2021 and the Internet of Value

December 2021

2021 marked the start of a digital asset revolution and the creation of Web 3.0. Listen in as Alex Tapscott discusses how this past year was huge for the future of Bay Street.

Michael Hainsworth:
2021 marked the start of a digital asset revolution and the creation of Web 3.0. Its foundation is being built on the blockchain. Today digital assets can be copied once or a million times. But this past year marked the building of the first floor on this foundation — decentralized finance. It’s one that will scale because we will soon have a reliable digital identity system. And from there we will create the conditions to transform legacy payments systems like the Inter-bank network “SWIFT”. The securities market will evolve as trades which today take days to settle, will be settled immediately. AGM votes will soon cast anywhere in the world securely. And the barriers to entry as investors will tumble to the ground. For the managing director of the Digital Asset Group at Ninepoint and the co-founder of the Blockchain Research Institute, Alex Tapscott says 2021 marked the introduction of the new “Internet of Value.”

Alex Tapscott:

The report itself was produced by the BRI in partnership with the Ninepoint Partners Digital Asset group. And it's important for us at Ninepoint that we continue to lead in developing new ideas and to help educate our clients. The concept of Web 3.0 is pretty simple. In Blockchain Revolution, a book that I co-authored a few years ago, we described how the internet today is basically the internet of information. It's a way to send and move information peer to peer, to consume content and so forth. But the first era of the internet, this sort of what's usually called Web 1.0 And Web 2.0, basically was bad for money and assets and that's because when you use is the internet today to send information, you can't create scarcity in digital goods. What that means basically is I can send an email to you and I can send the same email to a million other people, which is fine if it's an email, but it's not good if it's meant to be something of value, like say money or stocks and bonds or other goods, including digital goods.

So what blockchain enables is an Internet of Value, basically a way to move and store assets peer to peer, without the need for an intermediary like a large technology company or a payments company, or even a bank. If you think about the world of assets, it's actually much, much larger than the world of information. It turns out that lots of things require scarcity, sending money, stocks and bonds, titles, and deeds, votes. It's important that when you vote, you can't vote twice. You can't vote for multiple candidates. It's important that everyone knows your vote is cast and counted. So by enabling this new medium for value, blockchain is ushering in a new era of the internet. Now, Web 3.0 is the term of art that has been adopted by entrepreneurs and VCs and innovators in the space to basically describe this Internet of Value. And with it, come a whole myriad of new business models and the new ways of thinking about how we interact online, how we organize capability, but I'll stop there.

Michael Hainsworth:

Well, what you're saying is that if we treat blockchain as a foundational layer one of Web 3.0, then we can then look at layer two and the decentralized finance that we can build on that foundation.

Alex Tapscott:

Yeah, that's absolutely right. So step one is, do we have a way to move and store assets in a digital world? And blockchain enables that. Bitcoin was the first example of this, by creating digital scarcity in something of value and Bitcoin was designed to do something really simple. It was designed to act as cash for the internet, a way to move money peer to peer without the need for an intermediary. But what it did was prove the concept. So to your point, what we're seeing is an evolution. If Bitcoin enabled us to move value peer-to-peer using this thing called a Bitcoin, then DeFi or decentralized finance enables peer-to-peer models for everything that the financial industry does, not just moving value, but storing value, accessing credit, exchanging assets, normally what a stock exchange does, getting access to growth capital, normally what VCs and investment banks do, even doing things like insurance and accounting, all of this happening peer to peer, and what's called on chain, meaning all of these transactions are clearing and settling on blockchains like Bitcoin or Ethereum.

That is really important because by basically making it easy for anyone to access these basic foundational tools of financial services online, we're removing the need for banks and other intermediaries. So we can create a financial industry, which is not only more technologically sophisticated, but also one that's more fair and more open and more accessible to everybody and I think that's a very exciting opportunity.

Michael Hainsworth:

It still feels like early days though, you have written in your report that in one year the DeFi industry's market capitaled in 30 times, but at 150 billion, that's still very early days, user deposits are north of 200 billion. But again, this is just the early days.

