In this post, we will cover:

1. MEV - overview

2. Market opportunity & players

3. Value chain and MEV participants

4. About Flashbots

5. My thesis on MEV space: Is Flashbots really worth $1B?

1. MEV - overview

• Definition: Miner (earlier PoW) or maximal extractable value (MEV) is the value extracted by miners or validators by utilizing their ability to order transactions within a block.

• This new breed of high frequency trading allows savvy and technologically advanced participants in DeFi to arbitrage across decentralized exchanges (DEXs) and forcefully liquidate or draw down positions directly after a large swing in asset prices on trading and lending platforms, resulting in tidy profits. 

• MEV has grown more lucrative on Ethereum due to the rise of Decentralized Finance (DeFi) applications and become easier to earn due to the creation of Flashbots Auction, a dedicated marketplace for finding the most lucrative MEV opportunities.

• Types

  • The three main types of MEV on Ethereum are arbitrage, liquidations, and sandwiching.

    • DEX Arbitrage

      • When there’s a significant price difference across one exchange to another, MEV bots will buy lower-priced tokens to sell them on another exchange at a higher value.

    • Liquidations

      • DeFi lending protocols require users to deposit some cryptocurrency as collateral. When a user can’t repay his loans, the protocol typically allows anyone to liquidate the collateral and earn a liquidation fee from the borrower.

      • MEV searchers will compete to determine which borrowers can be liquidated and collect the liquidation fee for themselves.

    • Front-running

      • Some searchers will use bots called “generalized front-runners” to scan the mempool for profitable transactions.

      • Once a profitable opportunity is detected, the bot will replicate a user’s transaction with a higher gas price so that miners will choose that transaction over others.

        • Frontrunning (or Priority Gas Auction) occurs when a transactor submits transaction A with a higher gas price than an already pending transaction B, taking the profit opportunity from transaction B (i.e., taking a DEX price arbitrage chance). Such actions can cause negative externalities in a network.

    • Sandwiching 

      • Malicious type of front-running that is often used to manipulate cryptocurrency prices. It occurs when a searcher detects a large pending trade on a decentralized exchange (DEX) and places a trade right before and right after it to benefit from an artificial price change.

• Nature of MEV: Good or bad?

  • Good MEV: MEV helps make the DeFi markets more efficient by creating financial incentives to rectify price inconsistencies.

  • Bad MEV:  MEV can work to disrupt network consensus to the detriment of user trust in the Ethereum protocol and subject user trades to unforeseen slippage or attack. Network congestion and high gas prices for other users

    • Bidding war occurs in regular transaction pools, increasing the p2p network load and volatility in gas prices

    • Due to the all-pay nature of the network, failed bids revert on chain, leading to an unnecessary blockspace consumption and underpriced bids (bidder execution risk) that reduce the block proposer profit

    • Because gas prices determine the orders, bidders cannot express granular ordering preferences (only bid for top positions) and can lead to bid spamming

• Size of MEV

  • Miners and operators earned $730m in profit from MEV on Ethereum in 2021.

  • At current rates, Ethereum miners alone are expected to earn more than $750m annually from MEV.

2. Market opportunity & players

Industry TAM

Between January 1, 2022, and December 31, 2022, $133m in Maximal Extractable Value (MEV) was earned on Ethereum

Year-over-year, the total amount of MEV created in 2022 was significantly lower than the amount of MEV created in 2021 in part because of the steep decline of decentralized finance (DeFi) activity on Ethereum as a result of bear market conditions. In addition, increased competition between MEV searchers has also contributed to making DeFi markets more efficient and thereby reducing MEV profit margins.

Third-party builders and relays are new entities in the MEV landscape of Ethereum made possible because of the advent of MEV-Boost software, as well as the open-sourcing of both builder and relay code. Historically, Flashbots was the only operator of a relay, and mining pools connected to the Flashbots relay to earn MEV. However, because of MEV-Boost and the open-sourcing of relay technology, other MEV relays such as the Dreamboat relay operated by Blocknative are starting to compete with the Flashbots MEV-Relay and help decentralize MEV infrastructure. The Flashbots MEV-Relay is still by far the most popular relay, producing 81% of MEV-Boost blocks.

The data from MEV-Explore sets the lower bound on MEV and actual MEV extracted would be higher due to incomplete protocol / transaction type coverage. The data also only reflects extracted MEV and not all the MEV opportunities (theoretical total extractable value is higher). MEV-Explore only covers profit for single-transaction MEV opportunities (i.e. does not cover profits made from sandwich attacks). The explorer also does not cover CEX-DEX arbitrage due to lack of public CEX data. Flashbots indicated MEV extraction is expected to grow as new ways of value extraction appear in the future

Is MEV bigger than we think?

Historical context

• After The Merge in PoS Ethereum, miners are no longer part of the consensus process, and validators have taken their place as network security providers. The process for adding new blocks to the chain has been broken into two separate roles: block builders and block proposers.

• Block builders are not part of the base layer infrastructure of Ethereum post-Merge but are the optional MEV add-on that covers the building process on their behalf. Block builders scan the mempool for transactions and try to assemble the most profitable blocks for proposers to include. All else equal, the blocks assembled with the most profitable MEV transactions will earn the proposer a higher rate of reward.

• Block proposers simply stake 32 ETH to have a chance to propose a block. At the network level, the average reward per block is ~0.2 ETH, but this average varies based on the number of active validators, slashing penalties, and other network-level factors. At the individual validator level, rewards vary greatly based on the number of blocks they are selected to propose.

• Block building is a complicated and data-intensive process. The builders with the fastest connections and best algorithms create the most profitable blocks. In a handful of seconds, builders must be able to simulate the most profitable bundles of transactions, as submitted to them by searchers. Although there are over 400,000 validators on Ethereum, many of them are running fairly basic technology. For this reason, block building has been outsourced by validators and has fallen into the hands of a few entities.

• Flashbots addresses this issue as well, using a feature called MEV-Boost. MEV-Boost creates a marketplace for block builders looking to sell bundles of transactions to block proposers. The block builders submit full blocks of transactions, but the proposers can only see the block headers. In doing so, block proposers can’t see individual transactions, thus preventing them from censoring blocks because of any specific transaction.

Market share & competition 

• MVP boost Relay market: Flashbots share has been declining from 64.3% total block market share and 76.3% MEV-Boosted block market share (in Nov 22) to 50-55% in Feb 23

Flashbots competitors include Blocknative, Eden Network, BloXroute and Manifold. As seen from the MEV-Boost Relays market data, Flashbots is a clear winner in this race (64.3% total block market share and 76.3% MEV-Boosted block market share)

Source: mevboost.org, mevboost.pics as of November 13th, 

1. Blocknative

• Blocknative provides one MEV relay that validators can connect to. This relay is:

  • Publicly available

  • Publicly listed & maintained

  • Open-sourced

  • Transparent about address filtering

• Blocknative currently has only one trusted builder, but the company noted plans to expand to multiple external builders in the near future.

2. BloXroute

BloXroute currently offers three types of MEV relays:

• Max profit: Relay that propagates all available transactions/bundles with no filtering

• Ethical: Relay that propagates non-frontrunning bundles and private transactions – BloXroute tries its best to filter out MEV bundles that execute strategies like generalized frontrunning and sandwiching

• Regulated: Relay that propagates all available transactions/bundles except the ones sent from/to wallet addresses that are sanctioned by OFAC

Builders must be whitelisted by BloXroute. Builders must support the builder specs, either by using builder geth or developing customized software and then contact BloXroute support for builder registration. Builders must have Ultra tier in order to connect to BloXroute relay in Mainnet, or Introductory tier in Ropsten.

3. Eden Network

Eden Network has three products devoted to minimizing the negative externalities of MEV:

• Eden RPC: A set of endpoints that protect Ethereum users from malicious MEV (i.e. frontrunning, sandwich attacks)

• Eden Relay: A suite of tools for Ethereum validators and builders to maximize their revenue

• Eden Bundles: An endpoint for sophisticated MEV searchers to submit bundles to a network of builders

MEV on other chains

Solana

MEV on Solana is very different because it lacks an external mempool. In Solana’s design, each validator has its own mempool where it must evaluate MEV opportunities. Leaders are scheduled to propose blocks. When submitting a transaction, the transaction is routed to an RPC server, which keeps track of the time and schedule of the upcoming leaders. The server then sends the transactions to the next handful of leaders in the queue, hoping one will process the transaction. Transactions are therefore only effectively sent to a handful of validators rather than every validator on the network like on Ethereum.

Source: Jito Labs Medium

MEV on Solana is much less prevalent in dollar terms than Ethereum. Over the past six months, there has been less than $15 million in total MEV profits. Over 98% of both liquidation and arbitrage attempts fail. The failure results from the lack of penalties for failed transactions (i.e., gas costs), which creates an incentive for MEV opportunities to be exploited by interested parties spamming the network. Because of this dynamic, MEV-induced spam takes up huge amounts of blockspace and results in degraded performance for normal users.

Cross-chain MEV

Cross-chain MEV is a nascent market. MEV across chains involves the complex management of many currencies and data streams. It also requires knowledge of the intricacies of multiple developing chains. Cross-chain MEV also carries an additional risk factor in bridging assets. Today’s opportunities primarily center around arbitrage, and in the future, the market will grow as chains gain more DeFi activity.

3. Value chain and MEV participants

Read more

In this post, we will go through:

1. Traditional/Web2 investment framework

2. Evaluating a Crypto project (data-driven checklist for Web3 projects)

   1. Case Study 1: Unit economics of a DEX

   2. Case Study 2: Comparative metrics for DeFi tokens

   3. Case Study 3: L1/L2 ecosystem comps

   4. Case Study 4: DeFi business models

Read more

• First, the cryptocurrency market is highly volatile and subject to rapid price fluctuations. This can make it difficult for CFOs to accurately forecast revenue and make financial plans.

• Second, crypto companies often operate in a regulatory grey area, with different countries having different rules and regulations regarding cryptocurrency. This can make it difficult for CFOs to navigate the legal and compliance landscape and ensure that the company is operating within the law.

• Third, crypto companies are often startups that are in a high-growth phase, which can be stressful for CFOs who are responsible for managing the company's financial resources and making sure that it is financially stable.

  Overall, being the CFO of a crypto company requires a high level of financial expertise, strong analytical skills, and the ability to adapt to a rapidly changing industry.

As we look back on the events of 2022, it's clear that significant challenges and opportunities lie ahead for CFOs leading crypto and DeFi organizations.

First, 2022 saw the continued growth and adoption of DeFi platforms. We can expect to see more companies and individuals using these platforms to manage their financial assets and conduct transactions without the need for traditional financial intermediaries.

We have also seen the continued development of broader Web3 technologies, which enable users to interact with decentralized applications and protocols more seamlessly.

2023 will certainly present challenges and opportunities for Web3 CFOs. One of the biggest challenges will be the need to understand and navigate the complex and rapidly evolving landscape of Web3, crypto, and DeFi.

CFOs will need to develop a deep understanding of these technologies and their potential implications in order to make informed decisions.

Another challenge will be the need for Web3 CFOs to ensure compliance with increasingly complex and varied regulatory frameworks around the world.

Despite these challenges, there are also significant opportunities for Web3 CFOs. One of the biggest opportunities has, and will continue to be the ability to access new sources of liquidity and funding through DeFi platforms. CFOs will be able to use these platforms to raise capital and manage their financial assets in new and innovative ways.

Perhaps most of all, a natively global system of finance and commerce can allow DAOs, DeFi platforms, and Web3 teams to hire, operate, and grow at a scale and reach unprecedented 1n economic history.

By staying up to date with the latest developments, developing a deep understanding of these technologies, and working closely with legal and compliance teams, Web3 CFOs can navigate the challenges and take advantage of the opportunities that lie ahead.

Challenges facing Web3 CFOs today and key insights

Request.finance’s team spoke to 250 finance and operations leaders at Web3 companies to find out what their biggest challenges were when they started their new role, and what they learned.1

1. Education is needed to help finance professionals understand Web3.

Most CFOs at Web3 organizations come with prior experience in financial operations, accounting, or similar roles, but struggle with learning about Web3. A common refrain is the difficulty in keeping up with the rapid pace of new technologies and applications: from Layer 1s and 2s, to the alphabet soup of ZKPs, NFTs, EIPs and more. Sifting through vast amounts of new information, and trying to understand and incorporate new decentralized applications (dApps) into their workflows is a challenge many CFOs face.

o     66% of Web3 CFOs indicated that they had more than 3 years of experience in a finance or accounting role before joining a Web3 organization.

o    Over 99% of CFOs at Web3 organizations said they did not have formal on-boarding processes when they started in their roles.

o     63.6% said that knowledge of Web3 was one of the biggest gaps in their professional knowledge when they first started as a Web3 CFO.

