1st May 2022 - Could Web3 be backwardly compatible with Fiat? Stripe USDC Payouts, Truelayer Open Banking Payments
Hey everyone 👋, thanks for coming back to Brainfood, where I take the week's biggest events and try to get under the skin of what's happening in Fintech. If you're reading this and haven't signed up, join the 13,480 others by clicking below, and to the regular readers, thank you. 🙏
Hey Fintech Nerds 👋
The best thing about writing Brainfood is the velocity of learning. This week I had a play with a new decentralized identity platform (PFPid, one of our 4 Fintech companies this week). Went deep on regenerative finance (ReFi) and Celo, the Crypto L1 and Stablecoin issuer (covered in good reads). And had some incredible conversations about the future of global Crypto policy and the Global Digital Finance dinner.
The consistent theme is how policy, Fintech infrastructure, and web3 collide. Identity, ESG, and financial regulations are all colliding in interesting ways. And the narrative on Crypto is shifting.
A few people still think it is criminal, a perspective that law enforcement now knows to be factually incorrect. This is becoming a laggard view.
A few more think there is some sort of ESG issue. This is the most common complaint, but also something that is shifting.
Countless web3 projects are now carbon neutral or negative. And the so-called “wasteful” energy usage a) is dwarfed by Big Tech and b) Crypto is an "always-on" source of energy demand for the cheapest energy source. At current trends, the cheapest energy sources will be renewables (Solar is already cheaper than oil and gas, but it lacks infrastructure). So if there’s an always-on source of demand, but no infrastructure. Surely, we could pay for new infrastructure by partnering with Crypto miners who have a demand for cheap energy? Capitalism x ESG x web3.
Perhaps most importantly the narrative on Crypto in policy circles has dramatically shifted in the past 12 months. For example, Janet Yellen, the current Treasury Secretary in the US has dramatically changed in tone. Or, take the UK, once a champion of Fintech, had been very bearish on Crypto, but now has given vocal political support from the Chancellor and admission from the FCA; maybe they've been a bit too focussed on risk when it comes to web3.
This week, I heard stories of a bank CEO whose tone has shifted almost 100% in the past 12 months, and my contact said, "The rebrand to web3 really helped, as did seeing their grandkids using Crypto."
The power of Grandkids.
It's like the iPhone all over again.
The term web3 itself has served as the ultimate glow-up for Crypto and has really been a game-changer; proof if it were needed in the power of marketing, I suppose. Take a bow, Packy Mccormick and Chris Dixon, for taking it mainstream. And Kyle at Multicoin for making it popular in Crypto circles back in 2018 👏 (if anyone knows who originated the term, pls let me know so I can credit it).
The goal now is to bring these themes together, in the eyes of builders, entrepreneurs, and policymakers, to create an environment where we solve the world's biggest problems. Not just because it's the right thing to do. But also because it's the most profitable thing to do.
Web3 x ESG x ReFi = 💪🌍💸
PS. I'm going to take next week as a week off from Brainfood. Among other things, it's my daughter's first birthday 🥰 (and I need the rest!) But rest assured, I'll be back the week after.
Weekly Rant 📣
Could Crypto rails be backwardly compatible with Fiat?
It has never been easier to buy your favorite NFT or get into web3. But web3 is a big place that’s still being built. Will the on-ramps of today be the ones we need and keep up with demand?
Companies that bridge Fintech infrastructure and web3 (DeFi mullets or Web 2.5 companies) have started to do well.
Like Moonpay, the primary provider for NFT marketplace Opensea, that raised at a $3.4bn valuation. Moonpay has many more clients than Opensea (and is a front runner for the "Stripe of Crypto" position). Moonpay also just became (alongside Transak) one of the main on-ramps from Fiat to Crypto via the web3 wallet Metamask.
For today's biggest job to be done, "How can I quickly buy an NFT so that I can participate in this new hype." The bridge (for the US at least) is largely built.
But there are some challenges.
Ethereum has the highest amount of active wallets, value traded, and daily volumes in NFTs and DeFi, and you'd think, oh, well, we have a winner then? And yes, Ethereum is the current market leader or most mainstream; it is also slow and expensive.
