Crypto Thesis

Crypto is an inherently fast-moving, headline-grabbing industry that literally never stops. Days can feel like weeks and weeks can feel like quarters. While it’s easy to get caught up in the day-to-day headlines, more important is a focus on the 5-10 year horizon and beyond. I believe the crypto industry’s impact has only just begun and represents a true paradigm shift in the way we’ll operate and transfer value online going forward. Below are the things I try and level myself with on a daily to weekly basis as the industry, price moves, and headlines are rapid and never ending. I purposefully went with a broad, thematic list type structure as I think it is not only easier to reference to when thinking about things, but also crypto as a whole and the items listed are deeply complex and often require thorough micro-analysis to arrive at first principles. This is not the only, or best, or maybe even right approach, but it’s the one I chose to write down my thoughts that I could continue to reference in the future. If any of the points strikes a cord with you, I implore you to investigate that curiosity but be weary of how deep the rabbit hole’s abyss is when it comes to this ever growing and changing industry.

Overarching concepts I focus on for cyclical signal and growth:

• Internet continues to expand, develop, and ingrain within our lives + crypto as the most efficient, global, 24/7 way to transfer value on the Internet = ~everything~ becomes intertwined with and built on top of crypto
• Blockchains ability to uniquely enable coordination and incentive alignment: 24/7, globally
• Composability & Interoperability enabled by the open-source, decentralized nature of crypto
• NFTs (non-fungible tokens) and the ability to apply ownership and value to ~any~ digital item
• Rapid flywheel, feedback loops, and network effects enabled by global, 24/7 participation
• Current disruption and product market fit
• Holistic industry analysis including flows, incoming capital/investments, adoption signs
• Continual Internet growth and expansion fostering increasing global digital reliance and interconnectivity

Internet Expansion and Increasing Digital Reliance

The simplest, most broad way to describe what is/will happen with crypto is natural comparisons to the Internet. The Internet changed ~every~ daily interaction and habit and is now engrained forever. The Internet will continue to evolve and expand every aspect of business and life, now with a seamless global, 24/7 way to transfer value through crypto. ~Everything~ will be crypto enabled as it is the most frictionless way for global transfer of value.

A lot of the excitement and potential future growth revolves around the new formation of an internet primitive that blockchains enable as they allow the "trustless" ability to transfer value to anyone, anywhere in the world with near instant settlement.

A new computing paradigm has been created which will have impacts greater than the last computing paradigm shift, the smartphone.

Crypto assets allow for coordination and value transfer on the Internet that were simply not possible, and this new internet primitive along with the Internet in it's current form will continue to slowly intertwine until they are indistinguishable in Web 3.0.

We're only 10 years removed from Marc Andreessen writing his famous essay “Why Software is Eating The World”. This has obviously been proven extremely correct with incredible foresight and the question becomes why would these things (the Internet, software, and crypto) not continue to exponentially grow?

The internet driving growth, profitability, and everything in the real world (social media, navigation, constant access, business reliance, finance, etc.) has only been around for ~15 years and it’s naïve to think that it won’t continue to evolve and expand with future iterations/applications built with crypto baked into the infrastructure as it is a more fair, less friction, endlessly transparent, global system.

Software, the Internet as a thing we rely on, and the crypto industry are still in the earliest stages and have orders of magnitude in growth left as these are new human primitives whose future timeline is infinite.

Crypto is almost entirely software dependent and doesn’t rely on people building actual real world infrastructure so the pace of innovation, change, and experimentation is only limited to the amount of developers and time in a day.

Software has changed every facet of modern life other than the extremely regulated industries of banking and healthcare. Crypto is the evolution of code that can transfer money and value to anyone, anywhere, at anytime and is ripe to disrupt the financial industry's stranglehold on monetary regulations (fingers crossed for healthcare disruption soon).

Demographic Shifts - Everyone born into the world from 2000 onwards isn’t aware of the concept of the “internet” or “being online” as they have been interacting with it their entire lives which in turn reinforces the early nature of these things as we are just beginning to see the impacts of an entire generation, and all future generations, born into technology already existing that slowly but increasingly includes crypto assets.

Crypto can be extremely opaque, abstract, and requires a certain level of technological understanding from the user, but those requirements are slowly becoming easier over time while everyone is becoming increasingly technologically savvy which will continue to lead to growth in adoption MoM, YoY just as it has since it’s inception.

This is an amazing overview with good data and charts on internet adoption and growth overtime from https://ourworldindata.org/internet where the title is, “The Internet’s history has just begun”.

It will become increasingly clear that a bet on the future of the Internet and continued growth and expansion of the entire tech industry (which is increasingly the online industry (see everything is a tech company)) will be a bet on the expansion and inclusion of crypto assets.

Coordination and Incentive Alignment

The open-source structure of crypto combined with the proper alignment of incentives and modern social media communication channels allows for true global community formation and idea generation where every participant in the ecosystem can share in the same financial upside.