Source: FT Partners Research

2. Financial Operations (FinOps) tooling in Web3 represents a tremendously underserved Saas category.

Existing payments, accounting, or enterprise resource planning (ERP) tools are ill­ suited to the needs of Web3 CFOs.

There is an urgent need for more crypto-native accounting tools that can pull and label data from various blockchain networks, for financial reporting purposes. The demand for no-code blockchain analytics tools was also a key issue highlighted. Despite the existence of platforms like Dune Analytics, writing specific queries to meet the crypto accounting needs of CFOs still requires programming languages like SQL. Few CFOs have the technical know-how, or the time to create customized reporting tools for their own in-house use. The lack of appropriate tooling has led many Web3 CFOs to fall back on familiar, but painstaking manual reconciliations on spreadsheets, and using macros and pivot tables for financial reporting in crypto.

o    When asked about the availability of FinOps tooling in Web3, over 85% of CFOs polled said that it was "insufficient" compared to Web2.

Landscape of providers in the space who are racing to fill this void…

3. Web3 CFOs are re-emphasizing self­ custody of their organizations' digital assets, following he string of collapsed CeFi platforms in 2022, like Celsius, Hodlnaut, and FTX.

Each time a centralized exchange (CEX), or centralized finance (CeFi) lending platform runs into financial trouble, they bring down with them all the fund managers, companies and their employees whose crypto assets are stored on their custodial wallets

o     About 97.5% of Web3 CFOs indicated that more than half their organization's digital assets and crypto treasury are held in self­ custody today.

o     Interestingly, most Web3 CFOs polled were already actively practicing self-custody. Only 27.3% of Web3 CFOs indicated that the implosion of centralized crypto platforms in 2022 led to a shift towards more self-custody.

4. Despite the challenges, Web3 CFOs are optimistic about the growing need for more finance professionals in the blockchain space.

o     76% of Web3 CFOs polled estimate that the demand for finance, accounting, tax and audit professionals will grow over the next 12-24 months.

Ultimate guide for Web3 CFO: what you need to know2

1. ROLES & RESPONSIBILITIES OF WEB3 CFOS

2. CRYPTO WALLETS & CUSTODY

3. FIAT BANKING

4. ON/OFF RAMPS

5. CRYPTO PAYMENTS

6. TREASURY MANAGEMENT CHAPTER

7. FINANCIAL REPORTING & COMPLIANCE

8. LANDSCAPE OF CRYPTO COMPANIES

1. ROLES & RESPONSIBILITIES OF WEB3 CFOS

The role of the CFO in Web3 is similar to that of a CFO in a traditional company, with the added complexity of navigating the unique challenges of the cryptocurrency and decentralized finance (DeFi) space.

Some specific responsibilities of a CFO in Web3 include:

• Forecasting revenue and making financial plans: The highly volatile nature of the cryptocurrency market means that CFOs must be adept at forecasting revenue and making financial plans that are responsive to market changes. This may involve analyzing market trends, studying the performance of other crypto assets, and using financial modeling tools to create projections.

• Managing risk: CFOs must be able to identify and manage financial risks, including the risk of losing funds due to hacking or other security breaches. This may involve implementing security measures to protect the company's digital assets and developing contingency plans in case of unexpected events.

• Ensuring compliance: As the regulatory landscape for cryptocurrency and DeFi is constantly evolving, CFOs must stay up to date on the latest rules and regulations and ensure that the company is operating within the law. This may involve working with legal counsel to understand the regulatory environment and implementing policies and procedures to ensure compliance.

• Managing the company's financial resources: CFOs must be responsible for managing the company's financial resources, including its budget and cash flow, to ensure that it has the financial stability to sustain its operations. This may involve developing and implementing financial strategies, managing the company's financial budget, and ensuring that the company has adequate cash reserves.

Web3, on the other hand, refers to the development of a decentralized, open-source internet where users have greater control over their data and online interactions. This is achieved through the use of blockchain technology, which enables the creation of decentralized applications (dApps) and smart contracts that can facilitate peer-to-peer transactions and interactions without the need for a central authority.

Web3 organizations deserve, and need better software tools to help finance and operations teams manage their day-to­ day finance workflows. Automation of repetitive processes like payments, and integrations with other applications in both Web2 and Web3 are key to simplifying FinOps for Web3 teams. These tools can also empower CFOs to add strategic value through better visualization and reporting of the organization's crypto asset values, and cash flows across different chains, token types, and platforms.

2. CRYPTO WALLETS & CUSTODY

Wallets and keys are the crypto equivalent of bank vaults - where your funds cannot be moved without your consent. Understanding them is key to managing your team's crypto assets.

•     Crypto wallets are software programs that store private and public keys, which are used to send and receive cryptocurrency respectively. Unlike regular wallets, your crypto always lives on the blockchain, which is a digital ledger that records transactions, and account balances.

•     Public keys and wallet addresses are like bank account numbers, or wire transfer instructions you can share publicly to receive deposits.

•     Private keys are like authorized signatures that allow you to send and withdraw money. They are used to "sign", or authenticate blockchain transactions. Crypto wallets use a seed/recovery/backup phrase to algorithmically create private keys. They must be safeguarded at all costs. Each seed phrase can also be used to generate multiple wallet addresses linked to it.

TYPES OF CRYPTO WALLETS

There are different types of crypto wallets. Each has its own advantages and disadvantages, allowing them to play different roles, and meet different needs in your crypto FinOps.

While most CFOs already likely have existing wallets in use at their organization, this section can still be relevant.

Understanding different wallets can help you evaluate whether your organization's current crypto wallets are being used in a way that is fit-for-purpose. For instance, if your company's entire annual payroll is being held on an centralized exchange's hot wallet, you may want to rethink that practice. "We've always done it this way" is a poor reason to maintain an existing process.

Here, we map out what we consider to be the most crucial distinctions between wallet types that you should consider when choosing to adopt wallets for your Web3 organization's needs.

MPC vs Multi-sig

For most organizations, either a multi-sig, or MPC wallet is likely to represent the best tradeoffs between security and useability.

How can CFOs decide between a multi-sig, or MPC wallet? For the technically adroit CFO, a more detailed discussion can be found in a blog article written by Nichanan Kesonpat for the 1kxnetwork.

But for those who want the TL;DR - here is a practical summary of some key differences between the two types of wallets:

Evaluating crypto wallets

With hundreds of options available, it can be challenging to know which crypto wallet is right for you. As a CFO, the stakes are even higher. You need to be sure that you're choosing a wallet setup that will protect your company's crypto assets and give you the peace of mind you need to focus on your job.

To help you cut through the noise, you must first be able to understand what's important to you, before looking at how the different wallet types map onto those needs. It's important to remember that you can use different wallets to meet different needs.

When choosing a crypto wallet, consider the following factors:

• SECURITY

Security is paramount when choosing wallets. This includes who controls your private keys, and how transactions are approved - which affect your ability as a CFO to implement access control management, spending policies, limits, and permissions.

Other security measures you should consider in a crypto wallet include fraud detection and prevention features, two-factor authentication (2FA), or seed phrase recovery.

The track record of a wallet, including time in the market, or previous security breaches or hacks should also be noted.

• CHAINS  & TOKENS SUPPORTED

The wallets you choose should support a wide range of blockchain networks, as well as token types like non-fungible tokens (NFTs). The more extensive the support for different chains & currencies, the simpler your organization's wallet management will be.

• ADDITIONAL FEATURES

Wallets increasingly offer additional features to increase their usability, including the ability to convert or "swap" token types within the wallet, offering native staking, or other features like making batch payments. These features should help to simplify and automate your FinOps processes in crypto.

• COST & FEES

Depending on which wallets you use, they either have one-time upfront costs, or ongoing fees charged to users. Hardware wallets typically only have upfront costs. Custodial, or multi-sig wallets may charge ongoing fees for custody, on/off ramp fees, transaction fees, conversion fees, staking fees.

• PRIVACY

Privacy is a slightly contentious point, especially in the wake of the US Treasury's sanctions on the popular cryptocurrency mixer, Tornado Cash. However, there are legitimate reasons why CFOs may want to have optional privacy-preserving transactions, like when making payroll.

Web3 CFOs need to balance the need for privacy with the need for compliance with accounting and financial reporting requirements. This can be a challenging task, as privacy-preserving crypto payments may make it more difficult to track and report on financial transactions.

This may involve using specialized privacy preserving dApps while implementing strict internal controls and processes to ensure that their organizations are able to support privacy-preserving crypto payments while also meeting their financial reporting obligations.

Here's a handy checklist for CFOs to use when evaluating crypto wallets:

CUSTODY

•     Where are my private keys / key shares / key shards? Who will own them?

•     What% of my private keys or key shards do I control?

•     Can I have instant access to my assets and execute transactions at anytime, from anywhere?

•     Do I have a strong and robust recovery protocol?

•     Is the governance engine secure? How?

•     What happens if the service provider stops operating?

•     What happens if servers are down?

•     Has the technology provider been audited by industry security experts?

OPERATIONS

•     Does the solution support the blockchains, and token I want to use?

•     Are there transfers/transactions limits, or minimums?

•     Are there fees involved?

•     Does my setup scale across team and projects?

•     How can I connect my accounts to my backend systems?

•     How can I automate my workflow to be more efficient?

•     Do I have access to Web3 use cases (NFTs, DeFi, staking)?

•     Can I implement privacy-preserving solutions?

GOVERNANCE

•     What are the different user roles and how do they interact?

•     What are my teams and my back office allowed to do?

•     Who has access to what?

•     How can I prevent internal collusion?

•     Can I create and manage whitelists?

•     Can I implement governance policies and user access rules when I want? How long does it take?

•     Can I choose who will be involved in the approval process for all transactions?

FINANCIAL REPORTING & COMPLIANCE

•     How can I track my administrator and operator activities?

•     How can I meet financial reporting and other audit requirements?

•     Is the technology recognized and approved by regulators?

•     Can I collect data from various chains and token types easily and with clarity?

3. FIAT BANKING

Someday, blockchain payment rails will dominate payments, stablecoins will have replaced fiat currencies, tradable assets are tokenized, and decentralized finance platforms will stand where banks and other financial institutions once used to. That day is not today. The reality for some time to come, is that decentralized finance will continue to exist alongside their traditional finance counterparts. Remember that the gold standard dominated global finance from c. 1873 until the Nixon shock in 1971.That's nearly a century! It's predecessor, the silver standard, lasted even longer: starting with the Sumerians c. 3000 BCE until 1873 - nearly 4, 872 years. Today, traditional institutional investors who participate in your equity round may want to wire money in fiat. Your employees may prefer to receive a portion of their salaries directly in fiat currencies to meet daily expenses. More commonly, you will find yourself having to make purchases with merchants or vendors (normies) that only accept fiat. Choosing a bank that can support your fiat payment needs is crucial.

Some best practices to consider:

1. BANK USING SPECIAL PURPOSE ENTITIES

Typically, when opening a corporate bank account, you will be required to declare whether or not the business deals in cryptocurrencies. A declaration in the affirmative is highly likely to create problems as the Uniswap Labs founder and CEO, Hayden Adams, discovered.

And of course, making untruthful representations to your bank is inadvisable either. So how do you navigate this conundrum, if you cannot go completely bankless? When speaking to crypto CFOs, we found that most of them had to set up a bank account under an Special Purpose Entity (SPE) registered as a consulting or technology company. It is this bank account that then serves your organization's fiat banking needs.

Consider the following hypothetical Web3 organizational chart, reminiscent of many others in the space (Chart below). At the top is a non-profit foundation that manages the protocol layer. Below that is an affiliated, or wholly-owned subsidiary that develops dApps or other spinoff technologies on top of the protocol. CPL Corporate Services Ltd could be a distinct SPE. It is not a subsidiary of any companies that deal in crypto. Instead it can have service-level agreements (SLAs), and covenants with all the other entities in the chart.

Contracts with employees, service providers, or investors that wish to deal with the main organization in fiat can be either novated to, or signed with this SPE instead

For example, employees wishing to work for CPL Ltd could be hired under the SPE, which in turn has an agreement to be an employer of record (EOR}, and manage payroll services for CPL Ltd.

This SPE could also have debt covenants that extend interest free credit lines to other entities, effectively allowing it to pay operating expenses in fiat like cloud-hosting fees.

Note: seek advice from relevant Qualified Persons concerning your organizational structure, and other related matters like banking, trusts, subsidiaries, etc.

2. USE NEOBANKS & FINTECH BANKS

Smaller, regional or local banks may be more open to on-boarding companies that deal in crypto. However, these banks may have a more limited range of services that may hamper your banking needs. For instance, a smaller bank may not have convenient online banking services, or may not support international payments.

