Results for “elrond”
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Stripe v. Elrond! Crypto and the Payments System

Recently Elrond, the blockchain startup for which I am an advisor, bought a payments processor (conditional on approval from the Romanian government). On the same day, Stripe, the payments processor, announced that they are moving into crypto. None of this is coincidental. Elrond understand that the payments market is a multi-trillion dollar opportunity. Stripe knows that crypto innovation could undercut them very quickly if they aren’t prepared.

How did Stripe turn into a multi-billion dollar firm almost overnight? Obviously, Stripe is a great firm, led by the brilliant Collison brothers, CEO Patrick Collison and President John Collison. But it’s also important to understand that the payments market in the United States is a $100 trillion dollar market. Yes, $100 trillion. Any firm that captures even a small share of this market is going to be big. Credit cards are actually a small part of payments, about $7 trillion with roughly a 2% transaction fee or a $140 billion market. (Quick check. Credit card companies had 2020 revenues of $176 billion).  ACH debit and credit transfers are the big market, $65 trillion, which at a .5% transaction fee amounts to a $325 billion market (this is retail price, wholesale is lower). Thus, payments revenue is on the order of $465 billion. A small share of $465 billion is a very big market (and that is just the US market).

Now consider the following. Crypto payments are in principle at least an order of magnitude cheaper than ACH payments. On Elrond, for example, a very fast and low cost blockchain compared to Ethereum or Bitcoin, someone recently transferred $17.5 million for less than a penny. Moreover, crypto payments are global while every other payments system gets much more expensive as you cross borders. I recently sent $1500 to India and it cost me $100 in transaction fees! To be sure, payments made through the banking system have to obey “Know Your Customer” regulations and also include invoicing and billing services which adds both to value and cost. The main reason, however, that payments through the banking system are expensive is because the banking system rails are taped together with two hundred years of spit and duct tape.

Crypto payments are the future. Stripe knows it. Elrond knows it. The race is on.

Elrond and the New Crypto Spaces

I’m an advisor to a number of firms, including several in the crypto space such as Elrond (eGLD coin). When I signed on as an advisor more than two years ago, Elrond was almost completely unknown, which wasn’t surprising as they were based in Romania. I thought the Romanian base was a positive, however, because it meant that Elrond could hire extremely well-educated computer scientists, mathematicians and software engineers at below Silicon Valley prices. Moreover, the blockchain world, true to its foundations, is decentralized. Like a modern day Erdos, Vitalik Buterin operates out of his suitcase. The Silicon Valley of the blockchain is the internet. Why the blockchain world has evolved differently than Silicon Valley is an interesting question (with implications for whether SV could loses its centrality) but because it is decentralized I thought location was less important than the quality of the team. And the team, led by hard-charging founder Beniamin Mincu, is excellent. In the last two years the Elrond team has built a completely modern blockchain from the ground up using secure proof of stake and sharding to achieve a potential throughput of upwards of 16 thousand transactions per second with 6s latency and $.001 transaction cost and a toolkit for developers. I was also impressed by the commitment Elrond had to security, including formal verification methods, and especially to making Elrond accessible to the masses. Today Elrond/eGLD is on a tear and by market cap it is one of the top 50 projects in the space with a strong upward trend.

Will Elrond take over the world? I hope so! But, of course, it is unclear. Aside from ranking Elrond versus other projects the space itself still doesn’t have a killer app for the masses. In 2017 near the peak of the market at that time, Vitalik Buterin tweeted:

So total cryptocoin market cap just hit $0.5T today. But have we *earned* it?

How many unbanked people have we banked?

How much censorship-resistant commerce for the common people have we enabled?

How much value is stored in smart contracts that actually do anything interesting?

The total market cap is now close to a trillion, about twice the level when Vitalik tweeted, and these are still good questions. Bitcoin has established itself as a new asset class that is rapidly supplanting gold as a store of value (gold is lame) but not as a payments platform. Ethereum, Elrond and competitors like Algorand were built for smart contracts, including things like stable coins which will be used for payments, but smart contracts are capable of doing much more. In theory, smart contracts let people cooperate in new ways, potentially unlocking trillions in value. But we aren’t there yet.