Global ease of access (an internet connection and amount >= price) to tokens representing protocols has unlocked coordination and facilitated growth unlocks that were previously unachievable do to a combination of regulatory barriers and an arbitrary amount of equity in a company required to participate in economic growth.

Meritocracy and incentive alignment as it's not uncommon to see anonymous people participating in and contributing ideas to communities that end up being implemented by the protocol after a consensus vote by said community. Often times this person is retroactively rewarded with payment in protocol tokens or another currency of their choice and sometimes even hired full time by said protocol.

Implementation of these ideas is an insanely efficient process that can happen in as little as a week or even days and highlights the unique ability of participants to directly contribute to, and coordinate with, protocols which in turn benefits all involved parties.

The above also benefits from truly global scale and is not limited to a required amount of equity(tokens), the ability to attend a conference/meeting, or various opaque regulations depending on state to state or country to country jurisdictions.

Economic incentive alignment and coordination at a global scale are two of the most difficult problems in the world, both of which can be potentially solved by crypto-economic structures uniquely enabled by blockchain distributed tokens where the value capture is distributed to every level of participant.

Open protocols for collaboration, innovation, and human coordination at scale have always won in the long run, and while the crypto industry is still in its earliest stages, the benefits are clear.

All of the above is currently being explored and iterated upon even further with new exciting coordination mechanisms for protocols and groups of people with the same interests in the form of DAOs (Decentralized Autonomous Organizations). DAOs have the potential to continue to transform the future of work and coordination in the digital age, but like most things in crypto require an at length dissection of their own.

Composability and Feedback Loops

Since crypto and DeFi are decentralized, the industry shares the unique ability to use what has been termed “money legos”. Primitives that are built in the crypto ecosystem can be iterated upon and combined to create entirely new protocols that interact with and create value for each other and token holders/economic participants.

Again, the Internet is an apt comparison when evaluating the network effects and potential economic growth open-source, collaborative initiatives allow. While it is more sector specific and guarded today, the original explosive growth of the Internet was due to open-access and composable nature APIs that allowed for companies to leverage economic benefit from one another. This is the current and future state of crypto that global, decentralization allows when applied to the value, transfer, and the base protocol layer of future economic value.

Being a purely open and global system not only allows for maximum composability, it also allows immediate testing and experimentation with real economic value that has never been possible. Naval once said that open source has the insane benefit of only solving problems once.

Furthermore, decentralized, open protocols are more naturally efficient as if there are unexploited edges they will be forked and iterated upon. Inefficiencies largely don't exist in decentralized protocols because anyone can build a similar protocol that then removes those inefficiencies.

Economic incentive structures can be built into new protocols and tokens which are tested in real time, with real money. For good and bad, it creates pseudo randomized control trials of new ideas and innovations that if designed correctly have immense upside.

This creates feedback loops and innovation at a pace that allows for enormous scalability in a short amount of time when one of these new money lego primitives is either built, modified, or combined with another protocol.

Price appreciation in certain tokens, protocols, or the industry as a whole also creates natural flywheels where the valuations go up, media attention is allocated, resources and new developers are attracted to the ecosystem and build things that inevitably feed into the next price appreciation that restarts the flywheel.

As long as this holds true, talent will continue to enter the ecosystem and contribute to its future growth continually advancing and expanding the potential of said flywheel.

Crypto has some of the strongest network effects in history as the economic upside of each protocol is increased with every new participant.

NFTs, Digital Ownership & Gaming

Simply put, NFTs (non-fungible tokens) are interoperable, programmable, verifiable representations of digital objects. This obviously lends itself to a design space that is virtually unlimited. Digging into what they allow and their future impact is on crypto adoption is an entire post of itself you can read here.

Currently, my view is some combination of gaming, ownership, and composability of digital in-game items enabled by NFTs creates a (or multiple) globally scalable blockchain based game where the incentives of the players, developers, game engineers, token holders, etc. are aligned through their ability to participate in a robust economy where their in-game assets have the ability to be traded, owned, ported, collateralized, breeded, iterated upon, etc. giving them the ability and incentive to profit and build upon.

Increasingly, I think the growth of crypto and adoption will be seen through blockchain games that leverage NFTs to allow users ownership and participation in a robust, thriving digital economies like Axie Infinity along with vast potential games such as Star Atlas and other blockchain based games (read more on Axie and disruption here along with the intersection of NFTs and gaming here).

For more, you can check out my in-depth breakdown of NFTs and what they allow here

Current Disruption & Growth

There are a few main categories that I think have clearly found product market fit and point to ongoing adoption beyond all of the hype, headlines, and noise that the crypto industry entails: certain DeFi (decentralized finance) protocols, smart contracts, NFTs (non-fungible tokens) and growth in key metrics.