Alternatively, you can consider Non-Bank Financial Institutions (NBFls) like fintech banks, or neobanks like Revolut. These companies tend to be more open to taking on risks that their banking partners, or other traditional banks would ordinarily refuse to.

For instance, AsQire is a fintech Qlatform based in Sinmmore - where many Web3 companies, DAOs, and Foundations have set up, owing to its longstanding enterprise­ friendly environment. Aspire has helped to incorporate and bank thousands of Web3 organizations, and even has a liquidity pool on GoldFinch - an uncollateralized DeFi lending protocol.

However, fintechs and neobanks run on traditional banking rails, and are subject to many of the same service limitations and failure points. These include:

• CENSORSHIP: Nobody cares about censorship - until they become its victims. In 2020, 1,392 com12laints were made against Monzo for freezing accounts without warning. Revolut withheld tens of thousands of dollars without explaanation. Resolver froze more than 1,000 accounts, often without warning in 2021. In September, Paypal and Venmo were accused of shutting down the accounts of an LGBT organization. More recently, Paypal updated its terms of service agreement to authorize deductions of $2,500 fines from users' accounts. Around the same time, Flipper Zero, a successful Kickstarter-funded hardware hacking tool, accused PayPal of freezing_$1.3 million in backer's funds. Many NBFls also consider crypto-related businesses to be high-risk. This is typically stated in their terms of service agreements, which are subject to change without prior notice. For instance, in November 2022, Starling Bank blocked all card payments to crypto merchants and crypto-related bank transfers over alleged fraud concerns.

• COST & SPEED: Fintech platforms ultimately rely on legacy banking rails, and payment networks. While they are quick to advertise low, or no fees, what is hidden in the fine print is that:

  • there are low holding and transfer limits on non-enterprise accounts

  • currency conversion rates are poor, or

  • same-day settlements for cross border payments will typically be far more expensive than relying on crypto rails, and other off ramp methods

• SERVICE COVERAGE: Blockchain ledgers are born global: banking services are not. While a good many fintech platforms may serve most major currencies and markets, their coverage and penetration can vary considerably. In contrast, when you use blockchain rails for payment, you will never need to ask the question: "Is it available in your country?" Fintech banks and payment processors have also withdrawn service coverage from entire populations, after deciding that servicing a particular region or country is not economically viable. These can be incredibly disruptive for businesses.

3. USE UNRELATED BANKING PROVIDERS

Just as it is prudent to diversify your company's crypto inventory across multiple crypto wallets, it would be similarly wise to hold your company's fiat balances across multiple, uncorrelated banking providers.

It is important to ensure that your bank provider and NBFI are uncorrelated. What does that mean? NBFls like neobanks usually do not have their own banking licenses. Rather, they act as user acquisition channel partners, akin to wholesale retailers to traditional banks.

So for instance, if you already use Revolut in the United States, it would not diversify away your counterparty risk to use either Metropolitan Commercial Bank, or Cross River Bank - both of whom are Revolut's local partners.

Diversification is about not having exposure to correlated risks. In practical terms, you should ensure that your counterparties have little to no substantial dealings or linkages with one another. The string of collapsing centralized crypto platforms exposed to contagion from the Terra/Luna implosion illustrates this well.

To effectively diversify your risk of being de-banked in fiat, ensure to check for linkages between your fiat banking services providers. Should any one of these NBFI banking services providers - or their core banking partners cut you off or go out of business, it must not dramatically impair your company's ability to conduct business operations involving fiat payments.

The fintech and banking landscape can change rapidly. Professional communities on Slack and Discord can help you access actionable intelligence from the experience of fellow web3 finance and operations professionals.

4. ON/OFF RAMPS

Put simply, how do you move money between crypto wallets and bank accounts? It is important to note here that fiat on banking rails and crypto on blockchain networks live on entirely separate technology stacks. Thus, fiat cannot literally be transferred into a blockchain wallet, and crypto cannot be stored in a bank account per se.

To move value between a crypto wallet and a bank account, or vice versa, you will have to rely on on and off ramps.

On and off ramps, as their name suggests are two sides of the same coin. On-ramps simply mean the exchange of fiat currencies for crypto. Off-ramps refer to the reverse: the exchange of crypto for fiat.

There are presently four primary means of doing so:

•         Centralized stablecoins.

They are some of the most popular crypto payments options chosen by enterprises. USDC accounts for a large share of all enterprise crypto payments in the app. In effect, centralized stablecoins are tokenized deposits. Stablecoins are legally identical to the account balances on your bank statements, or a centralized exchange. All deposits are debts owed by deposit-taking institutions to you. Centralized stablecoin issuers promise 1:1 exchanges between fiat currencies and stablecoins. But it is important to note that stablecoin issuers' ability to meet redemptions is dependent on the composition and value of their assets held in reserve.

Typically, you will have to apply for a business account with one of these centralized entities. Sometimes, these are directly integrated into, and thus accessible from within crypto wallets and payment apps.

•          Decentralized stablecoins.

Not all stablecoins are issued via a centralized entity. Decentralized stablecoins mint synthetic stablecoins when users deposit other crypto assets into a smart contract, rather than wiring fiat into a bank account of a deposit­ taking institution. These smart contracts attempt to maintain a pegged exchange rate to a reference fiat currency in a programmatic manner. They attempt to mimic the decision rules and operations of how central banks, or currency boards around the world do as part of their exchang§ rate QOlicies. For example, Curve, the second largest decentralized exchange on Ethereum, has released a whiteQaQer detailing an example of one such implementation of a price stabilization mechanism. Off- ramping using decentralized stablecoins then, is somewhat of a misnomer as it is not technically possible to deposit fiat currencies from bank accounts into these smart contracts. However, they exist in something of a middle ground between centralized stablecoins, and using CEXes. It is possible to directly off-ramp some decentralized stablecoins in a roundabout manner that still appears nearly instantaneous. Off-ramping using decentralized stablecoins is useful for enterprises that wish to conduct their financial operations using non-USD stablecoins.

Non-USD stablecoins can enable Web3 companies to have deeper penetration into specific local markets. After all, it is already challenging to spend on blockchain payment networks locally, much more so using a USO-denominated currency. For instance, Jarvis Network is an over­ collateralized synthetic stablecoin protocol that focuses on issuing non-USO stablecoins, and creating liquid markets for them. The list of non-USO stablecoins available on Jarvis Network includes major currencies like the jGBP, jCNY and jEUR, as well as smaller, less represented currencies like the jSEK, jPHPand jNZO. Through Jarvis' Network's partnership with Mt Pelerin Group, an authorized financial intermediary in Switzerland users can off­ ramp decentralized stablecoins from any wallet, on both Layer 1 and 2 blockchain networks. It also offers stablecoin off-ramps in 14 fiat currencies directly from a bank account in 172 countries. To minimize the transaction costs of off­ ramping stablecoins this way, enterprises can encourage payment recipients to perform the off-ramps using their own accounts with Mt Pelerin.

•         Centralized exchanges.

Centralized exchanges (CEXes) offer more versatile on, and off ramps. Centralized stablecoin issuers enable on/off ramps only in single currencies. For instance, Circle only accepts USD deposits in exchange for USDC, and StraitsX only accepts SGD deposits in exchange for XSGD. Centralized exchanges typically accept fiat bank deposits via bank wires or credit cards, in many currencies, in exchange for most cryptocurrencies and stablecoins.

While this using a CEX for on-off ramps certainly seems more elegant on paper, there are four other considerations to note. Firstly, it can be costly and time consuming. Credit and debit cards are a popular way for retail users to purchase cryptocurrency via an exchange, but they come with high fees of up to 10% per transaction. This is generally unacceptable for enterprise use. Card payments are also on-ramps, but not off­ ramps as it is usually impossible to "withdraw" money onto a credit or debit card.

Secondly, you run the risk of being de­ banked. Many banks and credit card issuers still consider such transactions suspIcIous, locking or even closing accounts after learning the nature of the transactions. For exchanges, the credit cards of certain countries - including Russia and Ukraine - are automatically rejected.

Thirdly, banks that do tolerate transfers to cryptocurrency exchanges may still involve their compliance teams to ask detailed questions regarding the exact destination of funds and the reasoning behind crypto purchases. If and when transfers do go through, they can take several days. By then prices might have fluctuated dramatically.

Lastly, the counterparty risks of dealing with a CEX can often be higher. While both CEXes and centralized stablecoins are deposit-taking institutions, it is typically easier to audit the reserves, and liquidity of a centralized stablecoin issuer than a centralized exchange. Put simply, it is generally easier to assess whether a centralized stablecoin issuer has the liquidity and solvency to honor their debt obligations than a CEX.

•         On/off ramp service providers.

There are an increasing number of players that offer direct payouts: both from crypto wallets to bank accounts, and vice versa. Some of these include NBFls like online brokerages like Robinhood, fintech payment processors like Stripe, and neobanks like Revolut which have now begun to offer crypto. In effect, these on/off ramp providers are acting as their own exchanges and market makers.

Within this category, are also over-the­ counter (OTC} desks, often operated by CEXes. They are ideal for making outsized transactions typically in the millions of dollars, in a more cost­ effective manner than making spot purchases on exchanges. OTC desks are valuable due to their ability to conduct large trades without moving the market against them. This effect is known as "slippage" and occurs when large-scale buying causes prices to immediately rise before the targeted amount of cryptocurrency has been purchased, while selling causes it to fall before it's all sold.

This is ideal for cases where large amounts have to be off-ramped. Examples include converting part of the capital raised in fiat from a venture funding round into stablecoins for global payroll. Or conversely, converting a portion of your organization's crypto treasury to pay bills to landlords which may require a large upfront cash downpayment.

Top things to consider for On & Off Ramps

On/Off ramping is not as easy for businesses as it is for individuals. The nature and size of corporate banking introduces significantly greater fraud, and AML risks. Traditional banks may de-bank corporate accounts which receive funds from bank accounts linked to centralized exchanges.

As local banks' risk tolerances can vary widely between countries, it is recommended that you consult with fellow professionals like those in the web3cfo.club.

Regardless of which off-ramp methods, or specific service providers you use to convert your fiat to crypto, or vice versa, there are four best practices to consider:

• Map out your on/off ramp needs by payment corridors

Today, there exist a myriad of on/off ramp methods as compared to just a few years prior in 2017.

At the enterprise level, a growing number of solutions providers are increasingly eager to peddle their latest and greatest universal on/off ramp solutions.

What most won't tell you during the pitch is that there is no such thing as a free lunch. CFOs we interviewed quickly discovered one or more of these limitations:

•     Geographical coverage, or supported tokens/blockchains is highly limited

•     There are serious daily transfer limits far below your organizational needs

•     Settlement times are the same as bank transfers

•     Fees are exorbitant if they rely on credit card payment networks

•     You  must open a corporate  bank account with their banking partner

•     Payment services licensing must be obtained as part of the on-boarding process

Remember that on and off ramps ultimately mean having to deal with geographically-bound banking networks.

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•     Avoid using on/off ramps to hold your treasury

On/off ramp wallets - especially third­ party custodial ones, should never be abused as treasury wallets, to minimize your exposure to counterparty risk from custodians.

While I already highlighted the importance of self-custody in the third chapter on crypto wallets, it is worth repeating here. Too often, crypto companies are lulled into complacency, and end up misusing CEX wallets to hold significant amounts of their treasury. Web3 CFOs should strongly avoid abusing on/off ramps - especially CEXes in this manner.

•     Implement a monitoring regime to screen for de-peg and liquidity risks

Whichever stablecoins you choose to use to on/off ramp, it is recommended that you set notifications and alerts for social media activity and price action to regularly screen for de-peg risks.

Apart from screening for warning signs for stablecoin de-peg risks on your own personal accounts, consider recruiting the help of your marketing team. They likely already have tools which monitor social media regularly as part of their workflows.

What de-peg risk criteria should Web3 CFOs screen for? De-peg risks vary depending on the type of stablecoin.

If your organization relies heavily on centralized stablecoin issuers to manage your organization's on/off-ramps, CFOs can regularly review the attestation or audit reports provided by these issuers as part of their disclosure regimes. Balance sheet issues could cause fatal bank runs. This also applies to screening for liquidity risks when using other centralized entities like CEXes for on and off ramps.

On the other hand, synthetic stablecoins are also subject to similar risks of their own, largely related to the design of their price stabilization mechanisms. CFOs should review the design of these mechanisms closely, before deciding to rely on them as on/off ramp channels

There is no such thing as an unassailable stablecoin model, or indeed an infallible exchange rate policy. Catastrophic currency devaluations have happened in traditional foreign exchange markets, and have happened with on-chain stablecoins

Different stablecoin designs are subject to different risks, and Web3CFOs must implement robust due diligence in evaluating stablecoins for enterprise use, and also adopt ongoing screening for specific de-peg risks.