Alex Tapscott:

That's absolutely right. $200 billion would be the measure of total value that is basically deposited into DeFi projects. So 200 billion sounds like a big number until you realize that that would make it a tiny bank in the context of traditional financial services or even in an asset management sense. BlackRock has $5 trillion. So 200 billion is a important number. It's a sign that there's clear product market fit, and that people are deploying money into this space, but it is also evidence of it be eating very early. And there are lots of other measures that we can look at. For example, DeFi is probably one of the fastest growing industries ever in terms of new users. But again, in terms of users today, we're talking about, three, 4 million people. So in the context of a global population of 7 billion, we're only barely scratching the surface, but two years ago it was almost nobody. So you have to look at that curve and extrapolate where it's going,

Michael Hainsworth:

Decentralized finance, though, if it's going to scale, it needs a reliable digital identity system. What's the solution.

Alex Tapscott:

It's a great point, Michael and what's really interesting about DeFi today is that you can actually access a lot of these foundational financial services, way to get access to credit, borrow money and so forth without the need for an identity which is really unique in history most of the time or all the time, if you ever wanted to open a bank account, you needed to show up with a pile of documentation attesting to who you are and why you should be a customer of the bank.

Now, there are lots of good reasons for that, but there are lots of reasons that are part of the legacy history of financial institutions. For DeFi, all you need to do is have a wallet with some assets in it, and you can interact with any of these things. So what that means is that anybody can access financial services, regardless if they have a bank account. To me, that's a big thing. Having said that, in the world that, that I live in, which is the regulated financial market, it's very important for regulatory reasons that you fulfill things like, know your customer or know your product or AML, anti money laundering rules and requirements.

So in order for DeFi to become institutional grade or to, I think reach its next level of growth, there needs to be a way to do identity in DeFi. And that's something that I think actually is going to be solved by blockchain itself as well. And the reason for that is that you can think of the wallet that you use to interact with all of these different services as containing assets, money and financial assets and so forth, but it can also contain digital goods that represent who you are. You see, there are many different things that we can use to show what kind of a person we are, could be our driver's license. It could be our proof of address or bills or so forth. It could also be our reputation score online from interacting with different kinds of services.

So my view is that identity systems are going to be sovereign, meaning that individuals will control the data that makes their own identity so, and I think that's important, but that a lot of the data that we use to establish our identity will come from the interactions that we have online. So you may not need to have a driver's license to prove who you are because the totality of all of your activity on the internet does a much better job of describing who you are than anything else possibly could.

Michael Hainsworth:

It's like cookies on steroids, is what you're saying.

Alex Tapscott:

Well, it's cookies that you control them. Instead of the cookies, tracking where you go, it's like you get to own the cookie jar and all of those little pieces of data about you, you get to use everywhere you go. But instead of leaving behind a trail of cookie crumbs in every single site, you get to sweep it all into the jar and take it on your merry way.

Michael Hainsworth:

Very nice. So let's touch on the essential functions of the financial industry. In what you call the golden nine, moving value, lending value funding and investing, exchanging value, ensuring value, and managing risk, analyzing value, accounting for an auditing value, and then authenticating identity, we kind of touched on that last one, where amongst those golden nine, do you see the greatest opportunity at this stage in development?

Alex Tapscott:

Definitely, I would say in moving value, storing value and lending value. So those are not accidentally the three basic building blocks of financial services. All that other stuff is important, but any banker will tell you, "We move money. And because we move money, we get to store money, and because we store money, we get to lend money and lending is the bread and butter of our business." This is something a banker actually once told me. So if you look at where the innovation is happening today in blockchain and in digital assets, those are the three areas where you're seeing a ton of growth.