A transaction can cost anywhere between $10 and $100, and waiting for the transaction to complete can be an anxious experience for the first-time and experienced users alike.
These big obvious problems are being worked on by talented builders. As a result, web3 has an explosion of exciting blockchain networks and faster, cheaper, or potentially more efficient projects. These alternatives and scaling solutions are now well funded, and many are gaining traction.
That's awesome, but it's also the ultimate format war.
Web3 has a choice overload problem. Humans vastly prefer having a choice of options to no choice at all. But when presented with too many choices, especially similar choices, begin to find the complexity overwhelming. This becomes an unpleasant experience. Now multiply that with Crypto jargon and the dizzying pace of web3, and you have a recipe for most people being like; wtf?!
So if we're going to get better, faster, cheaper Blockchain networks, and we're then going to build on-ramps to those networks, what are our choices, and how should we think about them?
Some definitions might be helpful.
Scaling Web 3 - L1 or L2?
There are two primary options for scaling web3. Alternative Layer 1's (L1s) and Layer 2 scaling solutions (L2s).
What is a Layer 1 (L1)? Ethereum is considered a "Layer 1" Blockchain network. This means no other network or Blockchain supports it to gain security or execute transactions. The term alternative layer 1's ("Alt L1s") refers to competing Blockchain networks that make different design choices to be faster and cheaper for users, developers, or specific use cases. Examples like NEAR, Solana, Avalanche, and Polkadot are often cited as L1s.
It is important to note that Ethereum also has a scaling roadmap (e.g., it's due to have a network upgrade this year, "The Merge," that will bring it closer to a much faster proof-of-stake-based consensus mechanism).
How to use an L1. Alternative L1s like Solana have their own wallets and are directly supported by exchanges (like FTX). So you can use them as you would Ethereum. Buy some SOL (perhaps from a centralized exchange) and send it to your Solana wallet. Once there, you can interact with Solana Apps like NFT marketplaces, DeFi exchanges, or even games.
Payment services like Moonpay also allow for the direct purchasing of assets (like Solana) either from an NFT marketplace or within a Solana wallet (like Phantom or Solfare).
Other networks like Polygon and Avalanche are supported by web3 wallets like Metamask, and Coinbase Wallet supports "all EVM compatible networks." These networks have their own token, apps, and marketplaces too.
I didn't know where to put this, so it's here:
The "EVM compatible" part is worth paying attention to. Not all L1s are EVM compatible; Solana isn't today (although there are projects to try and create compatibility). NEAR isn't EVM compatible but has announced it intends to be. EVM stands for Ethereum Virtual Machine, and like the Java Virtual Machine (JVM), it creates a unified way for running code or instructions. The EVM is widely supported by wallets, understood by developers, and could be the "consistent way to run code in web3," much like Java was as the internet scaled.
Many L1s also have "bridges." These bridges will take a token (e.g., USDC, ETH) and bridge it from one network to another. The Avalanche bridge, for example, lets users transfer assets from Ethereum to Avalanche and back again. Otherwise, as a Metamask user, you could exchange from Ethereum to Fiat or Avalanche to Fiat, but what about Ethereum to Avalanche?
(Confused yet? And this is me trying my hardest to simplify it)
What is a Layer 2 (L2)? Blockchain networks that sit on top of one another and leverage an underlying Blockchain network for their security model. Examples would include Aribitrum, Optimism, and zkSync for Ethereum or the Lightning network for Bitcoin. While they all work slightly differently, the core idea is often similar. L2s batch many transactions from the L1 chain together and execute them in a more efficient (but more centralized) way.
To overcome the concern of centralization, the L2 shares the output result with the L1 chain so that any user or node can validate that the transactions were executed faithfully. How they do this varies, and there are tradeoffs in speed, cost, and decentralization/security between each choice.
How to use an L2. Most major Ethereum L2s are directly supported by the EVM wallet ecosystem. Metamask and Coinbase Wallet support several like Arbitrum and Optimism, and Argent supports zkSync. So you use the network with a wallet you probably already have. Or if you're new to the space, you have plenty of choices of wallets.