Specific DeFi protocols having value accrual tokens distributing a portion of fees back to users, and the permissionless ability to issue and receive over collateralized loans are here for the long-run. A specific example of a protocol's token distributing a portion of fees back to token holders would be SushiSwap. Sushi is a DEX (decentralized exchange) that uses an AMM (automated market maker) strategy for trades that takes a small percentage of fees from each swap (trade) performed on the protocol and redistributes it to token holders. COMP (Compound) and AAVE are two examples of money market protocols that allow lending and borrowing that require over collateralization for loans operating on a global, permissionless scale.

Smart contracts and the programmability of payments/distribution with royalty fees being coded into the contract forever, specifically applicable to the sale and resale of NFTs. For example, any percent of a future sale of an NFT can be programmed to be sent to the original creator's address ad infinitum. This has powerful implications for future creation of things ranging from music to art and the ability to have infinite value flow to the original creator of something every time it is resold for the rest of time. This also feeds into the point of how early it still is as we are just exploring the beginning stages of the ability to write if/then statements directly into code that can handle money and transact trustlessly, instantly, and online in seconds to minutes not matter your location, race, religion, identity.

Amazingly, the entire concept of decentralized finance and NFTs as we know them today have only existed in their current form for a few years(NFTs, 2018; DeFi, 2020). Clearly their massive growth, adoption, and notoriety by the general consensus as to the value they provide indicates a bright and prosperous future at a scale that crypto's network effects uniquely enables.

A few select metrics (from https://duneanalytics.com/home and https://www.theblockcrypto.com/data) that represent growth and the nascent stage we still find ourselves at considering the global TAM (total addressable market).

• ~216,000 DeFi users exactly a year ago compared to ~2,816,000 today (June 16, 2021)
• DEX volume May 2020 ~$256M compared to ~$173B May 2021
• Net Value Locked in DeFi June 2020 ~$1.24B compared to ~$41.47B June 2021
• Stablecoin (tokens pegged to $1) supply June 2020 $11.66B compared to $106.43B June 2021
• There is an endless amount of on-chain (programmatically verifiable) data that exhibits the above growth patterns I would encourage you to explore
• Internet has ~4.6 billion users (with TAM of every human) while MetaMask, the most popular ETH wallet, has ~10 million users

DeFi, smart contracts, and NFTs have made undeniable contributions to unlock value in ways that did not exist before blockchains and crypto. How much value they unlock and their ability to continue to grow and innovate is the central question we'll see play out of the next decade plus.

Crypto assets, not currencies

The holy grail for any crypto asset is ultimately replacing, absorbing, and becoming the settlement layer of all global transfer of value. This was Bitcoin's original goal in response to the bail outs of the Global Financial Crisis in 2008. Obviously, this goal is audacious, brave, and unlikely anytime soon, but ultimately what I think will happen when operating on a timeline that spans generations. In the short term to medium term though, I think that referring to everything happening in the crypto ecosystem as "cryptocurrencies" allows negative attention, regulators, and politicians to paint with a broad brush. Don't get me wrong, BTC is still king and the entire market reacts to, and is largely predicated on, it's support. But there are burgeoning ecosystems that I think will continue to reduce their correlation to BTC in the long run (Ethereum, Solana and everything they enable from NFTs to DeFi to DAOs).

Scanning the best data provider in the space, Messari, will give you a glimpse at the ever-growing ecosystem. Smart Contract Platforms, DeFi, Web3, Decentralized Exchanges, Data Management, Gaming, and a few others are the sectors that you can sort by (along with creating your own screeners and watch lists for free). DAOs and NFTs are two more massive segments that are still in the earliest stages of development while still having their fingerprints interconnected across the ecosystem as a whole. If you think of the entire industry broadly as a new computing and value transfer paradigm that fundamentally changes how we'll interact online in the next few decades, enabled by blockchains DLT (distributed ledger technology), then labeling everything as a "cryptocurrency" is intellectually dishonest.

Again, I currently fundamentally believe global value will eventually be settled on one of BTC or more likely ETH and these things are important long-term goals! But this is all still so early, and I think being solely focused on the monetary implications, that could not play out for decades, is missing the forest for the trees.

Many of these components are specifically broad and could be broken down into long micro-analysis but that’s not the goal of this post. The goal is to have an aerial view of the crypto ecosystem as a whole and what I think of as potential factors that do/will continue to support the growth of the industry. Many parts of the crypto ecosystem often delve into the abstract concept of money, its supply and velocity and the unsustainable nature of quantitative easing along with what is money as a philosophical concept. I don’t think that’s the optimal way to push the crypto ecosystem forward and would rather focus on the coordination and technological advancements the industry allows so the theory of money, value, and what that should be represented by were intentionally left out. Ultimately, having a new industry emerge that operates on a global scale, is open source, maximally inclusive, composable, and possesses the ability to programmatically enforce rules written into code that can handle the transfer of value limits the scope of what’s possible to the collective human imagination. The future is so bright.