What parts of the blockchain will survive?

I haven’t seen this much energy around a new technology since the dotcom era of the late 90s. The introduction of smartphones was a game changer, but it didn’t have nearly the exuberance that everything blockchain is experiencing. Personally, I’ve sat on the sidelines and watched the space develop since Bitcoin was trading in the $200s back in 2015. Never in my wildest dreams did I imagine that it would reach almost $70,000 per Bitcoin. So I never bought any because I could only ever figure out two use cases for it:

  1. Evade country currency controls; or
  2. Pay for illicit goods or services.

Since I didn’t need to evade the US’s currency controls and there wasn’t any illicit goods or services I was in the market for, I never bought it given its volatility. I figured there would be some floor to its value. At the time I was thinking it would be around $100 since the $100 bill was the traditional criminal currency of choice.

I was intrigued by the underlying blockchain technology that powered Bitcoin but I just wasn’t sure if Bitcoin would be the cryptocurrency that survived as there was nothing particularly special about it that couldn’t be replicated or improved upon by another blockchain-based schema. Which is where we are today with the proliferation of all sorts of new cryptocurrencies, DAOs, and blockchain-based businesses that are all trying to convince the world that they’ve built a better mousetrap.

Wild Speculation, Outright Frauds, and Some Actually Useful Developments

I am not one to indulge in wild speculation or rely on the greater fool theory to power my investment returns. So cryptocoins like Dogecoin or Shiba Inu that were started as jokes then accidentally got caught up in a speculative mania that fed on itself are of little interest to me. There are thousands of other coins like this that haven’t gained traction and are either languishing in obscurity or have already died an ignoble death.

I’m also not going to even try to detail the outright frauds that exist in this space. Given the lack of oversight, the speculative mania, the easy access to a large and gullible audience, and the general lack of repercussions, it’s often hard for a lot of experts to correctly identify an actual fraud from just another impractical technutopian vision.

But in spite of all the craziness there is some genuine technological developments taking place. It’s these genuine technical innovations that reduce financial frictions and provide real value beyond a meme that are most likely to survive on the blockchain.

Money Movement & Stablecoins

The biggest argument in favor of cryptocurrencies continuing to exist is their ability to send and receive money 24/7 anywhere in the world, almost instantaneously, and at incredibly low cost. I’m not sure if the average person will appreciate this given Venmo, PayPal, and ApplePay, but this can save a lot of money for a lot of businesses. Currently, the fastest and surest way for one business to receive money from another business is to send a wire through the Fed’s system. This wire will cost the business anywhere from $5 to $50 depending on the bank. It’ll also take anywhere from 3 to 6 hours to confirm receipt of the wire into their business account. And you better not be trying to wire any money to the Fed’s blacklist of people or countries.

Cryptocurrencies have the ability to do it faster and cheaper. #XRP for example, costs $0.00078 per transaction and only takes 4 seconds for the receipt of the money to be confirmed.

However, the only way this gets broadly adopted is with a stablecoin. A business owner can’t have the money he just received for a sale drop by 20 percent overnight. A stablecoin, whose value is pegged to the US dollar or some other stable currency, provides all the benefits of a cryptocurrency transaction but none of the value problems of a speculative coin.

While cryptocurrencies represent a better mousetrap for moving money, cryptocurrencies are guaranteed to stay alive past the current speculative mania because of their utility to anyone who needs to evade government currency controls, either through economic policy reasons or because the profits are from illicit activity. Ironically, money laundering may be the main reason virtual real estate and NFTs continue to exist and transact at high prices. I can’t think of an easier way to launder money; certainly easier than selling overpriced used books on Amazon or going through the hassle of international shell corporations and real estate.

Decentralized Autonomous Organizations (DAOs)

The next thing that will likely survive on the blockchain are decentralized autonomous organizations. The coolest one I’ve seen recently was ConstitutionDAO. It raised money to bid on one of the 13 surviving copies of the US Constitution. It was able to raise $40 million in less than 72 hours, which they then used to bid on the copy. They were ultimately unsuccessful in their effort and the money was returned to backers.

I’m not aware of any way that a bunch of retail investors can raise that kind of money, that safely, and in that amount of time, let alone at that little of cost.

Unfortunately, DAOs might get shut down by the SEC. While it would be nice for any small business to be able to raise equity via a DAO, the amount of scams that investors would have to wade through would be daunting, which will likely force the SEC’s hand. But as long as DAOs are not designed to be profit-driven, which should allow them to minimize SEC scrutiny, they’re well-positioned to be the vehicle of choice for collective activism, co-ops, or B-corp models.

Just think: next time Greece defaults on their bonds and needs to sell off some public property you can bet there will be an AcropolisDAO in with a bid.

A Modern Gold Standard

A lot of attention has been placed on using the blockchain to enable fractionalized ownership of just about everything. And it’s a great use-case for it, but will also likely have to overcome issues with the SEC. But the one area that I haven’t seen come together yet is the creation of a modern gold standard using a vault of physical gold and a cryptocurrency. Bitcoin was born out of the distrust of fiat currency, the control of the central banks, and our modern fractional reserve banking system. If you draw a Venn diagram of gold-bugs and crypto-evangelists you’ll find an overlap. So why hasn’t someone created a version of a stablecoin, and I use stablecoin in the loosest of sense here, where each coin is backed by one ounce of gold held in a vault?

  1. The cryptocurrency is actually backed by something;
  2. That something is not a fiat currency;
  3. You can actually buy and sell goods with gold without the hassle of physically handling the gold.

I’d argue that stable economies don’t need this, and for the record I think fractional reserve banking is better than a gold standard, but for countries or economies that are on the verge of hyperinflation it could make sense to switch to a cryptocurrency that’s backed by hard assets or a stronger currency. Its use would restore people’s faith in the country’s marketplace and enable it to function with fewer frictions. After all, optimism and less friction are two of the key ingredients of pulling an economy back from the brink and a cryptocurrency-based gold standard would accomplish both goals. Transacting in a stablecoin is a lot easier than shaving off gold at the marketplace.

I’m going to be wildly wrong on all of this

My background in banking and capital structuring undoubtedly influences my view on the likely lasting impacts of the blockchain. My investment style that focuses on things with actual real-world use and honest-to-god cash flows keeps me from believing that the vast majority of NFTs and virtual real estate being sold today will retain any value whatsoever. There may be a tiny fraction that retains significant value – there are 34 domain names that sold for more than $3 million in cash after the dotcom bubble burst and those 34 domains still have real value today. But true long-term value and the returns that accrue to owners will come via companies that use blockchain technology to reduce the current frictions caused by our current financial system without running afoul of government regulators.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s