To get Crypto into the L2 again looks similar to the L1s; users could use an exchange or a payment service. Exchanges like Binance and Crypto.com are integrated with Arbitrum. Then Crypto payment service ramp.network is integrated with zkSync, and Moonpay has a direct on-ramp for Polygon.
On top of that, there are also bridges between ETH and the L2 networks. The Arbitrum bridge, for example, lets users take assets like stablecoins or ERC20 tokens and bridge them over to the Arbtrium network.
Wallets, exchanges, and bridges.
So many on and off ramps and left and right ramps.
But wait, there's more! (in your best infomercial voice)
Interoperability or Layer 0 solutions
Cosmos, Thorchain, and LayerZero aim to build bridges between the L1s. Cosmos, for example, supports the different consensus protocols and SDKs for developers to securely bridge between L1s. Each interoperability or Layer 0 chain has its own security model and criticism of the others. Historically, bridges have been the weak point and subject to hacks, but this could change these solutions get adopted.
So let's recap.
Ethereum is the dominant network today, with most NFT and DeFi activity. But now, there are alternative L1s gaining traction and L2s being built on top of Ethereum. Oh, and Ethereum itself is in the process of being upgraded to be faster and more scalable.
The wallets, on-ramps, and bridges are being built between them, but it is a work in progress.
So, where do you start?
My sense is that inevitably power laws will play out, where most of the activity will accrue on a small number of networks. But at this phase of the cycle, there is so much capital chasing the next big L1 or L2 project that it could be some time away. Figuring out where to go after Ethereum or instead of Ethereum is non-trivial.
If we ever reach a steady state with web3, there will likely be several main networks that have strengths in different things and certain specialist chains and some way to interoperate between them that is well understood.
Like there is no single programming language to rule them all, it's hard to say there will be a single Blockchain network to rule them all.
So we have a lot of building to do.
If there isn't one winner, what will be the factor that drives momentum?
Ultimately, these networks compete for attention, transaction volume, and developers. They're getting big rounds, growing their communities, and trying to out-innovate each other for attention. They're supporting as many wallets and exchanges as possible to get transaction volume. And developers may support different languages or have ecosystem funds and grants to help developers build "that thing they always wanted to do."
But as I look at it, history could be a good teacher.
A network took a fragmented market and became the dominant player, aggregating national bank cards into a single standard. While each bank had its own commercial objectives, this one network ultimately saw that what everyone was selling was the same thing. It wasn't convenience or speed or even loyalty points.
It was acceptance.
The promise that this payment you're trying to make right here, right now, will work, and if something goes wrong, your bank has your back.
The story of Bank Americard and Dee Hock is a great window into how fragmented markets can be brought together by spotting the single promise you're making.
Imagine if there was a network that worked everywhere.
How do you become that network?
It's about having a narrative and approach. Understanding the promise you make to users. That this transaction will work, and if it doesn't, somehow, we'll figure that out and make things better.
Crypto has been the wild west, and there is an ecosystem of wallets, custodians, and companies upgrading that for users.
But there isn't a brand promise from any of them.
Imagine if a network could say; we're backwardly compatible with Fiat,
And we support EVM and non-EVM L1 bridging natively.
And we’re supporting the top 3 interoperability standards.
That would be cool.
There's probably too much Cryptography and complexity to get there tomorrow.
But narratives are powerful.
4 Fintech Companies 💸
1. PFPid - The Crypto identity card
PDPid creates a non-transferable NFT for users who complete KYC. PFPid has integrated with Passbase for KYC, which asks for two forms of government identity. It acts as a sort of "identity card," but all of the information is encrypted (e.g., Date of Birth = D386228...") Only 3rd parties that interact with PFPid can decrypt that data if you allow them to (by signing the transaction with your Web 3 wallet).
🤔 The most exciting thing about PDPid is that it is live, and it works. Someone could fully KYC through this service today and then use that to prove they have been through full KYC somewhere else (e.g., use it as an ID card online). It's also fully individually controlled; the user has to sign that transaction (a bit like handing someone your driver's license) to see the data. My concern here is there's a bit of a holy war between NFT-based Web 3 identity and DID-based. I sense that both formats will continue to exist, but it's hard to pick one of these projects for anything but experiments. Another fear I have is that so much of the security here depends on the user's ability to secure their own Web 3 wallet.
