OK Boomer, We Will Take It From Here
Frictionless Finance, Open-source Networks & The Decentralisation of Trust
We have proposed a system for electronic transactions without relying on trust. Satoshi Nakamoto
Don’t trust; verify. Gigi
Without encryption, we will have no privacy. Edward Snowden
The internet has transformed the way we live and work, but we are still in the foothills of its full impact. Today it is possible to send information around the globe in a few milliseconds at zero cost. We know this, yet we no longer really think about it. By comparison, the speed with which money moves around the world is glacial. A straight forward cross border financial transaction often takes several days. A more complex transaction involving counterparty risk or credit will take longer. Money transmission is not just slow; it is expensive. The cost of financial friction globally has been estimated between $5tn and $10tn pa, which is 8% and 15% of global gross domestic product. This represents a deadweight cost to the world and represents a big opportunity for disruption.
Historically money and payments have evolved closely with how we communicate. Today I spend a good deal of my time trying to understand what is going on in the world. Although I have market data feeds and access to Google, Twitter, and a network of informed contacts, it is a struggle. A thousand years ago, if I would have been fortunate enough to have some time to enquire about what was going on in the world, I would have had few options. I would most likely ask my local priest. Similarly, my requirement for money would have been limited. I would likely have credit accounts with local traders who I knew and who could trust me to settle through barter. If I undertook any trade with someone from another area, I did not know the transaction would be fraught with risk. I might choose to be paid in a social construct called money, most likely an amount of gold or silver coin.
About this time, a new medium of communications and data management became adopted called Arabic numerals. Arithmetic disrupted the abacus and enabled the paradigm shift of double-entry bookkeeping. The growth of trade and the flow of money evolved with improved means of communications and verification. As we communicate more easily, we can build networks of mutual trust, enabling us to trade with strangers and widening the scope of trade.
A thousand years ago, religion controlled nearly everyone’s access to information, and the use of the Latin language ensured the source material was inaccessible for most. Technological advancement came in the form of learning and enlightenment. The printing press spawned a massive array of weird and wonderful sects and beliefs, with a whole new genre of pamphleteers espousing a wide spectrum of alternative visions of the future. These pamphleteers were the proto-journalists and played a part in disseminating ideas that led to the English Civil War, and by comparison, many of their ideas make today’s conspiracy theorists seem tame.
The ultimate open source information network is the peer-reviewed scientific method. The adaptive evolution over the past two hundred and fifty years of the “don’t trust, verify” methodology is ongoing. It has done more than anything else to improve the human condition. Today anyone who can afford a mobile phone can not only access the world’s information but add to it.
Instagram, Pinterest and Tok-tok have made shopping a social experience, not just a transactional one. However, how we pay for things has not evolved as rapidly as our means of communication. There are two main reasons for this. First, trust is a hard problem to solve, and second, there is a strong vested interest in retaining the tolls that accrue to the owners of the existing rails. The early internet period is littered, with failed attempts to digitise money. The successes such as PayPal have reached a scale of network adoption via improved user interfaces or other improved product characteristics, but the base layer remains conventional centralised money.
Companies have grown rapidly by exploiting the efficiencies available by serving customers online. They are digitally native. The rest of us have had to adapt. Today we communicate via a decentralised network designed originally to improve the data-resilience of the US military. Little did the DARPA engineers realise their network would evolve into the world’s central nervous system. However, the financial plumbing that supports this communications platform has not kept pace. Payments continue to run on centralised payment rails owned by large financial organisations; this is changing.
Social networks and mobile e-commerce payment platforms are the surface level manifestation of our digitisation. However, below the surface, a decentralised world (or metaverse) has evolved, which has features that overcome many of our existing world’s bugs. We are experiencing a paradigm shift where virtual reality and reality merge, where value can be exchanged across these different worlds. (It is around this paradigm shift that Mark Zuckerberg is pivoting Facebook via the Oculus VR headset and the Diem stable coin).
The metaverse has evolved out of sight of non-gamers (i.e. most of us over 40). It has become a different world of social interaction via massive online games and other interactive applications. Literally 100s of millions of people spend time in the metaverse already. In this world asset ownership is tokenised and it is widely accepted that digital assets have value. This is where the internet of value is developing. The real-world manifestation of this can be seen in Bitcoin, cryptocurrencies, and Non-Fungible Tokens.
It is easy to dismiss these phenomena as bubbles that will burst and become forgotten. Surely they are bugs, not features? However, this is exactly what Amazon seemed to be when it lost 90% of its value in 2002. We know that financial markets have a tendency to overestimate the impact of technological change in the short term, especially in frothy, inflationary markets, where the time value of money gets distorted. However, what we risk missing is the geometric impact of Metcalfe’s Law, commonly known as the network effect.
The Arabic number system had it, gold had it, the telephone had it, TV had it, Facebook had it, Google had it, and Roblox and Fortnite have it. It looks like Bitcoin has it too. Network effects are transformational. While value is never guaranteed, it pays to understand where it comes from and how it might evolve in the future. In particular, it is worth recognising how difficult it is for our linear brains to recognise its adoption’s geometric impact.
If cryptocurrencies and blockchain tokens have solved the instantaneous trust-free transfer of value independent of any third party or higher authority, this radically transforms how we conduct finance. Imagine a world where all assets can be instantly verified, where collateral can be posted instantaneously, where value can be divided infinitely and transferred as simply and as cheaply as a WhatsApp message; smart contracts and tokenisation of assets allow revenue streams to be securitised among token holders, automatically and in perpetuity. All this can be achieved without any reference to a government, bank or custodian. In many ways, this world already exists; in the metaverse. As AR/VR devices supplant the mobile as our node on the network, the Internet of Things / Spatial Web and autonomous transportation will become fully enabled and interoperable. This sounds like sci-fi, but I suspect it is simply the central case expectation of Gen-Z. I am beginning to suspect this is their chance to show us Boomers how it should be done. In case it is, I am stacked and ready. Over to you.
Jeremy
Ealing
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