So let's start from the beginning, moving money. Well, we all know that we can use Bitcoin to move money around the world, but it's volatile and some people may not want to accept it for payments because they thought they were getting $100 one day and it's worth 150 the next or 75 the next. But that's where we're seeing a really important innovation coming into maturity called stable coins. So a stable coin is a digital asset that tracks the value of a traditional asset, like a dollar, usually almost always the US dollar. Stable coin values have grown from zero to $150 billion in a few years time. Now some of these stable coins are centralized, meaning they're backed by deposits that sit in inside of financial institutions like banks, but many of them are actually collateralized by digital assets that sit inside of DeFi protocols. So it sounds like a bunch of gobbledygook.

The point is many of these decentralized stable coins, one example is a thing called Dai, D-A-I does more daily volume than Venmo, which is the most popular payment app in the US. So what you're seeing is in the moving of value, stable coins, crypto assets like Bitcoin, are having a huge impact already on incumbent institutions. In storing value, that's another one that's very important.

So most of the time, we store money inside of banks and other financial institutions. And if they are other kinds of assets like securities, they're held in trusted third parties called custodians. What digital assets like Bitcoin and others enable is for you to hold coins on the blockchain in a digital wallet, and it allows you to have multiple parties who can sign a transaction, sort of like if you wanted to open a bank account with your wife, you need to have both people sign the form and have both forms of identification or a safety deposit box with two keys that open at the same time. This is a thing called multi signature authentication and multi signature wallets have become a huge place in which assets and money are stored.

So in the paper that you're referring to, we talk about a project called Gnosis Safe, G-N-O-S-I-S, which today has tens of billions of dollars of capital that sits inside of digital wallets that have multi signature capabilities. So what does that mean? Well, basically means that you, your bank, people close to you, et cetera, can store money in new and novel ways, which allow you to access them anywhere in the world, regardless of who you are or where you are. I think that's very exciting as well.

The final thing, lending money, lending is one of the biggest and most exciting areas in DeFi today. And basically, it acts more like a margin loan than anything else. So for people who are familiar with the security space, if you've got $100,000 of stocks sitting in a margin account at a brokerage firm, the brokerage firm will lend you money against that to continue to invest. So let's say it's 40%. So you can get an extra $40,000 of margin to then go invest in other shares of other companies and so forth, if the value of the shares that you own declines below a certain level, then you get a margin call and that a bank telling you basically to pony up more money, otherwise your assets are going to get liquidated.

So in the space of defi, there are protocols, technologies that do all of this automatically. So you can deposit digital assets inside of a lending pool and receive more money to go... You can deposit money into a lending pool and you can receive more funds to go invest. However, if the value of the assets that you've deposited drop beneath a certain level, then the DeFi project automatically liquidates you in order to make sure that the lender is made whole.

So everything that the brokerage account does in a margin account can be automated using DeFi. And this is an area where it's going to tens of billions of dollars. The holy grail for DeFi lending of course, is to enable people to borrow money for all sorts of normal things like buying a house or buying a car or paying off their credit card. We're not there yet, but we've seen some really early signs. There are lots of other things we could talk about, but those three things alone make up the majority of most wholesale banking operations. Lending is the bread and butter and payments are the lifeblood of most banks.

Michael Hainsworth:

Well then, let's take it to the next level and talk about Wall Street, because it's your suggestion here that decentralized finance is eating Wall Street. First of all, what do you mean by that?

Alex Tapscott:

Well, that's a playoff of an expression that Marc Andreessen has used before in the past, which he says, "Software is eating the world." And in 2016, I gave a TEDx Talk at TEDx San Francisco called Blockchain is Eating Wall Street. And at the time, I discussed many of the things that we're talking about right now. If you fast forward a few years, you're now really starting to see how blockchain is eating Wall Street, and it turns out that it's DeFi. Basically, what it means is that all of the individuals and institutions and different accounts and different regulations and different legacy attitudes and so forth, that define what we think of as Wall Street, masters of the universe, Gordon Gekko, blah, blah, blah, are being just simplified and reduced by software. And in this case, the software is blockchain enabled and it's in this area called DeFi.

