Cracking the crypto maze
World will remember 2020 and 2021 for Corona; and few may argue for Crypto. I’ve been trying to understand the phenomena — beyond the asset class or the currency or the technology or the anti-establishment DeFi movement.
There are many zealous discourses going on:
· Technology discourse is about distributed ledger and how cool that is…
· Regulatory discourse is about how risky it is for national security and retail participants…
· Markets discourse is about new cryptos, crypto billionaires, YOLOs, anti-fiat…
· Social media discourse is about folks with shiny laser red eyes in their DPs spewing wisdom…
But “so what?” It does feel like a maze. Through this note, I attempt to clear my own thoughts — get to the proverbial ‘bone’. The main ideas — secular and not seasonal.
First there is some arguably ‘crazy’ pattern-matching. But this is important to make sense of what could be happening. Then, I get to the pragmatic ideas which are actionable in 3–5 years’ time frame.
Forces of nature. It feels like the idea of crypto talks to three forces shaping our world. Efficiency, Fairness, Openness.
If one doesn’t get lost in the maze of technology, volatility, and regulatory noise, one can see that through Crypto, completely new financial infrastructural is being laid. This infrastructure has two superpowers — (i) it is ultra-efficient from a transactional perspective and (ii) it is born for the Matrix world, i.e. programmable by design.
On (i) efficiency: transactions across any [a] two parties can be settled [b] at any point in time (24x7) on [c] any ‘tokenized’ asset (not just currencies) in [d] a reliable manner in [e] a fraction of time that conventional systems take with [f] fractional or no human involvement. I have yet to come across an alternative that delivers all the [a — f] in the conventional finance world.
On (ii) programmability: features of any assets can become programmable once a token gets attached to them. Imagine … Direct Benefits Transfers that can only be used to buy medicines and ration — e.g. they cannot be directed to online trading platforms. A programmable ‘mortgage’ or ‘infrastructure loan’. A democratic ‘venture capital fund’ which can be tokenized and distributed to any investor based only on their risk appetite and not wallet size. This can give access to high value creation opportunities to the common person.
These ideas underpin the DeFi philosophy besides the cold commercial logic of efficiency.
It’s easy to see how the crypto technologies are aligned to the three forces of nature at work in our world.
Possible pragmatic moves.
1. If you are the CXO of a large corporate (esp. conglomerate), you can consider building a captive digital coin (CDC). This coin will be redeemable across all your businesses by all stakeholders — individual customers as well as large and small businesses associated with your value chain. Because this currency is backed by a high-grade corporate, it can avoid typical pitfalls of other currencies such as lack of legitimate underlying value and volatility in prices. The owners of this currency will benefit because all settlements across the conglomerate/corporate can move to seconds. No need to wait T+X (1–2–30–60–90) days for settlement. Truthfully, some of the 30–90 days are more terms of trade than settlement inefficiency. Nonetheless, the settlement inefficiency does contribute to some of the delay. Retail owners of the coin can monetize their relationship and personal data. The biggest value for the corporate is visibility to transactions data in real time which cannot be achieved today without some crazy corporate acrobatics. And in the process possibly some of the crypto value can get captured in the enterprise value
2. If you are the CXO of a financial institution, you can consider building a full crypto offering ‘as a service’ to your clients. If corporates create a digital coin as a medium of exchange and store of value, financial institutions are best placed to provide that service. Principles of finance and banking apply to the crypto world also. Idea is similar to white-labeled and co-branded offerings that are already prevalent. Ditto last sentence of previous point
3. If you are the CXO of a technology company, you can consider building safer and more energy efficient crypto software which can be used by the world. Ditto ditto
4. If you are an investor, anyone who is building crypto capability (not a new coin or asset) — but core horizontal capability such as App ecosystem, software suite etc. for B2B customers (not B2C in my view at least in the short term) would be interesting bets with many possible pivots.
5. If you are an individual, I don’t have a great answer; but it certainly makes sense to stayed clued into this space. In most scenarios it will evolve into something very important.
Risks and downsides. There are serious issues of course. They need to be checked. The dark use cases are real. We need to build capabilities to curtail if not eliminate them. Energy efficiency is another big problem. If the underlying technology is ultimately resulting in massive fossil fuel consumption, then Crypto will be a massive anti-ESG trojan horse. Crypto markets might have very dynamic microstructures — they need to be studied and managed. Finally, Crypto shouldn’t turn into a casino for it to have mainstream positive impact. This means, more people need to be educated and the knowledge needs to overcome the digital divide.
I can’t predict the future; it does feel like crypto technologies will be a meaningful part of it.
PS: Views are personal.
ESG = Environment Society and Governance
Crypto = i refer to the entire class of technologies from block chain to non fungible tokens etc
