Fintech 🧠 Food - Nov 14th 2021 - Coinbase earnings, Socure funding & Magic Internet Money is Bootstrapping Web 3
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Weekly Rant 📣
Magic internet money is bootstrapping Web 3
Imagine if owning a .com domain name from Godaddy resulted in you getting shares in Godaddy. Sounds crazy? Well, that's exactly what happened this week in Crypto.
A Crypto project called ENS (Ethereum Name Service) acts like an email address or URL for Crypto wallets. Meaning just like you could email email@example.com to learn more about 11:FS Pulse, you could send or receive tokens from sytaylor.eth instead of some garbled wallet address like "0xb794f5ea0ba39494ce839..."
This week, ENS "airdropped" tokens to its users, and for many, it was their first airdrop. Suddenly just for having (and using) a service, people found themselves with 5 to 6 figures worth of tokens from thin air. So what's going on here? Is Crypto bootstrapping adoption with its own stimulus? Is this a new way to pay for internet infrastructure? Or is this just all hype and speculation in a world with far too much of that already?
Web 3 Crypto wallets and tokens are new primitives. 👩💻
The word "wallet" has been abused in Fintech circles. It's a lazy shorthand for some sort of account that stores value but isn't a bank account. A bank account is a regulated thing that only a bank can offer. A "Fintech wallet" can be many things; sometimes, wallets store airtime, sometimes USD or even loyalty cards. Canonical Fintech wallets would be things like the original PayPal user experience. I send PayPal my USD, and in return, I have a balance with PayPal that I can send to any other user.
You'd be forgiven for thinking that a Crypto wallet is similar. And that's not wrong, but it's also not right either. A Crypto wallet is a different thing, and a Web 3, non-custodial wallet is a different beast entirely. Not all things calling themselves wallets in Crypto are the same:
Fintech wallets that do DeFi are folks like Donut, Eco, Juno, and Linus. These wallets feel like a local currency wallet, except they offer better yield and return. These wallets are owned and operated by a 3rd party. For many users, that's a good thing. Like your physical wallet, you wouldn't walk around with $100k in there (unless you're a real G). As a consumer, you store your USD in these wallets, can spend with a debit card, and maybe start to access higher yield strategies over time. Folks like Juno even allow you to receive your direct deposit and payroll directly into that wallet. All of the financial benefit, less emphasis on the "Crypto."
Crypto wallets (offered by everyone from Coinbase to BlockFi) provide access to types of value that wouldn't be available to traditional wallets. These wallets are owned and operated by a 3rd party (e.g., Coinbase), and the tokens are held (custodied) by that wallet provider. These wallets provide access to a wide array of Crypto tokens and rewards and lead, emphasizing "Crypto" rather than everyday savings and spending. Centralized wallet providers manage risk and make the experience of the wild west that is Crypto safer and easier. They also help access some of the more experimental parts of Crypto (like staking or yield farming) that provide high returns with far less complexity.
Web 3 wallets are to Crypto what the browser was to the internet. Wallets like Metamask, Rainbow (or even Phantom for Solana) exist as browser extensions or mobile apps that connect to a decentralized application (DApp). DApps like Uniswap or Rabbithole first ask you to connect your wallet before interacting with them. Unlike Coinbase or FTX, where you can send it regular USD from your bank account, then buy Crypto assets or even NFTs, Web 3 wallets and DApps don't interact with the traditional financial system.
With centralized wallets, the center of the universe is that wallet, and they bring the world of Crypto into that wallet. The only tokens you can hold are the ones the wallet allows, and the only services you can use are the ones the wallet has approved.
With Web 3 wallets, you take that wallet (and anything stored inside it) to any DApp. The permissionless nature of the Web 3 wallet is its superpower. While you can replicate just about any aspect of what the Web 3 wallet can do functionally, you cannot replicate its permissionless nature. A centralized wallet provider like Coinbase's very business model depends on you using them as an exchange. A Web 3 wallet doesn't care which DApps you use; it's software.
Crypto wallets help you receive and manage tokens and bake in any application functionality to the wallet itself. You take a Web 3 wallet to the DApp. The center of gravity becomes you, not the provider.
The role of the token. 💰
Tokens play a different role in Crypto wallets, to say, USD or a loyalty card in a Fintech wallet. There is no network I can check to see which wallets have any USD at all. In theory, the central bank and regulators should have all of that reported, but the reality is nobody truly knows how much currency is in the economy. They know how many physical notes and coins have been printed, but which USD, created by banks lending activity, is sitting in which wallet or account? No clue.
In Crypto, every token is registered on its Blockchain. We know which wallet holds every single BTC, ETH, or USD stablecoin. Which wallet has which token is a matter of public record that is incredibly secure and all but impossible to hack. This means software developers can add new functionality for a token holder when they receive it or later. So let's play this out.
