or to put it another way that P2P Exchange is feasible. Although some Legacy Finance markets (such as Public Equities) work through Centralised Exchanges, many Finance markets today operate through decentralized OTC (Over The Counter) traders, so this is easy enough for Institutional Investors to buy into.
- Why: Centralised Exchanges are a honeypot for thieves (even if the Exchange operator is honest). The only way to protect money when money is data is radical decentralization so that a thief only ever gets one person’s money (and if that is fairly hard to do, they won’t bother).
- Dam = liquidity. If exchanges are decentralised how do we get best price when we want to buy or sell? How do we get the price transparency of a Centralised Exchange in a Decentralized world? Here are the market pressure points where the dam could break first:
- Security Tokens. In short, a decentralized version of todays NYSE/NASDAQ duopoly.
- Long Tail of Utility Tokens that will become the de facto way to incentivize digital networks. In short, a way to trade something that you bought to use but no longer need.
- Picks & shovels: liquidity is fundamentally a broadcast messaging data problem and there are computer science solutions to this. There is likely to be a mix of offchain matching and onchain settlement. Hubs will perform a critical aggregation function and not every wallet is equal – some buy and sell in huge quantities. Data aggregation based on P2P broadcast messaging is a solved problem in computer science and does not require a scientific breakthrough.
Wave 2: Decentralized Investing/Trading
- What: The Legacy Fund Management fee model of AUM (Assets Under Management) plus Carry (aka profit share on exit) will move to a model of signals, decentralised exchanges, networks & syndicates. The big change is that the Legacy Fund Management fee model is based on first gathering assets from LPs then investing. The Blockchain Economy Fund Management fee model reverses this. You start investing whatever you can afford, then you publish signals of your trades and people pay to follow those signals. The passive investor’s capital is kept under their control, there is no equivalent of AUM.
- Why: Blockchain changes the rules of the game and the game has not been going on long enough for Legacy Fund Managers to show their track record. We need new compensation models for a new generation of Blockchain native active investors/traders.
- Dam: How do you a) identify the new and emerging investors/traders b) how do you compensate them properly? How does a a new generation of Blockchain native active investors build trust with passive investors (fka LPs).Here is the market pressure points where the dam could break first:
- the next generation of retail investors getting into Tokens/Coins.
- Picks & shovels: The Decentralized Investing/Trading world is being built using four tools – signals, decentralised exchanges, networks & syndicates. Signals are what an active Investor/Trader provides for a fee to passive Followers. Decentralised exchanges are critical so that we know what a signal provider actually bought and sold (avoiding the scammy promoters who say buy when they are selling etc). Networks are how Followers find Signal Providers. Syndicates are how enough capital is raised quickly through these networks by aggregating Followers just in time; lets not forget that the purpose of Capital Markets is to fund innovation and new productive capacity.
Wave 3: Stablecoins and other hard asset Tokens
- What: You can buy/sell them like any Token, on Exchanges, but their value is tied to hard assets in the Legacy Finance world (such as Fiat currencies, gold, diamonds, real estate etc).
- Why: If you are trader/speculator, volatility is your friend. If you are using Tokenomics to fund a venture, volatility is also your friend; you sell Tokens into a rising market in order to fund the business. In most other situations (such as payments and investing), volatility is your enemy and stability is your friend.
- Dam: Stablecoins and other hard asset Tokens exist at the intersection of Legacy Finance and the Blockchain Economy. It is not simply a matter of clever code. Interfacing to that Legacy Finance world is not easy. Here is the market pressure points where the dam could break first:
- A better version of Tether (both audited and multiple currencies) that Token/Coin traders can use.
- Picks & shovels: a new generation of Stablecoins are entering the market to meet these needs. These exist at the intersection of Legacy Finance and the Blockchain Economy and the winning formula seems to be “audit heavy/tech lite” (in the words Balaji Srinavasan, the ex Andreessen Horowitz Partner and now Coinbase CTO which he says around 37.40 to 42.3 during this panel on YouTube with Vitalik Buterin).
Wave 4: Safe & Easy custody/storage
- What: As easy as putting money in a bank, but as safe and unconfiscatable as your own private keys in your own vault.