Regular screening can enable CFOs to react in a timely manner to protect their crypto treasury from such risks. There are numerous examples of how vigilant monitoring of fear, uncertainty and doubt, (FUD) on social media platforms has allowed individuals and companies to save hundreds of millions of dollars from exposure to collapsing stablecoins and centralized off-ramps.

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•     There is safety in diversity

Use a mix of on, and off-ramp channels that are as uncorrelated as possible. In the example above, if you already use a CEX to meet over half of your monthly on and off ramp volume, examine its shareholding structure, and avoid using other entities linked to it.

Instead, you can use a different CEX that is not a subsidiary or partner to the one you currently use.

Better still, use a mix of other stablecoin issuers to meet the other half of your on/off ramp volume each month.

If for example, you are already using a Circle Business Account for USDC, consider using a Paxos off-ramp for BUSD, or USDP.

Ideally, you can use different on/off­ramp channels for different purposes. For instance, you can consider using a CEX tooff-ramp crypto for payroll, and a centralized stablecoin issuer to off-ramp when paying SG&A expenses in fiat.

Diversification is a running theme throughout nearly all the best practices sections in each of the guide's different chapters. Web3 CFOs today also diversify their on/off ramp channels (Fig. 16).

The technical, regulatory, and market risks in the crypto industry are rapidly evolving. In this environment, CFOs at crypto companies must never allow their organization to become reliant on a single provider - for anything that could jeopardize the company's finances. That said, more is not always better

Refer here for the top 20 Fiat-to-Crypto Onramp Services provider by geography

5. CRYPTO PAYMENTS

DAOs, enterprises, and foundations have very  different  crypto  payments  needs, including:

•     Billing or invoicing clients for goods and services rendered

•     Processing bills and invoices for goods and services consumed as operating expenses

•     Managing payroll, equity and token allocations

•     Submitting, approving, and reimbursing travel & expense (T&E) claims

•     Issuing and managing corporate expense cards

•     Disbursing grants and bounties, airdrops and prizes, or investment capital

And perhaps most importantly of all, keeping accurate transaction records is a matter of personal finance for the individual retail consumer. In contrast, Web3 CFOs need tools to manage their crypto payments in a manner that facilitates easy financial reporting for internal stakeholders like management and investors, and external parties like tax, audit, and AML authorities.

Thankfully, there are a number of applications which are specifically designed to address the crypto payment needs of organizations like DAOs, enterprises, and foundations.

A. Billing in crypto

1.      CRYPTO INVOICES

Invoicing clients in crypto is especially relevant for companies that provide services to crypto-native organizations. Examples include smart contract audit firms, software development houses, media and marketing agencies, or corporate services providers.

Crypto tools are designed to meet the operational and compliance needs of enterprises accepting payments in crypto, by simplifying the invoicing process.

You can automate recurring invoices for billing your clients monthly, weekly, or even on a streaming basis. Or schedule email reminders to chase upcoming bills, or even late payments past due.

It also lets you know when you have been paid. You can also enable email notifications to let you and your clients know when your invoices have been sent, rejected, accepted, or paid on­ chain.

It also serves as a deterministic proof of income. Suppose you receive a call by law enforcement agencies, suspecting you of laundering money for an international scam ring. Or the tax authorities accusing you of unlawful tax evasion.

Sending them your Etherscan wallet history does little good. The pseudonymous nature of crypto wallet addresses, and the long alphanumeric strings of transaction hashes are ill-suited for financial reporting, or calculating tax liabilities.

With crypto tools, all this is documented easily, and in a human readable format. All wallet addresses are also linked to real world identities in a deterministic manner. There is almost no chance that a wallet, or payment is mislabeled by accident

On the other hand, you may also be a CFO of a DAO or crypto-native company that pays contractors, contributors, freelancers, and other service providers in crypto.

Most crypto organizations have substantial proportions of their treasury in crypto from fundraising events, and will prefer to pay for their operating expenses in crypto as well. Your organization needs a tool that allows you to easily pay bills and invoices in crypto.

Most organizations send and receive PDF invoices - in different layouts and formats, across different communication channels like email, and messaging apps.

This is problematic for several reasons:

Firstly, there is the issue of operational efficiency when making crypto payments. Most companies manually copy the payment information from PDF invoices, or a spreadsheet when paying the invoices. This is time-consuming, and incredibly prone to human error.

With crypto tooling, all wallet addresses are linked to names and emails. There is no chance of paying the wrong amount or to the wrong person. With batch payments feature, you can also review, approve, and pay hundreds of different wallets, in different tokens in just three clicks.

Secondly, there is also the issue of finance operations. With crypto tools, you can spare yourself the endless back-and-forth of unnecessary communications between freelancers and your company's finance department.

A common nuisance companies experience with invoices is that mistakes sometimes occur with the wrong billing information like the company's name, Tax ID, or address. This can cause needless delays in processing payments.

Crypto tools allow you to send your freelancers or contractors a QR code or link. This will automatically create an invoice that's already pre-filled with your business information. They will just need to fill out the rest of the invoice. Now anyone can invoice you correctly in just a few clicks.

Thirdly, there is the issue of bookkeeping. PDF invoices typically come in different layouts, which must be manually downloaded, properly named, and stored into files.

Their data must be extracted, compiled, and uploaded into some bookkeeping or accounting software like Xero.

But how do you account for the historical exchange rates of invoices denominated in volatile cryptocurrencies, or even fiat exchange rates? What about gas fees?

All of this is automated with crypto tooling companies where you have a single clean dashboard where you can see all your invoices in chronological order, filter by names, addresses, or payment status.

All this data, including historical exchange rates and gas fees, can be easily exported to tax or accounting software in a few clicks.

2.  SUBSCRIPTIONS IN CRYPTO

Subscriptions in crypto is another topic that may be relevant if your organization accepts crypto payments.

Invoices are good enough for most B2B billing workflows - especially if there are lags between delivery of the service and payment.

Even for companies that wish to offer subscriptions in crypto, invoices can also be used to offer subscribers discounted lump sum payments for packages or bundles.

But companies like blockchain analytics tools, news, or media and other content platforms may prefer a crypto billing method that supports direct debits at regular intervals from customers' crypto wallets.

There are currently very few elegant blockchain-based solutions for merchants to pull funds away from their subscribers' crypto wallets on a regular basis.

True subscription on the blockchain is technically challenging. The blockchain was built with decentralization and security in mind.

Every transaction has to be signed and approved by the wallet owner - a "push" payment. This does not lend itself well to "pull" payments like subscriptions.

There are three approaches that currently exist to support subscriptions in crypto:

•     Streaming payments

Payment streaming protocols like Superfluid allow your organization to bill subscribers or users every second. This would be ideal for on-demand, sharing economy platforms like a car, or bike-sharing dApp.

In a single transaction, a subscriber could agree to transfer a fixed amount in a constant stream over a pre-defined duration. Every second, a tiny amount of the total bill will flow out of the subscriber's crypto wallet, without any need for additional gas fees. Similarly, cancellation is also only one transaction.

But in order to use Superfluid's payments streaming, a subscriber will need to wrap their ERC20 tokens into a Super Token, which are then used for payments. For instance, our hypothetical bike-sharing dApp could accept payments using Request Finance, in the USO-pegged stablecoin, DAI.

•     Token allowances

Token allowances are the equivalent of direct debit authorizations in traditional finance. It allows your subscribers to provide a one-time approval for recurring payments, enabling businesses to provide subscription-based services in a hassle-free manner.

Merchants can automatically deduct subscription fees directly from subscribers' wallets at regular intervals, over the subscription duration (e.g. 30 USDC per month). Once the smart contract uses up the allowance for the given period of time, it cannot pull any tokens from the user's wallet, until the periodic allowance is reset at the next time interval.

For instance, Suberra is developing a subscription payments standard through periodic allowances, which are time-gated smart contracts with pre-defined transaction values.

•     NFT subscriptions

Another approach would be recurring billing using NFTs that serve as digital membership cards. For instance, Unlock Protocol enables NFT-based recurring subscriptions and memberships that don't need to be manually renewed.

In comparison to the payment streaming method above, Unlock can allow your product to automatically enable, or disable a user's access to your services depending on the NFT's validity, which is tied to whether a member has paid their bills.

Additionally, billing subscribers via membership NFTs can also allow you to easily develop commercial partnerships with other merchants to offer incentives, discounts, and other loyalty rewards that enhance the value of your membership plan.

For instance, our hypothetical bike-sharing dApp that uses Unlock Protocol's NFT membership to bill its users for the use of its bikes, could also partner with coffee chains like Starbucks to offer a 10% discount on in-store purchases to members who have the bike-sharing membership NFT in their crypto wallet.

Comparing crypto billing methods

B. Compensation in crypto

Compensation at Web3 companies is also typically processed in crypto tokens and stablecoins - at least in part, if not entirely. There are good reasons for this. This section will cover how to manage three different aspects of compensation in crypto:

•     Payroll

•     Expenses, and

•     Token Allocations

1.  CRYPTO PAYROLL

The Benefits of Using Crypto for Payroll

As mentioned before, stablecoins offer a fast, cheap, globally­ available, universally accessible, internet-native means of payment. Being able to pay anyone, anywhere, anytime greatly expands your organization's ability to hire the best talent, and enter new markets around the world.

How to Set Up a Crypto Payroll System

•     Employer of Record (EOR)

One of the complexities of global payroll for remote teams also involves the need to have localized entities or subsidiaries which act as employers of record (EOR). On top of incorporating local entities wherever you wish to hire, you will likely also need to deal with local labor laws which cover things like pension schemes.

There are global payroll services providers like Deel, or Remote.com that do all of these for you for a monthly fee per employee. They also allow payouts in crypto - albeit only to US residents, and employees must open an account with Coinbase.

•     Contractor Payouts

Using an EOR to manage global payroll can be costly, and there are typically serious limitations when paying salaries in crypto or stablecoins. To address this, crypto companies such as Request Finance introduced a crypto payroll module. Choose from over 150 different crypto or stablecoins to pay your team in, and from 14 different payment networks of your choice. You can also schedule recurring salary payments, according to the frequency of how often they get paid in a month. Best of all, you also can pay hundreds of salaries in just a few clicks. You can also view the history of your salary payouts, or which team members have yet to be paid.

2.  EXPENSES IN CRYPTO

Expense management is a big deal for DAOs and crypto companies. For one, it is closely tied to how an organization manages its burn rate - especially given how most crypto organizations' operating expenses are financed with investors' capital. After payroll, travel and expenses (T&E) is typically the second-largest spending category for companies. When these expenses aren't properly tracked and processed, that can interfere with a CFO's ability to accurately budget and forecast for the future.

Also, T&E can be used to reduce corporate tax liabilities. Under most tax regimes, T&E is also tax-deductible - insofar as proper records are kept to demonstrate that they are business-related. By maintaining the right documentation for the right period of time, and ensuring that all deductions are valid, companies can be confident they can maximize their allowable tax deductions.

Automating your organization's expense management can simplify the claims submission process, simplify documentation when claiming tax deductions, and enable employees to be reimbursed faster. No one wants to pay $1,000 in travel costs out-of­ pocket for a business trip and then wait around for months while those expenses are reviewed, approved and reimbursed.

Additionally, for the sales and business development teams who attend conferences and events frequently, they will find themselves having to claim expenses like conference tickets, or sponsorships that were paid in crypto.

There are many corporate expense management solutions in the market: but few allow expense reimbursements to be made in crypto. For instance, one of the most popular corporate expense management apps is Expensify - but the only cryptocurrency it supports for reimbursements is Bitcoin. Look for crypto companies which have an expenses module that allow CFOs to easily track, review, and reimburse expense claims in crypto, stablecoins, or fiat.

3.  TOKEN ALLOCATIONS

In addition to ordinary wages being paid in stablecoins to meet the team's fiat expenses, many companies have governance, or utility tokens as part of their compensation packages. It is important to note that these tokens are distinct from equity. Unlike equity, most tokens do not represent a claim on the future cash flows of an operating entity.

Token allocations - typically done as part of an initial coin offering (ICO) - serve to align the incentives of the team with the long-term success of the platform. This inspires confidence in external stakeholders like users and early investors.

Token allocations have significant differences when compared to traditional equity.

The decision to offer tokens as compensation will depend largely on how the organization generates value, and where does the value accrue to. It is also possible to offer a combination of both tokens and equity as part of the compensation package.