Imagine you bought a Bored Ape, perhaps from a marketplace like Opensea. You'd take your Web 3 wallet to Opensea and connect it, and if you have enough ETH to afford a Bored Ape, purchase an Ape. After your purchase, you could view your ape in your Opensea collection or directly in your wallet. You could also take that ape and sell it directly peer to peer or any other marketplace.
But where things get more interesting is what happens for holding that token. The creators of Bored Apes have "airdropped" additional content and NFTs to the Ape token holders, like the bored ape kennel club, which is a dog to match your ape. The creators of Bored Apes didn't have to check who owned the bored apes, the wallet addresses that held apes are a matter of public record. They could reward existing token holders with new content after the purchase. Meaning, if you had an ape but sold it, you wouldn't get the airdrop.
So far, so speculative and internet meme culture. But if you look past the speculative and collectible use cases, value with functionality is a whole new business model for the internet.
In Crypto land, people use the term "Magic internet money" to describe these project rewards because it appears to fall from the sky. But the reality is it's a business model to bootstrap and reward engagement, and its foundation is distributing ownership.
Magic Internet Money bootstrapping Governance and Community. 🤝
This brings us back to ENS.
The guys at FTT did a good breakdown about the airdrop mechanics, but it's worth exploring the psychology of airdrops to understand why this is a new business model for the internet.
ENS rewarded their most active users with more tokens, less active users with fewer tokens. There were also bonuses for being a part of the community. Just like the Bored Ape users could get a dog to match their ape, anyone who had used ENS now had ENS tokens.
Unlike the apes, however, ENS tokens aren't just bling or speculative. As part of claiming the ENS token, each user was asked to vote on 4 resolutions for the protocol that would form its constitution.
Users vote via Snapshot, a service that connects to Web 3 wallets and allows individuals to "vote" on questions if they have a corresponding token in their wallet. It looks like a shareholder AGM, except during the formation of the organization and its first-ever "shares" being created.
Over time token holders will be able to vote on how the project itself is developed. 50% of the ENS tokens are held in a treasury. Encoded in the treasury is a rule that requires 100k tokens vote to "spend" on the new capability. The community can make proposals, and anyone can work on those proposals via grants. There's no guarantee that the project founders will be recipients of tokens (beyond their initial airdrop) unless the community itself votes for them to do so.
Put another way, the community governs what happens to the project.
As one of the core contributors said
In the future, ENS wants "login with Ethereum" to become a default like "login with Google" or "login with Facebook" is today. Except instead of that identity being owned by a centralized service. It follows you.
ENS isn't the only example of tokens forming governance. Star Atlas is a project building a massive video game world where token holders can shape the story and in-game economics. Friends with Benefits is a social community that is sponsoring artists and building products for the digital art world, again where token holders can vote on new projects, payroll, and even investment from 3rd parties.
Imagine if EA games allowed players to vote on content or game economics? Imagine if Soho House permitted members to vote on the payroll for staff?
Magic Internet Money has more use cases. Like:
Staking, a holder puts their token to work, helping to validate transactions in the network. That token can't be spent or moved while staking, and in theory, it could be lost if the network is abused. That token is doing work, and in return, you receive a reward.
Play to Earn, using a token to play a game, in which losing means losing those tokens, and winning means gaining more. Unlike traditional video games, those tokens also come back out of the video game and into the real world to pay for things like rent, utilities, and food.
Contribute to Earn, receiving a token for doing something useful in the network community (staking would be one form of this). An example is the Helium network. Helium provides long-range internet connectivity for devices at a fraction of the cost of a cellular network. Companies like Lime and Salesforce use Helium to manage assets, track their devices and have a single view of all of their devices. There is no single operator of Helium; instead, it allows anyone to install a device in their office that operates the network. In return, the helium network rewards the owner of that device with its token HNT.
Notice the reward is usually for some sort of engagement. Not unlike the Web 2 model of advertising, but now the engagement rewards the community more than the platform.
This is true decentralization. The project sets up an incentive structure, and participants can pay to use the service or be paid to help run the service. No operator can switch it off, take away your bored ape, or raise prices to make next quarter's results look better.
Web 3 is a business model for Public Goods. ♻
Before wallets, tokens, and blockchains, the internet had public goods. Every year Wikipedia looks for donations to keep it running. ICANN and W3C help set the standards that govern the backbone of the internet. But other than them being a good thing that many people wanted, they had no incentive mechanism or flywheel.