Decentralized finance or DeFi is one suggestive hint of where things are going. Already many billions of dollars are “lent” and “saved” using DeFi. The lending and saving, however, is almost entirely done in one cryptocurrency for another. In essence, the DeFi system is leveraging off of crypto speculation and trading.

Nevertheless, something interesting is happening in DeFi. The DeX’s or decentralized exchanges have shown that automated market makers can perform the services of market order books used by the traditional exchanges like the NYSE at lower cost while being easily accessible from anywhere in the world and operating 24/7/365. Thus, every exchange in the world is vulnerable to a DeX.

Also, although DeFi is a place where you can easily lose all your money to mistakes, scams, and bugs (not to mention changes in asset values), DeFi is rapidly developing state-of-the-art security. Only the paranoid survive on the blockchain which means that the systems that do survive are robust. Balaji Srinivasan recently tweeted that Bitcoin is the most powerful algorithm in the world and few algorithms have been as battle-tested as Bitcoin. In a similar way, DeFi will be secure or die and security in a blockchain world will be more secure than anywhere else.

Combining security with accessibility is what’s hard. It’s telling that Coinbase is one of the most successful firms in the crypto space despite performing services which are in some tension with the philosophical foundations of crypto. Satoshi Nakamoto would probably be a little disappointed to learn that people were depositing their Bitcoins in a bank! I can understand the impulse, however. It’s almost magical how you can move money on a blockchain without input or permission from any authority. But when you click the button and your money disappears it’s terrifying as you pray for the invisible hand of the miners to restore your money in another account. Elrond’s soon to be released Maiar app, a wallet that interacts with the Elrond blockchain using only a phone number, will be an interesting test of whether a blockchain platform can duplicate the ease of use of something like PayPal or Zelle.

The other interesting development in the space are zero knowledge proofs. Zero knowledge proofs let someone prove that they know a piece of information or the results of a computation without revealing the information. ZK proofs started in the academic literature but research in their uses and applications has exploded as computer scientists like Silvio Micali start blockchains and blockchains like ZCash hire computer scientists who advance the scientific literature (to give just one example). Truly anonymous digital cash is one application but more generally zero knowledge proofs let people buy and sell information in a way which has always been difficult and seemed impossible (how can you sell a piece of information without showing it to someone first but then having seen the information why would they buy it?).

Bottom line is that crypto is still waiting for the killer app which will make it 21st century infrastructure but there has been tremendous scientific progress in blockchains since the ur-date, 1/3/2009. Modern platforms like Elrond are faster, more robust, and more powerful than past platforms and the potential is there for transformative growth.

Bitcoin and Electricity

How many times have you read something like this, “Bitcoin uses as much electricity as Malaysia or Sweden or Denmark or Chile….”. What a bore. Have you ever wondered, however, why the comparison is to countries? Why don’t they ever tell you what would seem to be a more natural comparison which is how much “Bitcoin” spends on electricity?

The reason is that electricity is incredibly cheap so Bitcoin electricity expenditures priced in dollars don’t look very large. Bitcoin uses something like 100 terawatt hours (TWH) of electricity annually (depending on the price of Bitcoin) but a TWH costs less than $100 million (10 cents per KWH times 1000000000). Thus, Bitcoin spends say $10 billion on electricity annually. (In fact, it’s less than this since bitcoin miners can be located in places where electricity prices are especially cheap.)

$10 billion in spending isn’t a lot. It’s less than the world spends on toothpaste ($30b), much less than the US spends on cigarettes ($80b), and considerably less than the US Federal government spends in one day ($18.65 billion).

If we think of the $10 billion spent by Bitcoin as a security budget (as the spending secures the blockchain) it also compares reasonably to US bank spending on cybersecurity. Bank of America alone spent more than $1 billion on its cybersecurity budget and the total financial security budget is much larger.

None of this proves that Bitcoin spending is well spent but it puts things in context. It is also true, of course, that most of the new crypto platforms such as Elrond (I am an advisor) use proof of stake which uses much less electricity than proof of work.

Still, the next time you read that Bitcoin consumes as much electricity as Sweden substitute Bitcoin spends as much on electricity as Americans spend on Halloween costumes.

