In my days as an Emerging Markets (EM) trader, I would often find myself as a ‘tourist’ in other asset classes and topics of global interest. EM capital markets are intertwined with the rest of the world and how money flows between nations has great significance. Now that the world of finance is on a collision course with computer science, digital assets have become not just my area of tourism but a place of permanent residency. What’s unclear to me, however, is whether the computer scientists involved in blockchain, know that they are now capital markets people — since, through ‘crypto’ they able to originate new forms of capital.
Last month I joined nearly one thousand software developers from all over the world at the ‘Web 3.0 Summit’; three days of talks, workshops and hacking, held in East Berlin’s historic GDR-era broadcasting facility. The event was organised by the Web3 Foundation which seeks to advance the decentralized web (dubbed ‘web 3.0’) by supporting the development of the technologies that will power it — specifically, blockchain. The foundation envisions an internet where users have greater control of their own data and identity.
The Web 2.0, through the ability to both read and write to applications, gave us an interactive internet, transforming the way society communicates, co-operates and does business. Some of the most valuable companies in the world, like Facebook and Netflix, are built on so-called Web 2.0 technologies. These companies disintermediated businesses who largely operate in the ‘meet space’. Web 3.0 seeks to advance internet infrastructure further by disintermediating the disintermediators. The next evolution of the internet will give users the ability to interact person to person with no platform in between. Blockchain technology powers this new internet infrastructure by embedding trust into the system, such that trust in an intermediary is no longer required.
The native asset of a blockchain, demonised as ‘crypto’, has been criticised for being an inferior form of money and fostering an ecosystem of corruption and fraud. However, money is not the only use case for decentralised digital stores of value. Digital assets will support fully digital goods and services where people can transact person to person. For example, if you want to design a logo, produce copyright or build a website for someone you don’t know on the internet, how would it be done at the moment? Likely through a platform that will charge fees for brokering the transaction. In the future, on Web 3.0, you can get paid directly, with only you and your customer being part of the transaction (no payment service provider required); peer-to-peer digital services, powered by peer-to-peer digital money.
At the summit, Parity Technologies unveiled two initiatives that could accelerate the progress towards this new decentralized world. ‘Polkadot’ is a new technology that will allow blockchains to talk to each other and is seen as the key infrastructure required to deliver a unified Web 3.0. At the moment hundreds of blockchains (cryptos) exist and effectively compete with one another. The second initiative, ‘Substrate’, provides a standardized toolkit for blockchain development. Blockchain typically requires specialized coding ability, Substrate makes the technology more inclusive by providing the wider software engineering community development tools they are already familiar with, potentially advancing mainstream adoption by years.
The key attribute of blockchain is creating digital scarcity. Scarcity is what creates value. This is a concept that continues to elude people outside of the industry or those not familiar with paying for virtual goods. Millennials may have found the idea easier to grasp because most online games now have in-game economies. Digital scarcity is an extremely powerful property but much of the crypto community associates this with fixed quantity — which is not the same thing. Constrained money supply is touted as one of the key advantages of crypto but fails to acknowledge the reason we abandoned the gold standard is because a fixed money supply doesn’t work very well, as it can lead to deflation.
A big focus of the summit was blockchain design; creating systems with trust embedded in transactions. While much of the innovation revolves around software or system mechanics, it’s unclear whether the significance of building software with its own economic and monetary system is well understood. Understanding monetary policy and how the Web 3.0 economy is intertwined with global capital markets will be crucial for long-term success. No one lives in a self-contained digital economy, where they both earn and pay for all of life’s needs in digital currency. Despite perception, both crypto and normal forms of money are fiat money, backed by nothing but trust in the system. Blockchain design has yet to incorporate any aspects of fiat money systems that actually work.
Blockchain gives cyberspace a native currency. Analyzing these new cyber-economies is strikingly similar to analyzing emerging markets, which is fundamentally about how money flows between developed (real world) economies and developing (web 3.0) economies. Understanding exchange rates, capital movement and monetary policy will be key to designing digital economies that can endure. Blockchain developers and crypto users need to start thinking about the native assets as money for its own economy, rather than in terms ‘foreign’ currencies (i.e. the dollar). What economy am I referring to? It doesn’t exist yet, but the Web3 Foundation is helping to build it.