I missed it again. In July I wrote about venture capital funding chasing hyper-growth stories in “Thinking, Fast and Faster” but now I think there’s a bigger speed story which was missed. And, I’m not thinking of William “Captain Kirk” Shatner rocketing into space. Even that galactic event distracts from the more significant global story; let’s just say the reports of a secret launch of hypersonic missiles by the Chinese must have kept the Pentagon busy over the weekend! Anyway, back on planet earth another universe is emerging and the news flow is moving very very fast. Most people have heard of cryptocurrencies and Bitcoin but there’s more. Lots more. Welcome to the Metaverse or Web3.
Web3 will be the next generation of the internet. Web 1.0 was the read-only version of the internet in the 1990-2000 period where the user was limited to reading information provided by content producers. Web 2.0 was first used as a term in 1999 and can be considered the social or interactive web. The social web and its apps allowed for user-generated content. Think YouTube, Instagram, TikTok etc. However, these apps or platforms sit on centralized servers controlled by the likes of Google, Facebook and Twitter. User data is their business and you are their product. Web3 is different – it is decentralized thanks to blockchain/smart contract technology. These networks cut out lots of intermediaries and unnecesary costs in e-commerce and the good news is that the benefits accrue to the network participants. Those benefits can be captured by cryptocurrencies or tokens and that’s where things are hotting up.
It is probably wrong to focus on the price of cryptocurrencies and tokens currently. That is not my focus in this article. The critical point is that digital currencies and tokens are an integral part of a decentralized Web3 and global capital is beginning to shift. As always, opinions are cheap but real money data from the financial markets can be instructive. So, please reflect on the following headlines as recognition of a potentially new business model for the internet:
First Bitcoin Futures ETF Will Soon Trade on The NYSE – New York Times
Bank of America Initiates Crypto Research – Bloomberg
Standard Chartered CEO: Cryptocurrencies have a future, role to play – South China Morning Post
The final headline seems brave from a Hong Kong based newspaper given China’s recent crypto trading crackdown. However, the real eye-brow raiser is the SEC’s decision to allow a Bitcoin based ETF to trade on a US stock exchange. It may not be the ultimate seal of approval for crypto currencies, and financial markets are no strangers to woeful misallocations of capital from Tulips to Ninja mortgage loans. But….what would add to the credibility of a new internet business model would be to see real businesses rather than financial players making moves. This past week did not disappoint.
As recently as 2018 Stripe actually abandoned its support of Bitcoin four years after being an early crypto adopter in the payments world. Now the company has announced that it is assembling a new crypto engineering team to chart its future in digital assets. The choice of language in the announcement was interesting and points to a bigger picture, or universe, as Stripe explicitly states its goal “to build the future of Web3 payments”. Given Stripe is already committed to growing the “GDP of the internet” this seems like a pretty big clue that the internet as a place of business is about to change. It’s not just the new digital whizz kids spotting change. Even the oldest companies and services are expanding their horizons.
Sotheby’s has been trading art, jewelry and collectibles since 1744. One would have thought that a business dedicated to centuries of physical authenticity, provenance and legitimacy of ownership would have little interest in the upstart world of digital assets. Wrong. Sotheby’s has launched its own “Metaverse” which will be a market platform for digital artists, collectors and token enthusiasts to gather and trade. The latter group would specifically be looking for access to Non-Fungible Tokens, or NFTs as they are known. Note there is more to these tokens than digital images.
NFTs are unique digital identifiers used to certify authenticity and ownership and, unlike a cryptocurrency, cannot be replicated. Blockchain technology again underpins the use of NFTs and it is no great surprise to see giant crypto trading platform, Coinbase, launch a marketplace for NFTs too. In fact, within 24 hours of the launch announcement, more than one million people had joined the Coinbase waiting list for the new platform. In some ways, I see NFTs as an even bigger “currency” than actual cryptocurrencies so we should remind ourselves of some of the key characteristics/functions of such tokens:
- Unique identity
- Audit trail/time stamp
- Smart contract/automated execution
- Unique additional data eg. Image, text, video etc
Current headlines and eye-popping trading values for Beeple art NFTs, NBA Top Shots and CryptoPunk tokens are great examples of high value “unique additional data” but that almost misses the point of Web3. The intriguing business application for me is all that low value data which can be stored on an NFT/token but which can also deliver the other commercial necessities like ID, validation and automation. Think about the following businesses and all the intermediary costs involved in delivering a commercial service or product:
- Content Production
- Professional Services/Consulting
- Environmental/Sustainability Certification
Watch carefully to see which sectors above start to look at blockchain-based/NFT service offerings. However, we have deliberately avoided mention of the very sector which is perhaps most plagued with inefficiencies and intermediary costs. Amazon’s Jeff Bezos used to say “your margin is my opportunity” and it is striking to see that more than half of all technology funding from venture capital now goes to fintech companies(source: Bain &Co). Clearly, the disruption of financial services is a very big “bet” right now but I do wonder whether the relatively slow adoption of technology in finance will now be overtaken by an entirely new technology ecosystem?
I keep thinking of the core NFT features – identity, privacy, authenticity, automation/execution and storage of unique data, images, text etc. – and all those toll-takers and intermediaries taking their margin in the banking sector. Big Tech was the centralized elephant in the Web 2.0 banking universe but the banks survived. In a decentralized Web3 the threat is very different and banking really feels like a sector which is tailor-made for an asteroid strike from the NFT Metaverse. Think much faster.