Photo Credit: MaxPixel.

Andreessen on Crypto

From Noahpinion’s interview with Marc Andreessen:

[C]rypto represents an architectural shift in how technology works and therefore how the world works.

That architectural shift is called distributed consensus — the ability for many untrusted participants in a network to establish consistency and trust. This is something the Internet has never had, but now it does, and I think it will take 30 years to work through all of the things we can do as a result. Money is the easiest application of this idea, but think more broadly — we can now, in theory, build Internet native contracts, loans, insurance, title to real world assets, unique digital goods (known as non-fungible tokens or NFTs), online corporate structures (such as digital autonomous organizations or DAOs), and on and on.

Consider also what this means for incentives. Up until now, collaborative human effort online either took the form of a literal adoption of real-world corporate norms — a company with a web site — or an open source project like Linux that had no money directly attached. With crypto, you can now create thousands of new kinds of incentive systems for collaborative work online, since participants in a crypto project can get paid directly without a real-world company even needing to exist. As great as open source software development has been, far more people are willing to do far more things for money than for free, and all of a sudden all those things become possible and even easy to do. Again, it will take 30 years to work through the consequences of this, but I don’t think it’s crazy that this could be a civilizational shift in how people work and get paid.

Finally, Peter Thiel has made the characteristically sweeping observation that AI is in some sense a left wing idea — centralized machines making top-down decisions — but crypto is a right wing idea — many distributed agents, humans and bots, making bottom-up decisions. I think there’s something to that. Historically the tech industry has been dominated by left wing politics, just like any creative field, which is why you see today’s big tech companies so intertwined with the Democratic Party. Crypto potentially represents the creation of a whole new category of technology, quite literally right wing tech that is far more aggressively decentralized and far more comfortable with entrepreneurialism and free voluntary exchange. If you believe, as I do, that the world needs far more technology, this is a very powerful idea, a step function increase in what the technology world can do.

I agree. See also my earlier post Blockchains and the Opportunity of the Commons:

Today smart contracts on blockchains like Ethereum (and Elrond, AT!) have the potential to create a sophisticated set of global common resources that will form the foundation for much of the economic and social structure of this century–this is the opportunity of the blockchain commons.

Integrate Crypto with the India Stack

In India Should Embrace Not Ban Cryptoc I said “the irony is that India has one of the world’s most advanced identity and payments systems, the India stack” and by integrating the India stack with crypto India could take in important step and leapfrog slower to adapt countries. Now iSpirit, the team behind the India Stack, are pushing the idea. They note that the technology developed for India’s Goods and Service Tax can help by providing verified invoice data that can be used for lending.

India’s Goods and Services Tax (GST) helps to address this by generating invoice and payment data in a format suitable for credit underwriting and risk analysis. The GST data also enables a small enterprise in a large value system to provide data and visibility across the supply chain; for example, one can track the progress of parts from a small parts supplier to an auto component manufacturer to a large passenger car maker all the way through to distributors, sub-dealers, and retail sales.

The digital version of an SME’s sales and purchase invoices ledger thus amounts to informational collateral on both the company and the larger ecosystem within which it sits, that could become the basis for extending credit, as an alternative to the hard asset or collateral-based financial system. This is similar to how Square Capital and Stripe Capital already function in the West.

In addition to credit-based financing, the trustworthy records furnished by GST’s informational collateral can also support equity or quasi-equity financing, to support growth without increasing debt. These might take the form of direct equity investments in small businesses, or even personal micro-equity investments in individual consultants or students.

India’s innovation: use new pools of crypto capital to address long-standing financing needs

Accompanying the iSpirit post is a great manifesto by Balaji Srinivasan that explains the India Stack, crypto, and how they fit together.

The first step in understanding Crypto IndiaStack is to understand IndiaStack itself. It is a set of national APIs for payments, identity, KYC, e-signature, and document verification that scales to a billion people. Here’s a quick overview of the IndiaStack APIs:

… crypto is now bigger than Bitcoin. It also includes newer blockchains like Ethereum, which have enabled the new world of decentralized finance or “defi” for short. This new space is growing at an astonishing pace, with >25X year-over-over growth. It’s putting Wall Street on the internet and changing the very foundations of how money is represented and invested around the world. And most importantly for our purposes, defi is making huge pools of capital newly available to any Indian with a digital wallet, in the same way the internet made huge swaths of information available to any Indian with a cellular phone.