Tokens can be a form of marketing, drawing speculators and true believers to a project to give it attention and notoriety. Tokens create engagement, allowing the community itself to shape the direction of the project. Tokens can secure the network and help pay the cost of running it. Tokens also create a viral effect; as more users come to the platform, more fees are generated, which means more rewards are available to contributors.
Crypto wallets like Coinbase may help the mass market dip a toe into the world of Web 3. But the fun really starts when wallets connect directly to decentralized apps and form part of the very fabric of the network.
So we've solved world hunger? 🥕
Decentralization does not solve all of the world's problems as a business model simply by existing. Like the founders of Web 2 companies probably didn't intend to create a privacy nightmare and polarize politics by monetizing through ads, there will be unintended consequences to the Web 3 business model.
Web 3 is the wild west, filled with scams, and it's often hard to see the genuinely sublime projects for the sheer amount of speculation and hype in the space. There's almost zero cost to creating a token that can instantly be sold in a global marketplace. The temptation to cash in quickly (or cash out) is massive.
Incentives matter, and therefore so does incentive design. The Web 3 equivalent of ad-tech will be community tech. Holding a token instead of cashing out is a signal of your belief in a project, even if you could profit massively by selling. This psychology, mixed with the viral loop, is what makes the whole space so interesting.
What's next? 🤔
Over time, I suspect Web 2 and Web 3 will start to bleed into one another. Companies like Reddit, Twitter, and Discord will create better user experiences for wallet holders. But the nature of the innovator's dilemma is the hardest thing to change is your business model.
Facebook primarily monetizes by building a proprietary data set and targetting ads at those users. Web 3 primarily monetizes by providing a public good in return for fees (which it may then distribute to token holders or people running the network). This is why many in Crypto don't want Zuckerberg's Metaverse. The big centralized company and ad revenue business model are under attack.
This change won’t remove the company or advertising as a business model entirely. Instead, it provides a business model for things that wouldn't get built before. Web 3 will build global cooperatives with new incentives to solve different problems.
And I can't even begin to fathom how cool that could be.
4 Fintech Companies 💸
1. Stretch - Neobank for the formerly imprisoned
Stretch is a Neobank for the 600,000 Americans released from prison every year who struggle to find work. It features a MasterCard debit and free account and helps customers find work or education for employment. Stretch, like most Neobanks, will initially focus on interchange revenue, but over time could extend.
🤔 The app uses finding a job as the wedge into banking rather than the other way around, solving for the primary JTBD of the recently incarcerated. This trend of finding an underserved community and being hyper-focused on them continues, and Stretch is going after a worthy cause. The US has the highest per-capita incarceration rate globally, leaving millions of people unable to get ahead in life for things that might not have resulted in a prison sentence in other countries. The founder Yassi is a former Barclays colleague of mine and a force of nature. More like this, please 👏
2. Meow - DeFi yields for corporate treasuries
Corporates and CFOs can deposit cash with Meow to earn up to 4% yield on their USD (cash) holdings. Billing itself as "the most compliant alternative to a savings account," Meow is suited to corporates who are looking for a higher cash return but didn't want to learn DeFi or manage a new compliance overhead. A hack to think about this is "BlockFi for Corporates."
🤔 Inflation is expected to hit 6%, and most corporates holding USD in savings accounts (even at 1%) are going backward in real terms. We've seen companies like Tesla and Square place part of their corporate treasury into Bitcoin (partly as an inflation hedge, partly as a bet on Crypto overall). But for most companies, this is far too complex (and has some negative tax accounting implications). Whereas something that looks and feels like a USD deposit but with a much higher return is a no-brainer. Meow has the who's who of angel and seed investors. They'll do exceptionally well. I imagine it's a matter of time until companies like Brex or even Paypal launch this as a feature.
3. Vint - Democratizing wine investing
Vint allows users to buy SEC-qualified shares of high-quality wines. Wine has low volatility and historically strong returns, and by investing with Vint, users can start with $50. Vint buys a wine collection and then creates a fund that fractionalizes ownership into shares.
🤔 Historically, high-end wine collections were exclusive to the wealthy because a collection can easily run into 6 figures. The industry is also tight-knit and often requires significant knowledge to make the most out of it. It seems there is a dedicated fintech app for just about every alternate asset class. But I wonder how long until these asset classes are more readily available in services like Robinhood or even as NFTs?
4. Evergrow - Carbon offtake financing
Evergrow has created a marketplace to match carbon offset projects with buyers of carbon reduction projects. They do this by creating "offtake" contracts (a promise to buy a commodity at a fixed price over an extended period). There are many types of carbon commodities (e.g., offsets or renewable energy certificates), but the produces of these commodities find it surprisingly difficult to sell an offtake contract.