So you mentioned the golden nine of the things that the industry does, and in the report, we outlined how, in every single instance, there are DeFi projects that are growing like crazy and could eventually capture a lot of share from the banks. So an example of this would be what we call exchanging value. So decentralized exchanges are now one of the dominant ways in which people trade digital assets, peer to peer. The biggest of these is a thing called Uniswap, which on some days does more daily volume, then Coinbase, which a centralized exchange. So rather than an institution having a central order book where it maintains the bids and offers for every single asset and connects these people in a market, this is all happening peer to peer. So the order book is just simply a piece of software that connects anyone anywhere in the world who wants to buy and sell an asset.

So today it's being used mostly for digital assets, but we're already starting to see it transition into other kinds of assets as well. There's a huge and growing market for synthetic securities that trade on decentralized exchanges. And in my view, it's only a matter of time before the New York Stock Exchange and the Nasdaq and all the other big centralized order books that we know and understand to be the behemoth of Wall Street adopt this kind of technology, because it's quite simply just an easier and more efficient way to knit together the markets and different kinds of assets.

Michael Hainsworth:

Right. I could see today, new trades settled in days. Everyone has to gather at a location for an AGM for a vote. The barriers to entry for the world of investing are high as well. How do you see though, the securities market evolving under decentralized finance?

Alex Tapscott:

Well, I think the idea that you need to have a US based brokerage account to access the US capital markets is going to be a thing of the past. I just think it's so odd today that the internet of information, the internet that we know is available to anyone anywhere in the world. Like you can do a Google search if you're in Canada, or you can do a Google search if you're in India but what you can't do is buy shares of Apple or Tesla if you're in a lot of countries in the world. You can't have a US dollar bank account in a lot of countries in the world. So a lot of people think that crypto is intended to be some threat to the old way of doing things. And I think in many respects it will really transform it, but in other ways, it's actually going to make a lot of things that people really want more accessible.

There was an appearance of some major executives from the industry in front of Congress yesterday, yesterday being December 8th, 2021, for those who are watching Deep Into the Future, where basically the executives described how one of the fastest growing areas of crypto is stable coins, crypto backed by dollars, which undermines the notion that crypto's supposed to disrupt to the dollar. The executive said quite simply, "The most in demand financial product in the world is a US dollar bank account, but most people can't have it." So with stable coins, you can have a US dollar bank account. You can basically store, lend and borrow in US dollars without having a bank account, and that could be a huge boon to the US.

So in my view, how is DeFi going to change financial services? It's all about access. It's all about making money and assets and financial products and opportunities more easily accessible to more people around the world, regardless of their station in life, or how much money they might have.

Michael Hainsworth:

With stable having the US dollar as a fundamental underlying support, it sounds like this holds the potential to transform the legacy payments infrastructure that we use every day like the Interbank Network SWIFT.

Alex Tapscott:

I completely agree with you. The system that we use for Interbank Settlements, SWIFT was developed in the 1970s. It predates the internet. It's basically a super secure instant messaging system. That's about it. So all of these different interbank systems where you've got to clear and settle transactions between banks within central bank clearing in institutions, I think all of that is going to be not completely removed, but radically simplified through stable coins. Why would someone send a wire to their family living in the Philippines and wait five days and get charged 10%, which is the average cross border fee, according to the world bank, just to move money between people when they could move the same money in a stable coin, peer to peer in seconds? That's the answer. The answer is why would you send a letter or a telegram to your family overseas when you can have a Skype call with them, or when you can send them a text message or a WhatsApp? This is like a quantum leap in technology where you don't need all of those legacy institutions and all that old infrastructure.

Michael Hainsworth:

Now we can't address the entirety of your 72-page report in this conversation. So if a listener wants to read the full document, how do they get it?

Alex Tapscott:

Yep, blockchainresearchinstitute.org. And in the projects in the research section, you should be able to download it. So blockchainresearchinstitute.org. I've also posted about on Twitter @Alextapscott. Of course, you can just go to that link and download it for yourself.

Michael Hainsworth:

Awesome. Thank you for your time, Alex.

Alex Tapscott:

All right, thank you.

 

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Part of Ninepoint’s Alt Thinking Podcast Series. Available at Google, Apple, and Spotify Podcasts.

 

 

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