…defi is to finance what the internet was to information.

By adding both a digital rupee and crypto support to IndiaStack, we could turn every phone into not just a bank account but a bonafide Bloomberg Terminal, giving every Indian the ability to make both domestic and international transactions of arbitrary complexity, attracting crypto capital from around the world, and leapfrogging the 20th century financial system entirely.

How do we get there? In four easy steps:

  1. Understand what a digital rupee is.
  2. Add digital wallet support to IndiaStack.
  3. Add crypto assets to the IndiaStack digital wallet.
  4. Extend IndiaStack APIs with crypto concepts.

Read the whole thing.

Addendum: On defi see also my earlier piece on Elrond.

India Should Embrace Not Ban Crypto

Should India ban crypto in a return to foreign currency regulations of the past or embrace cryptocurrency? Shruti Rajagopalan has an excellent column reminding us of India’s old system of currency control under the License Raj.

If India proceeds with a rumored ban on cryptocurrency, it wouldn’t be the country’s first attempt to impose currency controls. This time, however, a ban is even less likely to succeed — and the consequences for India’s economy could be more dire. The country shouldn’t make the same mistake twice.

In the 1970s and 80s, at the height of what was known as the License Raj, Indians could only hold foreign currency for a specific purpose and with a permit from the central bank. If a businessman bought foreign exchange to spend over two days in Paris and one in Frankfurt, and instead spent two days in Germany, the Reserve Bank of India would demand to know why he’d deviated from the currency permit. Violators were routinely threatened with fines and jail time of up to seven years.

Imports required additional permits. Infosys Ltd. founder Narayana Murthy recalls spending about $25,000 (including bribes) to make 50 trips to Delhi over three years, just to get permission to import a $150,000 computer. Plus, since any foreign exchange that the company earned notionally belonged to the government, the RBI would release only half of Infosys’s earnings for the firm to spend on business expenses abroad.

Naturally a black market, with all its unsavory elements, emerged for foreign currency. The government doubled down, subjecting those dealing in illicit foreign exchange to preventative detention, usually reserved for terrorists. Businessmen selling Nike shoes and Sony stereos were arrested as smugglers.

The system impoverished Indians and made it impossible for Indian firms to compete globally. There’s a reason the country’s world-class IT sector took off only after a balance of payments crisis forced India to open up its economy in 1991.

…While details of the possible crypto ban remain unclear, a draft bill from 2019 bears eerie resemblance to the 1970s controls. It would criminalize the possession, mining, trading or transferring of cryptocurrency assets. Offenders could face up to ten years in jail as well as fines. Such a blanket prohibition would be foolish on multiple levels….

A related problem is that you may think you are banning a cryptocurrency but if you are banning something like Ethereum or Elrond what you are really banning is an experimental workspace, a platform capable of supporting an ecosystem of innovations in finance, art and new forms of cooperation and organization. As I said some time ago:

The Decentralized Autonomous Organization (DAO) is a new organizational form potentially as important as the creation of the corporate form in the 1600s.

and that’s just one example of how crypto will–in one form or another–under-gird much of our life in the 21st century in ways we don’t yet fully see. Banning is premature to say the least.

Moreover, the irony is that India has one of the world’s most advanced identity and payments systems, the India stack. By integrating the India stack with crypto systems regulated similarly to foreign currencies under India’s Foreign Exchange Management Act, India could become a leader in fintech. Balaji Srinivasan presents practical steps forward:

Basically, India doesn’t need to take a risk with a novel ban on the financial internet. It can just modify FEMA to regulate decentralized cryptocurrencies and national digital currencies as foreign assets. A 64-page report by the Indian law firm Nishith Desai Associates outlines in detail how that could work. In brief, the report recommends:

  • Treating crypto as a foreign asset. FEMA provides language that could be used to expressly classify digital assets as “securities”, “goods”, “software”, or “foreign currencies” depending on their features and attributes.
  • Regulating exchanges with startup-friendly licensing. RBI could use FEMA to regulate crypto exchanges as “authorised persons” per the Act, thereby permitting them to deal in foreign currency. Some provision would need to be made to accommodate startups, perhaps by monitoring small new licensees under a regulatory sandbox framework. By repurposing this well-established regulatory mechanism, crypto-assets become subject to all the existing safeguards that the Act provides, including RBI oversight and KYC/AML.
  • Adopting KYC/AML rules. Most developed jurisdictions, including Australia, Canada, the EU, Japan, South Korea, and the US, have brought crypto-asset business activity within their AML regimes. Such an approach has also been recommended by the FATF. India can do this with a simple Central Government notification under the Prevention of Money-Laundering Act.

The FEMA-based model (or a close alternative) would allow us to turn all licensed, regulated Indian exchanges like CoinDCX, WazirX, Coinswitch, Zebpay, Unocoin, and Pocketbits into well-lit venues for trading cryptocurrency. Over time, they will also become huge drivers of remittances for Indians abroad performing remote work, thereby bringing capital into India.

Decentralized Finance and Innovation

Decentralized finance to date seems mostly to be about speculatively trading one cryptocurrency for another. I see little real investment. But in my post on Elrond, I also wrote, “The DeX’s or decentralized exchanges have shown that automated market makers can perform the services of market order books used by the traditional exchanges like the NYSE at lower cost while being easily accessible from anywhere in the world and operating 24/7/365. Thus, every exchange in the world is vulnerable to a DeX.”

One of the reasons that I think DeFi has a big future is that there is much more innovation in the space than in traditional finance. Decentralization is really not a big deal for consumers–it’s even a negative in some respects–but it’s a huge factor for producing innovation.

As an illustration the excellent Bartley Madden (note my biases!) has an interesting idea for reformulating order books on size rather than time.

  • One patented concept is that at a specified limit price, priority is based, not on the time when the order was received, but on order size, which incentivizes placing larger orders.
  • Additional issued patent claims concern variable prices on limit orders depending on the number of shares traded and other technical details for new ways to facilitate the matching of institutional orders with large retail orders.
  • The reason this platform would actually build liquidity is because of the preference given to the largest orders. In operation, a slight price advantage is achieved by the larger investors while the counterparty smaller investors achieve a very quick fill of their entire order.

Or consider the Budish, Crampton, Shim idea for batch auctions to avoid resource waste (rent-seeking) from high-frequency trading. Are these good ideas? I don’t know. But what I do know is that there is little chance that either will be adopted by a major exchange–the transactions costs, including bureaucracy, fear and complacency (why rock the boat?) make it very difficult to innovate. But these ideas could be implemented very quickly by a DeX.

DeFi illustrates “the perennial gale of creative destruction,” and right now we are in the creative phase. New ideas about how to exchange assets are being rapidly deployed and destroyed but a few will prove robust and then watch out. The destruction phase has yet to be begin. Wall Street is unprepared for the onslaught.

Addendum: See also Tyler’s post Will the Future be Decentralized?

LBRY in NYTimes

Last week I wrote about Elrond, yesterday another one of the blockchain firms that I advise, LBRY, made the NYTimes. LBRY is YouTube on the blockchain and it’s not just a White Paper but a working product and potentially serious competitor to YouTube. The piece by Nathaniel Popper, however, is swarmy with a lot of bullshit innuendo like this:

Minds, a blockchain-based replacement for Facebook founded in 2015, also became an online home to some of the right-wing personalities and neo-Nazis who were booted from mainstream social networks, along with fringe groups, in other countries, that have been targeted by their governments. Minds and other similar start-ups are funded by prominent venture capital firms like Andreessen Horowitz and Union Square Ventures.

Get it? Without exactly lying, Popper associates venture capital with supporting neo-Nazis. Garbage reporting. It’s like saying last year 75% of neo-Nazis ate at McDonald’s, their favorite all-American restaurant. Or, neo-Nazis have been known to use Apple phones to arrange their rallies. Or neo-Nazis often pay for their purchases using a private, untraceable means of payment marked by strange symbols and widely used to illegally purchase drugs, guns, and prostitutes.