2. Column - The nationally chartered developer-first bank
Column allows developers to build into a nationally chartered bank without middleware providers. This means a developer has the flexibility to choose their own issuer processor, move and hold money via any rail or build a lending program. Founded by the former Plaid CTO, stays intentionally small and provides unique features like book transfers or the ability to get close to the metal on everything from lending to compliance. Clients include Brex, Point, and Oxygen.
🤔 Banking-as-a-Service has always been a bit of a misnomer. Really you were building middleware over a bank or APIs from an issuer-processor. Only in Europe did you really see "API-only" banks like Solaris or Griffin. The details here are really nice; you can tell this was built around some of the frustrations working with partner banks. For example, they have a full ledger-as-a-service capability (an entire category of companies) or the ability to programmatically sell loans a Fintech company originates. There is a lot of competition in chartered banks with good tech stacks, which makes the future for Fintech exciting. Ultimately, if a bank has a killer tech stack, it'll always be able to do more than the middleware folks.
3. Nymcard - Modern issuer processor for MENA
Nymcard is a new issuer processor for MENA that allows users to build a card program, instantly issue (with a bank partner), make cards programmable, manage the card program and create virtual cards. Users can get working virtual cards in 6 weeks and physical cards in 8 weeks from sign-up.
🤔 I almost called these guys "Lithic for MENA." Something about their website is old school, but if you look at the details, much of the underlying philosophy about being developer-first and giving users access to dynamic spend controls are similar. Countries like Iran, Turkey, and Egypt have populations nearing 100m each and have historically been under-served by banks, and the Fintech infrastructure looks nothing like it does in the west. With Nymcard, Fintech companies and non-banks can drive at that opportunity.
4. Sawa Credit - Community-driven support for borrowers
Sawa Credit uses behavioral science and "machine learning" to help borrowers get support from their community (or the wider community). Users get rewarded for helping others avoid missing debt repayments. There's also a social aspect where the community can encourage and support each other.
🤔 It's sort of True Accord + Community. There is no downside to avoiding delinquency for consumers and most lenders (unless they have a predatory fee model). Excited to see this expand and more use of the community generally. I think Public.com does a good job here, and Monzo always did historically.
Things to know 👀
Stripe has enabled creators on Twitter to get paid in USDC, the stablecoin pegged to the US dollar. Stripe says this will allow many people to hold dollars who wouldn't otherwise be able to. The USD are sent via Polygon. Stripe says this was chosen for its compatibility with the Ethereum network. Once received, users can hold the USDC on Polygon, bridge to Ethereum, or exchange it for another currency. Stripe also noted, "We plan to add support for additional rails and currencies in time."
🤔 Use cases like this are exactly why I think Stablecoins will become the Eurodollar for everyone else. The offshore dollar for consumers and businesses.
🤔 Starting with creators and Twitter makes a ton of sense because you're starting with folks already dabbling in NFTs, Crypto and somewhat global in nature.
🤔 Stripe has scale and the ability to execute. It is still privately held (and maybe it missed the IPO window), but I get the sense there's no rush to the exit. That allows them to thoughtfully wrestle with the challenges of being a regulated, at-scale company while delivering meaningful innovations.
🤔 Polygon is becoming one of the default networks people choose first or second when adding Crypto. The alt L1s and L2 network space is crowded, well funded, and competitive. Polygon seems to be a front runner for now, but this space is moving so quickly that I doubt anyone takes that for granted.
🤔 Why can't the L1s and L2s be backwardly compatible with Fintech infrastructure? What if ETH or Polygon had a direct bridge to ACH or Visa. In a way, Visa is stepping towards that by acquiring Fiat and settling in USDC, but the L1s and L2s always need bridging from Fiat rails; they're rarely backwardly compatible. My sense is if you made a network that did plug directly into a fiat rail, you'd make it subject to a ton of regulation and break it. But perhaps there's a more elegant solution?