🤔 In the shadow of COP26 it's madness that projects that decarbonize struggle to find the right kind of capital. I remember seeing countless attempts by innovation teams in banks to create this sort of marketplace, and it's great to see venture capital making this happen. Carbon markets are complex, and it will take entrepreneurs with experience in them to open them up.
Things to know 👀
Coinbase stock sank 13%, missing analyst earnings estimates. Transacting users fell from 8.8 million in the previous quarter to 7.4m. Net revenues of $1.2bn were also down from $2bn in Q2. 71% of volume comes from institutions transacting, vs. 29% retail, but most revenue comes from these retail investors' 1.1% take rate. Great insight from John St Capital that institutions traded $193bn of tokens "other" than BTC or ETH, showing that the demand has moved far beyond the big 2 Crypto assets with large investors.
🤔 Crypto largely traded sideways until late Q3. Stocks especially reliant on retail trading activity felt that in their revenues, we saw this with Robinhood and now with Coinbase. Coinbase pointed out that they're not a Quarter to Quarter stock but rather a long-term bet on the Cryptoasset ecosystem, but it seems the market didn’t listen.
🤔 These numbers also show that Coinbase is the default on-ramp to Crypto for most consumers. Coinbase adding NFTs and announcing (then removing) DeFi yield products make them the mainstream crypto juggernaut. They're now also diversifying into Crypto payroll, staking, and their "earn" product which pays users to perform tasks in Crypto (not unlike an airdrop or magic internet money, just centralized).
🤔 Longer-term Coinbase is well placed to be one of the only fully vertically integrated Crypto players. If they operated in Equity markets, they would be like E*Trade, the New York Stock Exchange, and the DTCC rolled into one (h/t Marc Ruby). I sense FTX is also heading in this direction.
🤔 The role of the on-ramp is a hard one. On the one hand, Coinbase takes the hit from regulators and institutions that want to see them be more conservative. On the other, the Crypto industry mistrusts how centralized Coinbase is. The CEO Brian Armstrong gave a great interview with the Bankless podcast where he talked through this tension. I'm curious to see if Coinbase ever fully embraces Web 3 or if its business model of fees is too hard to get away from.
Socure, the identity verification company, has raised $450m from investors, including Tiger Global, Accel, and T Rowe Price. Socure provides "e-KYC" and identity verification for 12 of the top 15 banks in the US and Fintech and non-bank companies like Public, Stash, and Draft Kings.
🤔 e-KYC is table stakes. Historically branch-based customer identification and verification (and all of the KYC checks that follow) was a labor-intensive and manual process. Simply acquiring a customer via this branch and human first approach could cost upwards of $200 per customer. That's a significant hurdle to overcome to get the customer you just won to be profitable, and meant banks often weren't inclined to help the underbanked or low-income segments. e-KYC can reduce this cost dramatically and is a must-have for anyone trying to operate in Fintech, Finance, or even government in some cases.
🤔 The competition in compliance tech is significant. Newer entrants like Alloy or Hummingbird have gone deeper into the bank's compliance and ongoing monitoring workflow. By bringing together the initial customer identification with continuous monitoring, they're able to become an "operating system for compliance." Socure is using the funding to add in this capability and "considering an IPO." I wonder if we'll see Socure try to acquire its way into these new capabilities rather than build before it hits that IPO?
Good Reads 📚
PackyM guides us through how Modern Treasury is a software layer for any company that moves money via bank transfer that aims to partner with banks instead of competing with them. Bank transfers are hard and often require logging into a bank portal or sending them a specific type of file to move that money. Companies either maintain many banking relationships via custom software or have a large in-house team managing the operational overhead.
The volume of payments Modern Treasury is managing (and reconciling) has grown 20x in the last 9 months. Customers can set up payments, approve processes, track payments, manage failures, and reconcile all of this against accounting and bookkeeping software. The opportunity is to become Stripe for payment operations.
🤔 Unless you've worked in a corporate back office, you won't have seen the aggregation and ugly admin, and yet it's absolutely massive. Corporate payment volumes dwarf consumer payments, which are mostly via wires, ACH, or checks. Once you're big enough to have more than one bank, you create a bookkeeping nightmare.
🤔 Banks have done nothing to help their customers with this problem. Meaning someone else has come along and built software to solve the problem for the bankcustomersmer. And then, typical banks tend to view the software provider (modern treasury) as a threat. And in some way, yes, modern treasury is "disintermediating" the bank, but only because no bank built this aggregation and workflow capability themselves. I heard a great quote this week from one C-Suite banker who had a tech client tell them, "you could charge us almost $0.00 for ACH and Wire, and we still wouldn't use you directly." Services like modern treasury have to exist, but they also hopefully force banks to up their game.
Tweets of the week 🕊
That's all, folks. 👋
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