In addition, you'll also need to consider:

•     Payroll taxes and tax withholding

•     Accounting and tracking token-based awards

•     Legal documents and processes to ensure compliance with tax and securities laws

Note: seek advice from Qualified Persons like a local tax advisor or accountant with experience around token compensation plans.

6. TREASURY MANAGEMENT CHAPTER

As explained earlier, you should consider maintaining at least three different crypto wallets:

•     one for receiving payments,

•     another for paying expenses,

•     and a third wallet that acts like a savings, or investment account

The assets comprising these accounts are derived from multiple sources, primarily from fundraising or operating revenue. Fundraising in crypto typically takes the form an Initial Coin Offering ("ICO"), which lists a newly-minted token for sale on a decentralized exchange for sale to retail investors. The company receives cryptocurrencies like ETH, or stablecoins in exchange for its native token.

This fresh capital is typically directed to the treasury. Ideally, organizations or dApps that have sound fundamentals will aim to generate revenue from fees. This operating revenue represents a recurring source of income to the treasury. While other ancillary sources of income may exist, this piece will focus on those fundraising and operating revenue, with an ICO being the primary source of treasury capital.

Typically in an ICO, the token issuer will retain a significant portion of the supply of its native token in its own treasury account. These tokens are usually pre-allocated for a variety of uses as outlined in a public offer document like a White Paper. Allocated uses often include staking rewards, compensation for advisors and other core contributors, ecosystem development grants, or future working capital needs.

Often, the organization's treasury will be composed largely of its own native token; effectively seeking to align the interests of investors and the token issuers. Messari illustrates this in its report, Crypto Theses for 2022, showing the breakdown of top organization treasuries. Shown below, some of DeFi's largest treasuries are largely, if not entirely, composed of the issuer's native tokens.

Treasury Capital Allocation

BEST PRACTICES

For proper organization treasury allocation, as with a traditional finance investment strategy, there is no "one size fits all" solution. There are, however, some best practices and a framework for approaching treasury allocation.

A16z Crypto states that "the goals are capital preservation, liquidity, and income, in precisely that order" for a Web3 CFO's treasury asset allocation and management strategy. Building off of this framework, let us dissect each component and build a hypothetical treasury basket assuming a profitable organization with a native token.

1.    CAPITAL PRESERVATION

Large exposures to a single asset are a significant risk factor to the organization's treasury.

Regardless of economic fundamentals, token prices are highly susceptible to exogenous shocks.

Proper asset allocation and defensive diversification are fundamental pieces of traditional investing that carry into the DeFi realm as well.

An investor holding an S&P 500 ETF will almost certainly fare better than the investor holding one individual technology company stock in the face of a tech sector bottoming such as the Dot-Com Crash.

Narrowing the focus, holding that one specific stock introduces direct, unmitigated exposure to a sole company: if it goes under, the investor goes under. These same principles can be applied to the DeFi ecosystem and specifically to treasuries.

At its core, a treasury should be a fortress of capital, walled against market gyrations and certainly impenetrable by the malperformance of one individual asset. This approach, as seen in the Messari chart, is not always taken, however. So how should a treasury be composed? What is the proper asset allocation?

As highlighted by the cryptocurrency market's volatility and overall 2022 performance, capital preservation can be a challenging target. However, focusing less on the market movement of an investment, an investor may look to the underlying organization's health and likelihood of survival. In other words, what is the chance of it blowing up?

Without naming specific tokens, some assets within the ecosystem are generally respected as "blue-chip" investments with the largest market caps, they are foundational to the industry; if they go under, we all go under. Additionally these assets have shown massive historical price appreciation since launch which more than preserves purchasing power.

Capital preservation can also be achieved by holding industry-standard, dollar­ pegged assets. For example, and not providing recommendations, Circle's USDC or MakerDAO's DAI might fit this approach.

Assuming operations as usual, a treasury of 100% these two assets would have the exact same balance in thirty years as it does today. This is essentially a "leave it under the mattress" approach.

So which approach to choose? While the former comes with volatility and a litany of organization-specific risks, the latter delivers no possibility of price appreciation and loss of purchasing power when off-ramped to a fiat currency due to off-chain inflation.

This leads back to the basics: Diversification. Including a mix of both types allows an organization to know its treasury will have a floor value of the dollar-pegged assets while also aiming for capital gains from the industry's top coins or tokens. Capital is preserved and maintained.

2.    LIQUIDITY

This is the cash in the checking account used to cover expenses. An organization will have a list of basic cash expenses such as compensating core contributors, audits, server hosting, marketing at events, and so on. Without immediate liquidity, the project could potentially renege on contracts or miss payments.

Going back to the need for diversification, an organization with 100% of its treasury in its native token would need to sell that token in order to generate short-term liquidity.

This raises three, of multiple, primary complications.

•     Downward pressure on the token's market valuation. Selling large blocks into an otherwise stable market reduces the token's price, all else equal.

•    Capital loss when selling into a down market; if the token has declined in price then selling for liquidity results in a loss.

•     Invites the appearance that the organization offloading its own token has lost faith in its own project. Other sellers may follow, cratering the token price, or users may abandon the platform.

Liquidity exists in the form of cash. Cash, in the cryptocurrency ecosystem, exists in the form of dollar-pegged assets. Thus, liquidity is best maintained by holding a diversified basket of the most battle-tested such stable assets.

This selection may include the aforementioned names USDC and DAI or introduce other well-known dollar-pegged assets with transparent collateral reporting.

3.    INCOME

DeFi platforms can offer a range of treasury management services, including decentralized exchanges, lending and borrowing platforms, and yield farming opportunities. From these different avenues, a treasury may generate income through two methods:

•    Capital gains, highlighted above, strives for the "buy low, sell high" approach. However, as seen in the case of my investment portfolio, this approach does not guarantee positive returns and often results in massive losses. It is a high risk strategy. That does not mean organizations must eschew asset speculation entirely, but rather that they should diversify to protect against market or asset downturns.

•    Yield bearing investments, present an income strategy that, if selected properly, is insulated by market dynamics.

On Lido, for example, ~$5.8 billion ETH is staked earning 5.5% APR (as of 30 November, 2022). Similar options exist for other proof of stake chains such as Solana or Polygon.

Staked assets must be appropriately balanced against available liquidity due to lockup periods on many staking platforms and organizations. Lido and others do afford investors the ability to sell the staked assets on the secondary markets, but these assets are subject to the same risks as highlighted in the "capital gains" strategy.

A further, more stable, and often higher­ yielding option is investing in a yield­ generating platform such as Credix. On Credix, institutions and accredited individuals may generate ~12% targeted APY on USDC by investing in the Liquidity Pool which represents the Senior Tranche of all active deals in a marketplace. Credix deploys capital to traditional, off­ chain FinTech lenders in emerging markets which then issue loans to SMEs and consumers.

This type of investment relies on a pegged-dollar asset, USDC, and extends the lion's share of risk outside the cryptocurrency market. Thus, it is a market diversification from holding an asset such as Bitcoin. Neither should comprise the entire treasury, but balancing one against the other helps mitigate risks.

This three-pronged approach to treasury management ultimately fails without proper diversification. A treasury focused 95% on capital gains income fails in capital preservation and liquidity as nearly all of its assets are in the riskiest strategy thus putting its capital at risk and limiting dependable liquidity. Likewise, a 95% idle USDC treasury is not generating income

Diversification is the backbone of proper treasury management. Without a diversified allocation, a treasury puts the entire organization at risk of failure.

Regardless of whichever chains your organization uses, there is safety in diversity. While many Web3 teams may build on specific chains, and thus rely predominantly on one particular chain, Web3 CFOs should note that over­ exposure to one particular chain presents its own risks.

For instance, the collapse of Luna and UST wiped out many companies building dApps on Terra, and who held a large proportion of their company's treasury in assets on the Terra blockchain.

Web3 CFOs owe a fiduciary responsibility to its organizations core stakeholders, especially its team, users, and investors to protect the company's financial health- not a particular ecosystem or ill-defined sense of "community".

Balancing these three different concerns is a task that rests in part on the good judgment of Web3 CFOs, whom the management team can count on to act in the best interests of the company as a going concern. Hedging your crypto treasury's exposure should never be left to convenience, inertia, or an excess of blind optimism in any one particular chain.

Chains and their ecosystems are like countries. Failed chains are like failed economies in the real world: poorly governed banana republics where no one wants to visit, invest, or build in. The history of national economies - and blockchain economies is littered with gravestones to both.

Blindly trusting in a particular chain or assets on that chain would be the same as deciding to move your business, and all its assets into a newly-formed country in an emerging market. If doing so sounds like a terribly risky idea, Web3 CFOs at crypto companies building on particular chains should reflect on the prudence (or lack thereof) in doing so in the world of DeFi.


7. FINANCIAL REPORTING & COMPLIANCE

The string of collapsed crypto companies culminating in the fall of FTX & Alameda has sent shockwaves through crypto. Despite the damage, the turmoil presents an opportunity for new standards in financial reporting to emerge for enterprises and DAOs.

For internal stakeholders like employees and management, financial reports are like a health screening. It can be used to align teams, and inform decisions throughout the organization. For external stakeholders like investors, users, and regulators - financial reporting is a matter of compliance with local laws, but also to inspire public confidence in the viability and financial health of an organization.

In this section, we will review key issues in financial reporting in crypto like:

•     Financial Statements

•     Proof-of-Reserves (PoR)

•     Accounting Standards for Crypto Assets

1.    Financial Statements

The financial health of a web3 company or DAO should be measurable through consistent financial reports and statements that can be crafted on a regular basis. Just as a traditional company would regularly bookkeep and produce monthly/ quarterly/ annual financial statements, why should web3 companies and DAOs be any different?

If anything, CFOs can signal quality by a proactive commitment from a Web3 firm or DAO to produce regular financial statements internally and or to investors.

But producing financial statements can be a frustrating affair without the right tools. There are available enterprise grade crypto accounting solutions designed for web3 projects and other companies looking to incorporate crypto assets into their balance sheet.

Essential tools for setting up the complete back-office system for a web3 CFO include a solution for crypto accounting, AR/AP & payments, and payroll.

Ideally these solutions should integrate with one-another to maintain everything in one place.

For simplicity, the most basic financial reporting consists of three financial statements: income, balance sheet, and cash flow (Fig. 14). The populating of the content within the financial statements then involves the systematic linking of information from each of the areas within the model, starting with revenue and working through expenses, debtors, creditors, assets, etc.

The practice of maintaining consistency in the creation of regular financial statements and thorough financial reports will prepare Web3 companies for auditors when they come knocking at the door.

Alternatively, Web3 CFOs at smaller organizations that may lack the in-house capabilities to manage financial reporting can consider outsourcing the work to crypto-native corporate services providers like BlockOffice.

2.    Proof of Reserves

Proof-of-Reserves (PoR) Is an independent audit performed by a 3rd party to validate that a centralized entity's, or smart contract platform assets equal clients' funds. PoR allows the market to verify that industry giants are acting honestly, and are solvent.

A competitive advantage can be achieved by an on-chain PoR that matches assets against liabilities and details equity. The same is true for decentralized stablecoins. It's not enough to list assets.

PoR should detail cryptographic proof of client balances & wallet control. The public should also be able to see the sum of client liabilities, user-verifiable cryptographic proof that all wallets were included, & signatures showing a custodian has control.

Currently, PoR is most popular amongst exchanges, and other centralized deposit-taking institutions or platforms given that cryptoassets are often opaquely held In these centralized entities.

Of the largest centralized exchanges, Kraken Digital Asset Exchange has been known & respected for its a semi-annual PoR. Binance recently also announced plans to perform routine PoR audits in light of FTX imploding.

PoR should be an industry standard for DeFi, especially stablecoins & real world assets (RWA). If individuals/entities can't be certain that a protocol or stablecoin is backed as it claims to be, the market remains susceptible to systemic risks that harm DeFi adoption & innovation.

For example, Chainlink's PoR service provides smart contracts with the data to assess collateralization of any on-chain asset backed by both: (i) off-chain and (ii) cross-chain reserves. Operated by a decentralized network of oracles, it enables the autonomous auditing of collateral in real-time, rather than forcing users to trust paper guarantees made by custodians. This can give DeFi platform users transparency into an asset's underlying collateralization

Chainlink Proof of Reserve verifies the collateralization of any on-chain asset backed by off-chain or cross-chain reserves.

Read here how ‘How crypto companies can provide proof of reserves’. As a public company, Coinbase already proves our reserves using our audited financial statements. Coinbase is also exploring various novel ways to prove reserves using more crypto native methods and are announcing a $500k developer grant program to encourage others to do so as well. On-chain accounting is the future, bu there are pros and cons to the various ways this can be implemented today.

