Crypto Is A Sidechain
And it runs parallel to our existing financial infrastructure
DISCLAIMER: The information contained in this newsletter is for informational purposes only and should not be considered financial or investment advice. Any opinions expressed in this newsletter are solely mine.
I recently wrote a piece on the decade-long thesis for digital assets - you can check it out here:
My thesis is threefold:
Digital assets as a new “currency”
A digital world needs digital assets
But recently I’ve been doing more thinking - the thesis I wrote comes from the point of view of someone inside the space. However, if you were to go to anyone in real life and tell them that you’re bullish on crypto because it’ll be the basis of a new currency in the future - they’ll laugh.
Why? Because the problems that Web3 solve are simply not problems that everyone faces.
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What’s the first thing an entrepreneur always learns when he/she tries to build a product to change the world? That it has to solve a ubiquitous problem.
Uber - it’s hard to get a taxi in certain places of the world
Social Media - working adults don’t have that much time to meet and maintain friendships
Cars - it’s too slow to get from place to place on horses
The truth is - the problems that Web3 aims to solve aren’t ubiquitous.
What reason is there for a small business in America to enable payments in USDC, and take on the unnecessary on-chain risk? USD is easier to handle. Do retailers really think that KYC is such a big issue that they’ll resort to using on-chain order books? Decentralized Finance? Yields aren’t even that high. NFTs? I mean - people can live without them.
It’s why people are saying: “Blockchains are a solution looking for a problem”.
But that’s ok.
Web3 is in a unique spot. We’re placed within the financial infrastructure space - a space that, for starters, doesn’t often experience technological leaps compared to other industries.
Anecdotally, the biggest changes that I, a consumer, have experienced regarding financial technology in the past decade have been:
The democratization of stocks-buying (Robinhood, Tiger Trade, etc.)
The emergence of peer-to-peer payments (Venmo, PayLah, etc.)
All whilst the very shape of our lives has been changed by social media, e-commerce - and now, AI. In general, it’s extremely hard for first-world countries to iterate on their existing financial infrastructure, because it’s already pretty good.
There’s a reason why the top 10 countries by crypto adoption are mainly composed of third or second-world countries:
And so, it’s important to change our perspectives. We can’t approach Web3 from the perspective of “novel technology that will change the world”. Instead, my point is two-fold:
For first-world countries, Web3 / Crypto is building a world parallel to our existing financial infrastructure
Builders should thus not approach it from the angle of “how do I get everyone to use this” - but “how does my product unlock more liquidity in the market”
We are not making products for everybody. Instead, we are constructing financial infrastructure parallel to existing financial rails - a sort of “new finance”, unlocked through the power of computers.
Think about it - before the existence of computers, it probably wouldn’t be possible to “create” another asset class that has similar properties to gold. Bitcoin is an incredible feat of engineering that goes to show that this miraculous invention - the computer, unlocks way more possibilities than we can ever imagine.
The decades before 2000 were led by traditional rules - a stock of a company = representative ownership of that company, and each stock actually had something backing them.
Now, our tokens are backed by nothing - no cash flow, no real-world assets; theoretically worthless. It seems that we have unlocked a completely new world.
We have, for better or worse, created an entirely new asset class.
Now, builders aim to bring Web3 to the world - but I imagine that instead, Web3 will evolve to become a sector that runs parallel to existing financial markets.
Web3 shouldn’t aim to become something “consumers will use in their day-to-day lives”. It shouldn’t be viewed as a product like AI, where it’ll help people in their day-to-day. It’s more of an entire industry in itself, siloed from the rest.
Web3 is “new-age finance”. The digital age needs digital assets - and digital infrastructure. The new generation has quite literally created an entirely new industry - very Gen X/Y/Z of them.
And so - why did I write this article? Well - it was inspired by OpenEden successfully bringing T-bills on-chain.
This sparked a flurry of discussion, with the main point of contention being that people believed it was pointless since you could just buy T-bills direct.
Yes, that is true. As I said - there’s not much reason in holding USDC, when you could hold USD. But that’s operating from the standpoint of a “general consumer”.
Instead, when you operate from the viewpoint I mentioned - of someone who believes that Web3 is a parallel financial industry, you realise that on-chain T-bills are another way of bringing what exists into this new asset class that we’re creating.
It unlocks more liquidity in the market - by assembling more and more products to attract liquidity, we slowly but surely build recognition around Web3 as a parallel financial world, and that in itself is important in cementing our existence.
Operating from this perspective also makes it clear which projects have more asymmetric upside. For example, projects that iterate on existing De-Fi building blocks, or help facilitate the buying and selling of NFTs - i.e products that help stimulate the movement of liquidity in the market. These ar important in helping to set the stage as we transition into an entirely new asset class.
And so, I’d like to imagine that 10 years from now, if we don’t get regulated to death, we’ll see business students clamouring to work in Web3 as much as they want to work in Investment Banking. That’ll be cool.
(P.S. I didn’t touch on products made in Web3 that aren’t finance related - e.g decentralized Uber /social media/gaming/etc. , because I just don’t think they’re as groundbreaking as finance 2.0, and for some, centralization works better. But hey, I might be wrong. These are just my thoughts after all.
But there’s a lot of nuances not included in this article for the sake of brevity, e.g ancillary products that help build finance 2.0, like AI that reads smart contracts and audits them. )