Surprisingly, the real story is in the sub-head, “companies inspired by cryptocurrency are creating social networks, storing online content and hosting websites without any central authority.”

And do check out LBRY, a platform from which you cannot be deplatformed.

Blockchains and the Opportunity of the Commons

Tyler asks which goods and services are most likely to be bought and sold on a blockchain that is paid for with token issuance and appreciation?

  1. The services with high mark-ups? Low mark-ups?
  2. Big consumer bases?
  3. Well informed and well coordinated consumer bases?
  4. “Influencer” consumer bases, in the Gladwellian sense?
  5. “Trivial” consumer bases, that you don’t mind risking?
  6. Some other properties?

I will go with 6. Blockchains and tokenization are a way to incentivize the creation of a commons. A commons is an unowned place, platform, or protocol that helps people to meet, communicate and transact. Commons underlying modern life include TCP/IP, SMTP, HTTP, GPS and the English language. We don’t see these commons clearly because they are free, ubiquitous and, like air, taken for granted. What we do see are platforms like Airbnb, Uber and the NYSE and places to meet and communicate like OkCupid, Twitter, Facebook and YouTube. What blockchain and tokenization offer is the possibility of creating commons to replace all of these services and much more.

As the examples of AirBnb, Facebook and YouTube indicate, it’s possible for private firms to create platforms that serve the same purposes as a commons but these platforms are not a commons since they are privately owned. Private ownership is great but not without tradeoffs. Bill Gates hinted at one problem when he defined a platform:

A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.

The platform dilemma is that a company that controls a platform wants to maximize the company’s value rather than the economic value of everybody that uses it. Company value and social value are correlated but they are not the same. There are three problems. First, the company will want to grab up as large a share of the social value as possible. That’s ok for efficiency but not ideal for platform users who, because of network effects and coordination issues, may find that they need to use the platform even though it leaves them with only a small surplus. Second, the company may take actions that increase its value but reduce social value. On some margins, for example, Facebook and YouTube profit from advertising that reduces social value. The third problem is that in creating a platform where many people meet and transact, a small number of companies come to control and access more data than may be ideal. Big centralized data is worrying for libertarian reasons but also because big, centralized data is a honeypot for bad actors and hence insecure.

The first set of internet commons like TCP/IP and HTTP were created by government and independent researchers. The unique use-case of blockchains is that blockchains can be used to incentivize the creation of unowned platforms, i.e. commons. The creator of a blockchain need not control the blockchain and indeed can credibly commit not to control it. Thus, the creator of a blockchain can commit to never taking actions to maximize profit at the expense of social value and it can commit to never taking actions to redistribute more of the social value to itself. The blockchain creator, however, can be rewarded through token issuance. Moreover, since the value of the token and the social value of the blockchain are positively correlated the blockchain creator has strong incentives to create a commons that maximizes social value.

To give an example, LBRY–one of the blockchain firms that I advise–is a kind of YouTube on the blockchain. The protocol that LBRY has created is unowned. LBRY’s incentives are to create something that will maximize the value of both content creators and content consumers. The social value created could well exceed that of any owned platform and if LBRY earns a small share of this social value they will be well compensated. Token issuance and appreciation is what incentivizes the creation of the commons.

Creating a commons on the blockchain isn’t easy, however. Decentralized institutions are much more difficult to design than centralized institutions. Decentralized databases are a big advance but making them work at scale-size and speed is a challenge. Precisely because the blockchain is unowned the designers have to get much more correct, right out of the gate. Changing a commons on the fly, forking, is costly, disruptive and not always possible. All of this explains why in the history of the world almost all decentralized institutions, such as markets and language, were not designed but arose through evolutionary forces. Hayek called decentralized institutions spontaneous orders because he implicitly assumed that all such decentralized institutions were spontaneous, i.e. unplanned. Only in very recent years have economists and computer scientists developed the understanding and tools that are necessary to design decentralized orders–orders that are planned but not controlled. Today smart contracts on blockchains like Ethereum have the potential to create a sophisticated set of global common resources that will form the foundation for much of the economic and social structure of this century–this is the opportunity of the blockchain commons.