3.    Accounting Standards for Crypto Assets

Accounting for crypto assets remains a highly-debated topic among bookkeepers and investors today.

While innovation in the crypto space is moving at a rapid pace, standard setters in the accounting industry have not had the same stamina to keep up. With new crypto assets emerging all the time with varying properties, the task is monumental, to say the least.

Current accounting standards had not been written with crypto assets in mind, and therefore, one must look at the existing accounting standards and apply a principles­ based approach.

The two prominent standard setters today are the IASB and FASB, responsible for the development and publication of International Financial Reporting Standards (IFRS) and US GAAP accounting standards, respectively. While both seek to improve the transparency of financial reporting, the accounting treatment of crypto assets will slightly differ under IFRS and US GAAP, and should be applied according to the jurisdiction of the underlying entity.

A Web3 CFO needs to learn how to approach each of the following:

•     Initial recognition and subsequent measurement of crypto assets

•     Fair value measurement of crypto assets

•     Tax: calculating capital gains/losses

•     Disclosure for crypto assets

DIFFERENT ACCOUNTING TREATMENTS UNDER IFRS AND US GAAP

With different exchanges quoting different prices, it's important that you maintain a consistent approach with regards to the pricing source of your crypto assets where the greatest volume are being traded. Given markets never close, the recommended practice would be to use the same time for pricing the assets.

Crypto assets like Bitcoin, Ethereum are actively traded, and therefore will have an active market or a 'principal market'. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The accounting standards do not define specific thresholds that need to be exceeded with regard to frequency and volume to determine if an active market exists. As such, the determination is subject to professional judgment.

Therefore, if an active market exists for that crypto asset at the measurement date, a Level 1 valuation can be performed. In the absence of an active market, the prescribed guidance is to use a valuation model that can be applied consistently from period to period.

TAX: CALCULATING CAPITAL GAINS & LOSSES

To make more informed investments and better manage risk, most finance managers actively track the unrealized gains/losses of their digital assets.

Calculating capital gains or losses also may be relevant where taxation on capital gains is levied. In some cases, capital losses may be used to offset your tax liabilities. Typically, only realised gains are relevant for tax reporting purposes.

Capital gains are usually calculated by taking the fair market value at the time of sale, minus the cost basis at which the crypto asset was acquired.

Thus, if your organization is domiciled in a jurisdiction where capital gains taxes are levied on crypto assets, it is important to understand how to assess your cost bases (i.e. what did it cost to acquire the asset) when calculating the profit or loss of transferring, selling, or spending a digital asset.

There are several methods to calculate cost-basis, including:

•     First In, First Out (FIFO)

•     Weighted average cost (WAC)

•     Last In, First Out (LIFO)

•     Highest in, first out (HIFO)

Below, I will illustrate the impact that each of these methods have on the gains/losses. It is important to note that the explanation below is referring to cryptocurrencies that are fungible.

Consider the following example of Janet Saylor, CFO of MacroTactics, a Web3 fund:

•    Janet bought 1 BTC in Jan 2017 for $1,000 per BTC

•    Janet bought 2 BTC in Jan 2018 for $14,000 per BTC

•    Janet bought 5 BTC in Jan 2019 for $3,500 per BTC

•    Janet sells 2 BTC in Dec 2021 for $47,500 per BTC

With FIFO method, Janet would set her cost basis for the 2021's sale as $15,000:

•     Capital gains on 2021's sale= ($47,500 x 2) - $15,000 = $80,000

With WAC method, Janet would set her cost basis for the 2021's sale as $11,625:

•     Capital gains on 2021's sale= ($47,500 x 2) - $11,625 = $ 83,375

With LIFO method, Janet would set her cost basis for the 2021's sale as $7,000:

•     Capital gains on 2021's sale= ($47,500 x 2) - $7,000 = $88,000

With HIFO method, Janet would set her cost basis for the 2021's sale as $28,000:

•     Capital gains on 2021's sale= ($47,500 x 2) - $28,000 = $67,000

As seen above, HIFO often leads to lowest capital gains and hence tax liabilities. However, the FIFO methodology is the most widely accepted cost basis method. This is because it accounts for the frequent points of purchases and sale of crypto assets across accounting cycles. Discuss with your professional accountant when deciding on your preferred cost basis method.

OBTAINING CLEAN DATA FOR YOUR COST-BASIS CALCULATIONS

When maintaining your ledger of digital assets transactions, it is essential to review the following data points across each wallet type:

•    Transaction fees

•    Timestamping of transactions

Not accounting for these may result in erroneous data being used in calculating the cost­ basis of your team's digital assets.

1.       TRANSACTION FEES

When calculating the cost-basis of your digital assets, it is essential to account for the fees incurred in the transaction. It is essential to deduct the transaction fees when determining the cost of the said digital asset. Some of these fees include:

1.  Gas fees charged by the blockchain protocol

2.   Fees imposed by the wallet provider (usually by centralised wallets)

For each of these activities, it is important to understand the relevant fees involved in the process and account for it. See table below.

2.     TIMESTAMPING OF TRANSACTIONS

It is common for Web3 teams to have transactions involving both centralised exchanges and self-custody wallets. The good news is that for both centralised exchanges and self­ custody wallets, users can quickly export their transaction records (e.g. via the central exchange's records or block explorers such as Etherscan).

However, centralised exchanges and block explorers often mark the timestamp of transactions in different timezones.

When compiling a chronological record of transactions across centralised and self­ custody wallets, finance managers have to ensure the transactions are in the same timezone before compiling them into a master journal. This matters because cost basis methods such as FIFO require an accurate chronological order of transactions.

It is best to keep all transactions to be in the same time zone, be it UTC or the local timezone of the entity in which financial statements are prepared for.

Here are the default time zones for popular block explorers and centralised exchanges. (Updated as of Dec 2022)

When choosing a crypto-native accounting software, ensure that these adjustments for fees and timestamps are accounted for. For instance, Headquarters (HQ.xyz), enables CFOs to generate automatic records of the cost-basis, fees, and time-stamp adjustments for crypto transactions - across wallet types.

DISCLOSURE FOR CRYPTO ASSETS

As there are no explicit IFRS and US GAAP standards for crypto assets, the presentation and disclosure of crypto assets and crypto asset transactions should follow the entity's approach about the accounting model to apply to the crypto asset, i.e. as an intangible asset, inventory, a financial asset or otherwise.

However, such disclosures require significant judgement and a thorough understanding of the underlying facts and circumstances.

For example, below are the summarized disclosure details of Microstrategy for their Bitcoin holdings in the annual report 2021 (note (g) to consolidated financial statements);

•     The Company determines the fair value based on quoted prices on the Coinbase exchange, the active exchange that the Company has determined is its principal market,

•    The Company performs an analysis each quarter to identify indicators for impairment,

In determining if an impairment has occurred, the Company considers the lowest price of 1 Bitcoin quoted on the active exchange at any time since acquiring the specific bitcoin held by the Company.

LEVERAGING TECHNOLOGY FOR FINANCIAL REPORTING

Implement robust accounting and tax systems that are capable of handling cryptocurrency transactions.

This may include integrating specialized software or hiring external experts like BlockOffice to assist with the accounting and tax reporting of cryptocurrency transactions.

Web3 companies can take advantage of accounting software such as QuickBooks or Sage lntacct to manage their corporate financial reporting. This software will allow companies to handle their accounts payable, accounts receivable, and payroll quickly and efficiently.

This can include using cloud-based crypto accounting platforms like Cryptoworth, utilizing data analytics to gain insights, and utilizing crypto-powered AR/AP and payment solutions like Request Finance.

Corporate level financial solutions designed for web3 in the marketplace can be evaluated by their cross­ functionality capability between applications. The right tools can dramatically simplify financial reporting in crypto for Web3 CFOs.

Crypto financial reporting and tax compliance is very difficult to accomplish at scale without a practical crypto bookkeeping solution to consolidate cryptocurrency transactions in one place. Sophisticated back-office solutions exist for web3 companies and DAOs to enable scalable crypto financial reporting and compliance.

The core requirement for the ability to produce meaningful financial reports from a corporate level crypto operation is through a bookkeeping solution designed specifically  for cryptocurrency transactions.

Tracking cryptocurrency transactions is an entire challenge on its own due to the complexities that come with blockchain and its technical diversity.

Meaning, such a solution would need to be capable of tracking transactions and other crypto data from the following sources:

•     Exchanges

•     Blockchains

•     DEXs

•     DeFi Protocols

•     NFTs

•     Neobanks

•     Crypto Payments & AR/ AP

•     MPC-enabled Custody Solutions

With the data sources being supported, the next challenge is data injection. This means how the back-office bookkeeping solution can actually receive the data itself in a secure Read-Only way while having the required dataset for a comprehensive ledger.

There are three possible data injection methods that need to be supported in order to support every crypto data source available.

•     Read-Only APls

•     Blockchain support (more chains the better)

•     CSV   support  (including  a  solution native template)

If the above data injections are all available within the back-office crypto accounting solution, there will always be a way to inject the data.

8. LANDSCAPE OF CRYPTO COMPANIES

As digital assets became more widely accepted, the need for corresponding tooling to meet accounting, reporting and tax requirements of both individuals and corporate users grew. Initially operating largely out of sight, tax authorities across the globe noted the surging value of digital assets and the increasing number of retail and institutional players within new digital asset markets. Following a long period in which cryptocurrency traders and participants in the broader ecosystem were largely left to their own devices, tax authorities now apply increasingly elevated levels of scrutiny and enforcement action. In response, consumers and enterprises seek the means to both reactively and proactively ensure compliance with tax regimes. In many cases, tax reporting requirements coincide with the need for enterprise-scale accounting and reporting solutions.

Recent market turbulence as the consequence of FTX's failure further underlines and incentivizes the need for appropriate accounting tools and procedures, whether for risk management, reporting purposes, or tax loss harvesting.

Source: FT Partners Research

Popular crypto onramps

Not long ago, the crypto onramp scene barely existed. However, now the onramping scene is much more lively. Some of the more recognizable crypto onramps in action today include, though aren’t limited to, the following services:3

• Banxa — a financial technology platform that provides fiat-to-crypto onramp services plus offramping services for stablecoins

• MoonPay — another financial tech company that provides crypto onramp and offramp services, currently active in +160 countries

• Mt Pelerin — a non-US, no-KYC crypto onramp based out of Switzerland

• Ramp — a crypto onramp and offramp service that specializes in facilitating in-app crypto purchases for web3 projects

• ShapeShift — a fiat-to-crypto onramp aggregator that supports buys through Banxa, JunoPay, Mt Pelerin, and OnRamper

• Transak — another onramp and offramp service that supports +130 cryptocurrencies across +125 countries

Which of these services would be right for you depends on your needs. They respectively vary in the money limits, payment options, and geographic jurisdictions they support, so some may be better fits depending on your specific situation.

Treasury Management and payment tools

These are the companies, tools, and protocols working on allowing on-chain companies to manage, deploy and diversify their treasuries in the best way for the organizational objectives.

When analyzing this segment, we decided to investigate both DAO-focused tools and broad-based ones. We explored over 30 treasury management-related solutions and below share a list of the ones we found more relevant/interesting. We believe the most interesting opportunities lie in either:

Company-oriented blockchain finance hubs (for which brokers/exchanges seem like a natural complementary business model)

OR

Highly secure open-source fundamental plug-ins that become basic block pieces (resembling pretty much what gnosis.safe achieved). We are skeptical about the market size and strategic positioning of treasury management tools exclusively focusing on DAOs.4

Payments

Focused on tools that allow on-chain organizations to streamline on-chain and off-chain payments for employees, contributors, service providers, and partnerships.

These tools provide DAOs and companies with more efficient ways to handle their increasing crypto payment transaction volume and complexity. To date, most on-chain payments rely on self-composed spreadsheets coupled with simple transactions from many self-created and administered wallets.

When analyzing this segment, we reviewed more than 20 payment and compensation tools, and below have shared a list of the ones we found most relevant/interesting. We found a significant overlap or potential synergies from tools offering payment services to those offering treasury management ones, and believe that there are significant strategic advantages for companies offering both. Again, similar to our conclusion for the treasury management section, we see considerably more value in non-DAO-specific approaches, although we decided to include some interesting DAO-focused profiles.

Crypto payments - provider landscape

VC developments

Check sizes in 2022 increased in the sector with prospects of consolidation going into 2023 as many regional players are emerging solving the same core problem set.

As many crypto tax competitors are starting to provide free crypto tax services for retail customers, many large players such as TaxBit believe future competition will be focused on attracting enterprise-level clients. TaxBit noted that there is limited competition for enterprise tax information reporting in the current crypto space and the company is at the forefront of this effort. 5

“For tax information reporting in traditional finance, there are a few players such as Thomson Reuters, IHS Markit, Broadridge etc., but we haven’t yet encountered their competition in the crypto space.”