UK Open Banking provider Truelayer has launched "Variable Recurring Payments (VRP)" (think Auto Pay or Direct Debit but via Open Banking). This means any current (checking) account from a consumer or business can pay any other UK domestic account. Use cases allowed to date include sweeping between accounts, sweeping into savings, and paying off loans or credit cards. E-commerce, Crypto, Gaming, and FX are all out of scope.
🤔 The UK already has a direct debit scheme, and companies like GoCardless built APIs to help manage those recurring payments from a bank account. What's new here is allowing consumers to build their own IFTTT for money. If you have seen Astra.finance, that ability to set rules like "when I get paid, put 10% in savings, and immediately pay off my credit card" feels like a killer UX feature dying to be built.
🤔 The direct debit scheme is operated by PayUK (think The Clearing House for US readers), a private organization that runs the non-card payments rails for retail and businesses. VRP could be a competitor to PayUK, and given it's new and allows linking to account data, it would enable new use cases.
🤔 That's why it's such a shame the use cases are so limited. Like all UK Open Banking rules, it's actually driven by the competition regulator, the CMA. This would be like the FTC's Bureau of Competition setting open banking rules, not the CFPB. The CMA does not have the legal capacity to make VRP more broadly available. The CMA driving Open Banking has been a blessing and a curse, as it meant the UK was a first-mover on regulated Open Banking, but it also limited the scope and potential of Open Banking.
Quick hits 🥊
Robinhood has announced it is laying off 9% of its full-time staff. Robinhood, whose stock peaked at $85, is now trading near $10 and recognizes that its growth was accelerated by lockdowns, stimulus, and low-interest rates. 🤔 Robinhood was in hypergrowth mode even as it IPO'd but now needs to hunt for profitability. I'm curious to see if they can grow when stocks go down and, if not, how they diversify. There's a massive opportunity in alternative assets like real estate that some companies are playing with. Robinhood would be a fantastic way to distribute that asset to the masses.
Good Reads 📚
As someone who scrawls words on a weekly basis, I regularly sit back and genuinely clap, with my hands, at Packy's work. It is exquisite. Please, find a half-hour in your week to go read this.
Packy guides us through ReFi (regenerative finance) and the Celo project. Celo is an alternative Layer 1 (think Solana, AVAX, NEAR, etc.), best known for its stablecoins like cUSD, cEUR, etc. The reserves that back Celo are 40% natural capital assets and are designed to be carbon negative, enabling low-cost P2P transactions with great UX.
This is a direct copy + paste because Packy nails it: "Celo is based on a belief that programmable money will unlock new economic models, and that changing the features of money (which is possible because money's just a technology) can lead to a more beautiful world. "
🤔 If Crypto got a glow up to "Web 3" does ESG get a glow up to "ReFi" to make it much more attractive to the folks who just want to make a return? Chris Sacca (famed investor in Twitter, Uber, and Instagram) believes sustainability is an opportunity. If Solar is cheaper than oil, it is also a much better investment. Maybe we need to de-hippy ESG a little and dial up the "greed is good" but just whisper "for the planet."
🤔 Further reading: If you want to go deeper on Regenerative Finance, Niall Haughey does a great explainer here. I also love his concept of a "credit score for land." Land that has been intensively farmed for agriculture gets a poor score. This reminds me of Dave Birch's idea of a land value tax. That way, taxation is related to the asset (and potentially, how good that asset is for society and the economy).
🤔 With the ESG subject, we often get so lost in sustainability and within that carbon. Given the existential risk to all life on earth is probably fair, but also far from the only part of the subject. This often leads to companies buying butt loads of carbon credits to offset their emissions (and get a good ESG rating). Everything from water use, use of chemicals, and use of plastics have a long-term impact on our biodiversity and life's ability to thrive. We need to measure (and hold to account) all of that.
🤔 We cannot just extract from the planet for profit and expect progress. I deeply believe that by fixing the incentive structure around production and consumption, we will figure out how working with the planet is more profitable than being extractive. Given it is a giant blue sphere of resources.
Tweets of the week 🕊
That's all, folks. 👋
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