- Why: Safe must mean decentralised to avoid the centralised honeypot problem and to avoid the danger of confiscation. That is job number one. To cross the chasm from early adopters with their hardware wallets, brain wallets and other nerd friendly stuff, it must be easy to use for the mainstream.
- Dam: Insured banks don’t store crypto assets today, (and if they did they would offer centralization risk) so the problem has to be solved technologically so that a trustless/uninsured ecosystem of custodians emerge. Here is the market pressure points where the dam could break first:
- Institutional buyers of Tokens/Coins who know how to manage market risk but must have asset security as a baseline.
- Picks & shovels: we need digital version of the old bank vaults, hardened against both physical and cyber attack and an easy way for them to interface into the world of investing/trading.
Wave 5: Whitelisted Wallets = your ID
- What: A self sovereign Digital ID wallet that stores all our assets including our personal data and our reputation assets. Part of our reputation defines what type of assets we can buy and sell.
- Why: if every wallet can trade with every other wallet through Decentralized Exchanges, it is critical that some form of Whitelisting emerges where we trust that the wallet we are transacting with is doing things legally and is owned by a person “of good standing”. Even if you are of the libertarian school and believe that the solution must be free markets not regulators, you want some quick and easy way to spot the good guys from the bad guys.
- Dam: self sovereign Digital ID wallets exist today but are only used by a small number of very early adopters. Here is the market pressure points where the dam could break first:
- Investors/traders in Tokens/Coins who want to abide by AML/KYC laws and need an easy/frictionless way to do this.
- Picks & shovels: Self sovereign Digital ID technology already exists, there is no scientific breakthrough needed.
Wave 6: Security Tokens
- What: Legacy Finance has Debt + Equity. The core building blocks of The Blockchain Economy are Utility Tokens + Equity. We already have Utility Tokens (albeit often controversially, with many that are scummy and illegal). What is coming are Security Tokens that enable Early Stage Equity and other Securities to be traded like Tokens.
- Why: Just ask a) any entrepreneur fed up with the current process of early stage fund raising or b) any early stage investor who wants liquidity and price discovery.
- Dam: Security Tokens are regulated by Securities Law and this is complex and changes slowly.
- Early Stage Equity
- Hard assets that are non-fungible such as diamonds and real estate.
- Picks & shovels: Tokenisation is the easy part and Security Tokens will be able to use all the tools and techniques of the Blockchain Economy. The tricky bit, as with Stablecoins, is the interface with the Legacy Finance world which currently controls Securities.
Wave 7: Credit Card dominance era is coming to an end
Note: this maybe the most controversial mega wave. I am saying that the Peak Credit Card dominance era is coming, not that Credit Cards will soon cease to exist. It is like saying we may start using a lot less oil, but we will still be using some oil for a long time (ie oil will be less dominant but will remain part of the economy). Just like when we moved from cash to credit cards, cash did not disappear; the past will always be with us.
- What: Credit Cards are replaced by Blockchain based payment networks (on chain and offchain).
- Why: Credit Card payments are expensive for both buyer and seller (which is why Credit Card Networks are so profitable). They are expensive mostly because as centralized networks they are honeypots for thieves and it takes a lot of money to protect against those thieves. Credit Card networks are also susceptible to political pressure (as Wikileaks discovered in 2011).
- Dam: integrating credit at the point of sale is hard and the reason why Credit Card Networks are still so dominant today). But it is a solvable problem. Here are the market pressure points where the dam could break first:
- PrePaid Debit Card payments where credit is NOT needed at the point of sale.
- Cross border payments (ie high FX fees) for digital products (no physical return issues).
- Markets where the trust in the Fiat currency is low (eg Venezuela).
- Picks & shovels: This is likely to come from a new global cryptocurrency that cracks the mainstream adoption issues.
There are two ways the water gets past the dam. One way is the regulated way – via the sluice gates in the dam. The other way is the unregulated way – there are no sluice gates and the water goes over the dam, eventually breaking the dam. Regulators and lawyers and technologists, conscious of the threat of a dam breaking are working overtime to build those sluice gates.
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