– Lindsey Argalas, COO, TaxBit

As noted by TaxBit, other crypto tax players are starting to shift their focus on enterprise offerings to capture the more lucrative institutional client market share. Notable venture-backed competitors with professional product suites include CoinTracker, Ledgible and ZenLedger.

CoinTracker

CoinTracker is the official tax partner of Coinbase, OpenSea, Intuit’s TurboTax and H&R Block. The company’s crypto portfolio assistant and crypto tax solution supports +300 exchanges and +10,000 cryptocurrencies. CoinTracker’s portfolio management software has been used to track +$50 billion in crypto-assets (3% of crypto market cap tracked). CoinTracker’s tax solution has full support for the U.S., India, U.K., Canada and Australia (partial support for others). As a part of its enterprise solutions, CoinTracker also offers a tax platform for crypto providers (white labeled for each platform). Enterprise clients include Coinbase, Intuit’s TurboTax and Wolters Kluwer.

In January 2022, CoinTracker closed its $100 million Series A round led by Accel, with participation from new and previous investors, including General Catalyst, Initialized Capital, Y Combinator Continuity, 776 Ventures, Coinbase Ventures, Intuit Ventures, Kraken Ventures, as well as Claire Hughes Johnson (Former COO, Stripe), Gokul Rajaram (Coinbase and Pinterest board member), Jeremy Liew (Early Investor in Affirm and Snapchat), and Alex Bouaziz (Deel CEO). With this round, CoinTracker hit a valuation of $1.3 billion.

CoinTracker plans to use the funding to meet the increased demand and complexities of the cryptocurrency industry by:

• Bringing in high caliber talent to support its aggressive growth plans, including Head of Engineering Gaurav Garg, formerly VP of Engineering at Uber and Google; as well as Product Lead Zack Reneau-Wedeen, formerly Head of Product at Robinhood Crypto

• Continuing to lead in coverage of exchanges, chains, and popular cryptocurrency segments such as DeFi and NFTs as the industry evolves

• Expanding CoinTracker for tax professionals

• Scaling customer support, content and community to help users address their crypto portfolio and tax challenges more deeply

In April 2018, CoinTracker closed its $1.5 million seed round led by Initialized Capital. Other investors include Y Combinator and a host of angel investors. Some of those include Protocol Labs CEO Juan Benet and Paul Buchheit, the engineer who created Gmail. CoinTracker also raised $120K during its pre-seed round in February 2018 (led by Y Combinator).

Ledgible

Ledgible is a professional-first crypto tax and accounting platform. Ledgible supports +270 exchanges, 15 blockchains, and 3 accounting platforms (Netsuite, QuickBooks and Xero).  Ledgible supports a wide array of cryptocurrency wallets, including XPubs and other derivation-based protocols (HD). Major wallets include Ledger, Trezor and Bitgo. Ledgible Tax Solutions also integrate with all major professional and consumer tax software such as TurboTax, Tax Act, UltraTax CS, CCH Axcess and more.

In June 2022, Ledgible closed its $20 million Series A round led by EJF Capital. Joining the round are JAM FINTOP, Thomson Reuters Ventures, TTV Capital, Fenbushi US, Commerce Ventures, Nathan McCauley and Perkins Coie. Ledgible noted that the funds would be used to “expand the teams within [Ledgible’s] two core lines – Professional Tax and Enterprise Accounting, including further expansion to support [its] growing number of institutional partners and accounting firms.” Ledgible also raised $1 million during its pre-seed round in February 2018 (led by TTV Capital).

ZenLedger

ZenLedger is a crypto tax software provider that supports +500 exchanges, +50 blockchains and +40 DeFi protocols, including NFTs. Like TaxBit, ZenLedger is providing enterprise-grade solutions for public and private sector clients. ZenLedger has been partnering with the IRS to provide crypto tax support. In March 2022, ZenLedger announced the renewal of its contract with the Civil and Criminal Investigation Units of the IRS. The company also noted “Big 4 accounting firms ultra-high network tax practices, top 10 blockchain core developing teams and token/crypto founders” as its institutional client base.

In May 2022, ZenLedger closed its $15 million Series B round led by ParaFi Capital, with participation from Three Point Capital, King River Capital, and its Series A lead investor Bloccelerate VC, among others. This new funding was used to enhance ZenLedger’s professional offerings by adding products such as registered investment advisors (RIAs) and certified public accountants (CPAs). Prior to this round, ZenLedger hired for c-suite level executives in April 2022: Duyane Norman (Chief Strategy Officer), Daniel D. Escobar (Chief Technology Officer), Jonté Harrell (Chief Financial Officer) and Greg Adams (Chief Operations Officer). The employee base has tripled as well.

In August 2021, ZenLedger also closed its $6 million Series A round led by Bloccelerate VC. Investors included Mark Cuban’s Radical Ventures, G1 VC, Borderless Capital, 4RC, Centrality, BIGG Digital Assets, CoinGecko, Accelerator Ventures,Vestigo Ventures, Castle Island Ventures, Migration Capital, Blackwater Capital, and angel investors Jon Staenberg, Karl Muth and Darren Lau. ZenLedger noted that the company had raised a total of $11.5 million in funding as of Series A (two seed rounds disclosed: $3.4 million seed round in December 2019 and $1.5 million seed round in September 2018). This funding was used to launch ZenLedger’s crypto portfolio management solution and grow the company headcount (new hires in marketing, enterprise sales, customer service, and software engineering). During this announcement, ZenLedger shared that “the company has grown its customer count and revenue 500% YoY and has exceeded $5 billion in cryptocurrency transactions processed.”

3

Bankless

How to Onramp to Crypto without a CEX

Read more

3 years ago · 44 likes · 10 comments · William M. Peaster

Methodology:

Scoring the fashion brands was done using the following major categories: 

1. Purchasing Power of Wallets - As measured by the amount of liquid ERC20 tokens within the wallet. Purchasing power is our proxy for wealth and every brand wants the richest consumers. We will also sharpen this analysis by looking at wallets across a few wealth thresholds. Third consideration for this analysis will be to determine which brand is most concentrated in terms of high value customer cohorts through a clustering analysis

2. Impact of Frauds and Scams - As measured by the number of scam / fake / phishing tokens that were purchased by the brand’s customers. This tells us which brand’s consumers are likely to have negative web3 experiences. 

3. Engagement of Wallets - As measured by Daily Active Wallets (DAWs). More engagement, more potential. 

Diving into each of the categories, we rank each fashion brand to come up with an overall winner. Here’s how it broke down:

Purchasing Power of Wallets

Tiffany’s dominated this category with a staggering ~$20k average USD balance in collection owner wallets. The next leading brand, D&G, wasn’t even close, coming in at $1.3k. Gucci follows with $1.2k and Prada comes home dead last with a whimpering $400. If you want to know where the rich wallets play, it’s Tiffany’s!

But what if Tiffany’s appears to have more wealth because of some outlier billionaire wallet? Well we thought of that too. We looked at the percentage of each collection's wallets that fall above a certain threshold in wealth and it became evident that Tiffany’s crushes the competition here as well. 

% of wallets > Threshold

But what use is having money if you don’t use it? You can be a baller, but if you’re only spending once a year, that’s not impressive. This is where our clustering analysis comes in. We want to find high net worth individuals who spend. So, we ran our clustering algorithm on 2 variables, wallet value and transaction frequency to see which brand has the highest concentration of most valuable customers.

Some slight surprises here, but with our focus on the engaged whales, D&G comes out on top. It’s worth calling out that Prada has the most frequent traders, because (spoiler alert) that’s one of the few things they take the lead in so far. 

Impact of Frauds and Scams

We all know getting scammed can feel like your soul has been attacked, and that can create negative associations with brands. So we took a look at which brand’s collection owners have fallen victim to the most scams. Out of the top collections that each brand’s owners participate in, we found that if you’re a Tiffany’s owner… chances are you have been duped into buying a “bad” NFT. That might be because you’re RICH and people are targeting you. Heavy lies the crypto wallet eh?

% of total NFTs (that are bad) owned across the top 10 collections customers participated in

This one is kind of hard to explain without too many words, but what we mean is, if you look at all the collections that Tiffany’s collection owners participate in, rank them by participation overlap, of the top 10, this is the percentage of tokens that were bad. For example, take a look at this collection on Etherscan as it’s one of the most popular collections for Tiffany’s owners. I’m not mad, I’m just disappointed.

So who wins this category? D&G. Their customers are the least susceptible to scams! Hopefully we didn’t just alert scammers to an opportunity… 

Engagement 

Why is engagement important? Greater engagement means greater potential for marketing and greater potential for purchases, etc. Engagement drives retention and that’s what keeps you alive. So what portion of a brand’s user base actually transacts in the web3 ecosystem over the last 2 weeks? Here’s the answer:

Winner, D&G!

Conclusion

And with that, D&G wins overall and is crowned the best web3 fashion brand. Tiffany’s was so close and we almost gave them the edge because of just how much purchasing power they have in comparison to the other brands. Prada comes in last, but, interestingly, their consumers participate in fashion collections much more than the other brands’ users. Those wallets are interested in fashion related projects whereas other brands’ users are interested in web3 more broadly.

After crowning our top web3 brand, we expected we would get questions from curious minds to better understand our analysis. So… 

As a quick reminder, we measured the brands based on multiple categories (purchasing power of customers, wealth at different thresholds, persona clustering, impact of fraud, customer engagement levels). Let’s take a look at the first pillar of our analysis, purchasing power. We crowned Tiffany’s the winner of this pillar.

The easiest way to understand purchasing power is simply by looking at which brands’ customers have the most capital to purchase goods with. So we took all ERC20 balances of the participating wallets and summed and averaged them. Here’s how it shook out:

Now, one might argue that D&G should be the winner here given the total amount of purchasing power their community has, but that’s purely a side effect of having nearly 9x the amount of wallets. What brands should care about is the average because that shows who’s got the most liquid wealth. In this regards, Tiffany’s dominated. 

What if Tiffany’s appears to have more wealth because of some outlier billionaire wallet? Well we thought of that too. Here’s a distribution of the percentage of each brand’s wallets at various wealth thresholds. It’s evident that Tiffany’s crushes the competition here. 

All signs point to Tiffany’s at this point, but being the curious minds that we are, we also wanted to run a clustering algorithm on consumers to see if we could isolate high value customer groups and determine what portion of each brands’ users qualify as high value. The results came back more surprising than we expected. D&G and Tiffany’s have similar customer personas, but D&G came out ahead. 

Segmenting Users by Key Characteristics:

• Highly Engaged Whales - large balances, frequent transactions

• Traders - Highest velocity of transactions

• Modest bunch - 2nd highest wallet values, moderate levels of transactions

Tiffany’s has won 2 out of the 3 initial categories so far with D&G claiming one victory. We’ll dive deeper into the other analyses (fraudulent activity) and (engagement) in our following posts this week. 

Fraud and real engagement

As you know, the web3 space has been rife with scams and hacks, so we wanted to take a look at how they impacted fashion brands. 

A big part of brand strength is brand image and how consumers perceive their experience with the company’s products. Any brand looking to grow brand strength should try to minimize events that could harm their customers’ experiences. In web3, that means minimizing spam, phishing and counterfeit tokens. 

We’re not looking directly at how many customer wallets were hacked because that’s not something the fashion brand can really control as it’s more of a layer 2 front end issue. Just like if you saw an item on Nike’s homepage but bought the item through Amazon and Amazon is where the hack occurs.

Instead, we looked at the top 10 other collections that each brands’ wallets participated in and dug into each contract to identify potential bad assets. The results were surprising. Out of all the tokens in the top 10 other collections for Tiffany’s owners, 71% of them were tagged as spam, phishing or fake by Etherscan. 

Example of a bad asset tagged (red box) by Etherscan:

It’s clear to see that D&G is our winner in this category and while it’s going to be hard for any of these brands to secure their users’ wallets on their own, they should keep this metric in mind as a barometer for their users’ experience in web3. It is not a direct reflection on the brand, however we believe it could make their customers more likely to churn from web3, causing brands like Tiffany’s to lose influence in the space. Advice, track it and try to influence it.

Engagement

As we round up our Battle of the Fashion Brands in web3 analysis, we turn to our final metric, engagement.

When it comes to customers, companies should care about acquisition, engagement and retention. We’ve decided to focus on engagement for our analysis as we believe continued engagement levels results in better retention and is a sign of good customer experience. That positive experience will then drive acquisition through word of mouth creating a flywheel effect. At least, that’s what we believe, but we’re open to your thoughts :) 

We use Daily Active Wallet (DAW) to measure engagement by taking every wallet in each of the 4 brands and tracking whether or not they made a transaction with a web3 product. Then we took that number and divided it by the total wallet population of each brand to find out what percentage of their users are engaged. Here were the two week results leading up to our analysis. 

D&G was our winner over this time period, having captured the top spot 9 out of the 14 days in the past two weeks. 

And with that, we conclude that D&G was our winner having claimed top spot in the majority of our analysis areas. Stay tuned for our next analysis and if you have ideas for us, we’d love to hear them!

Here is the summary of the 3 sections for this Web3 guide from Cryptechie:

1. Web 3 stack: Overview of Web3 stack and what you need to know

2. Resources, guides and best articles: A list of constantly updating notion pages and databases full of crypto and web3 resources

3. Learning by doing exercises: Quick hands-on experience on various basic topics such as non custodial wallets like metamask & coinbase wallet, transacting on different blockchains like Ethereum & Polygon, trading or swapping crypto coins like ETH, DAI & MATIC , buying different NFTs like ERC721 & ERC1155 on OpenSea, transacting on centralised & decentralised exchanges, etc

1. Web 3 stack

The Crypto ecosystem can be better unpacked as a six-layer cake model¹, ranging from the basic settlement/mining layer, all the way through the consumer-facing decentralized application and access layer. Between the consumer facing access layer and mining is a spectrum of infrastructure providers, hybrid infrastructure application tools known as primitives, and composable applications that codify, enable and make accessible the various use cases across the crypto ecosystem.

A. If you are a beginner and want to understand Web 3 stack at a high level

A guide to Web3 and Blockchain stack by @Suhail

• Blockchains

  The base of Web3 stack is the blockchains network. These are divided into 2 types. The first layer refers to the base level of blockchain(its main structure) such as Ethereum and BNB. However layer 2 refers to networks built on top of layer 1 blockchains.

• Authentication

  These are the tools/wallets that is used to authenticate a user inside of applications. Metamask and Wallet connect are the most popular wallets.

• Languages

  In order to write smart contracts we need a programming Language. Popular ones are Solidity, Vyper and Rust. Each one has their own pros and cons.

• SDKs

  Building functionalities from scratch can be a little time-consuming, therefore we can use Web3 SDKs to make the development process much faster. thirdweb, Moralis are great examples.

• Frontend Development

  To develop the UI for Web3 application you would need a framework such as React, Angular or Vue. Developer can use any of them however for react there are many resources available online.

• Oracles

  Blockchain oracles are tools that connect blockchains to external systems. They act as a bridge between blockchains and off chains. Chainlink is the most popular price oracle.

• Development Environment

  This is the place that you write code. When it comes to writing smart contracts, you can either use Remix IDE a local development environment

• Web3 Libraries

  These are used to interact with the blockchain from client. There are many libraries that does that but the most popular are Ethers.js, Web3.js, and Web3.

• Node Providers

  Node provider offers a way to access information on blockchain without having your own local blockchain setup. Some of the fastest node providers are Chainstack, Infura and Alchemy.

B. If you are an engineer / Web 3 developer

Defining the web3 stack²

When building a traditional web or mobile application, developers depend on a handful of building blocks to get the job done.

1. API / app servers (REST or GraphQL)

2. Authentication layer (managed or hand-rolled)

3. Database

4. Client-side frameworks, platforms, and libraries

5. File storage

So what did this look like in web3?

• Blockchain

• Blockchain development environment

• File storage

• Off chain data protocols

• API (indexing & querying)

• Identity

• Client (frameworks and libraries)

• Oracles

• Other protocols

You can build a full stack web3 app with Next.js, Polygon, Solidity, The Graph, IPFS, and Hardhat

1. Blockchain - Polygon (with optional RPC provider)

2. Ethereum development environment - Hardhat

3. Front end framework - Next.js & React

4. Ethereum web client library - Ethers.js

5. File storage - IPFS

6. Indexing and querying - The Graph Protocol

Web3 Application Architecture

Preethi Kasireddy, who worked for a16z over 2013-15 and was an engineer at Coinbase from 2016-17, recently published a blog post that explains the “architecture of Web 3.0 applications.” Backend programming for a dapp is entirely different than for a traditional web application. In Web3, she writes, “you can write smart contracts that define the logic of your applications and deploy them onto the decentralized state machine [i.e. the Ethereum blockchain].” Web servers and traditional databases, in this paradigm, are no longer needed — since everything is done on, or around, the blockchain.

She notes a bit later in the post that “Smart contracts are written in high-level languages, such as Solidity or Vyper.” Solidity was partly inspired by ECMAScript syntax, so it has some similarities to JavaScript (but is very different in other ways).

As for the frontend, that “pretty much stays the same, with some exceptions,”She lays out the simplified Web 3 application architecture in this diagram:

C.If you are growth PM/developer in Web 3, understanding the Web3 Growth Playbook is key³

Web3 Growth Strategies

Partnerships & Integrations

Software companies growing through large BD deals is nothing new and many Web3 projects have adopted this strategy. For example, ChainLink executed on a strategy of closing partnerships during the 2018-2019 bear market and $LINK outperformed as a result.

However, business development can look very different in Web3 when these partnerships are negotiated transparently in governance forums rather than behind boardroom doors. Given that these integrations often do not require permission from one of the two parties, they are not always mutually beneficial. For example, a number of platforms have integrated Curve in ways that do not necessarily benefit Curve itself.

A few examples of Web3 partnership categories:

• Token utility - projects that have a native token want to make it as useful as possible. This could include exchange listings, collateral listings (eg adding $LINK to Compound), or a partnership with a DEX to drive additional liquidity.

• Distribution - all users interact with DeFi protocols through wallets (Metamask, Rainbow) and increasingly aggregators (Zapper, Zerion). These frontend interfaces control which protocols they show to users and so getting your yield aggregator integrated with wallets can be a big deal.

• Lego building - leveraging another DeFi primitive to bring additional utility to your product. For example, Notional leverages Compound to increase its effective yield.

• Mergers - the recognition of two teams building in similar directions and no longer making sense to compete has led to protocol mergers, notable Keep & NuCypher and Fei & Rari.

We're starting to see times prioritize hiring a partnerships/BD lead given its increased importance .

Liquidity Mining & Tokenomics

Growth hacking has become incredibly popular over the past decade as marketing has become more analytical and engineering driven. While growth hacking in Web2 has historically been on building affordable, repeatable growth loops, the focus in crypto has been on leveraging a project's native token to drive growth loops.

Liquidity mining is a "a network participation strategy in which a user provides capital to a protocol in return for that protocol’s native token." Just as VC funds helped subsidize marketplaces until they reached scale, Web3 protocols can bootstrap their growth using their native token.

Crypto projects that have grown through token incentives have faced similar challenges to Web2 startups that burned through piles of venture funding. The data is quite clear that most subsidized liquidity is highly mercenary. Hence, we're starting to see more thought out liquidity mining products including OHM and Rift.

Community

If Web2 companies have focused on driving loyalty amongst their uses in the form of engagement and retention, Web3 companies are focused on driving user ownership. One of the most exciting and unique features of Web3 is that "users...fund the products, information, and services that they consume." We're still very early in understanding all of the downstream implications of this innovation.

We think community is critical in a network growth context because engaged communities will give networks leverage in everything they do. This is evident if you look at the Twitter feeds of projects with engaged communities - every announcement sees a ton of engagement and retweets.

Communities can substitute or complement key stakeholders in Web3 projects:

• Early customers (and cheerleaders) - having a small group of fanatical customers is crucial for any startup. Community members can serve this role (and then some) because they're both early customers and have meaningful upside

• Leverage core team - community members can help with hiring, token design, fundraising (things investors historically helped with)

• Extend core team - community members can provide both technical and non-technical support to the core team. Sometimes they step up and join core team, other times this happens more ad-hoc.

• Distribution - upstart token projects want to partner with other projects with large communities, just like new products look for distribution in channels with a large footprint

D. If you just want to know more about real world use cases for Web 3

To grasp the power of Web3 , imagine the following ideas of how web3 could improve or disrupt the most successful companies⁴:

• Amazon logistics

  Instead of having large distribution centers, Use decentralized mini warehouses (e.g. your backyard) for storage & drivers pick up merchandises from closest storage location. Delivery fees paid in warehouse tokens are earned by warehouse owners.

• Meta / Facebook

  Users earn the platform token by posting and commenting. Amount earned is based on popularity of content posted. Advertisers pay for ads in the platform token.

• Google

  If the search engine / browser records any user data—e.g. demographic, behavioral— into its database, user earns the platform token. Advertisers pay in platform token to access the database.

• Costco

  Customers purchase store membership in NFT. They can rent out the NFT on secondary market to others who want access to Costco discounts but don’t shop frequently. Members get rental incomes. Costco gets more customers.

• Pepsi

  Pepsi owns dozens of food & beverage brands & regularly acquire new ones. A PepsiCo utility token— which customers can earn when buying from one brand & spend on another brand— could help Pepsi grow new brands by leveraging customers from existing brands it owns.

• Comcast / Xfinity

  Comcast operates a public WiFi network, which consist of hotspots in public locations, businesses & home gateways. A utility token supported by network revenue, which users can earn when providing hotspot service would improve WiFi coverage & user loyalty.

• Netflix

  Airdrop Netflix tokens to users-> Let users “stake” tokens on pilot shows they like-> Users earn partial streaming revenue from those shows. Now users have more incentive to help promote their favorite shows which attract more subscribers.

• Mercado Libre

  Use tokenization to drive traffic & give marketplace vendors more incentive. Vendors earn tokens when the customers they attract to platform make purchases. Vendors can then give the tokens to customers as discount or use tokens to pay for platform commissions.

• Airbnb

  Hosts & guests earn Airbnb tokens when they receive good reviews. They can use tokens to pay for future booking fees, or lower commission charges, or sell tokens on secondary market to monetize their rewards of being good participants on the platform.

• Nike

  NFTs matched one-to-one w/ limited-edition shoes maintain rarity even after physical shoes are worn out & gone. A collection of rare sneaker NFTs becomes a store of value, which gives more incentive for customers to buy rare sneakers & allows higher price premium.

• Starbucks - they already announced it!

A visual exploration of the REAL use cases of NFTs by @Shivsak

Resources

A list of constantly updating notion pages and databases full of crypto and web3 resources

1. Gaby's Web3 Reading List (One of the best resources!)

2. The Daily Ape by @Darrenlautf

3. Crypto resources by @a16

   

4. The Library by @CuriousAddys: Consider this your community portal to a world of web3 knowledge!

5. Token Economics Resource List: This is an open source list of valuable tokenomics resources

6. Working in web3 handbook by @smsunarto

7. Web3 Podcasts Spreadsheet by @AdrienBe_

8. Monday DeFi Market Alpha: Weekly DeFi news summarized

9. ZK Research by @asnared

10. Working In Web3 by @Clavisishere

11. List of 600+ crypto VCs

12. Sov's Compendium by @sovereignsignal

13. Crypto/Web3 So Far in 2022

14. A long list of 1600+ blockchain/crypto/Web3 projects with 1-liner description

15. List of 24 top resources to get up to speed quickly

Evergreen articles & research on Web 3

1. Best books on Ethereum (Mastering Ethereum) and Bitcoin (Mastering Bitcoin)

2. Crypto/Web3 Startup Ideas by DeFi alliance

3. How web3 is shaping the future of finance by 11FS

   

   How Web3 Is Shaping The Future Of Finance

   15.6MB ∙ PDF file

   Download

   Download

4. Web 3 gaming landscape

   

5. State of_Digital Asset Data Infrastructure Landscape

   

   

6. FT report on Blockchain - A basic blockchain industry report

7. The Ultimate Guide to Solana

8. A16z report on State of Crypto

9. Crypto consumer use cases

   

10. Learning, Earning, and Web3

    

11. Decentralization for Web3 Builders: Principles, Models, How

    

12. The Complete Guide to Full Stack Ethereum Development

    Building Full Stack dApps with React, Ethers.js, Solidity, and Hardhat

13. What Are Blockchain Bridges And How Can We Classify Them

    

14. Guide to L2 / roll-ups by Vitalik and L2 comparision by The Block

    

15. What I'm frustrated by in crypto - an honest piece

16. 2021 Electric Capital Developer Report

17. Dapp Industry Reports: Q2 2022 Overview

Transition to web3: a guide for non-technical roles

👩‍🏫 1. Start with basics (how & why)

Start here to learn the fundamentals of blockchain and crypto.

✍️ 2. Consume & create content

Curated information sources so you can stay up to date on web3.

🎓 3. Learn by doing

Jump in and use decentralized applications to gain more familiarity with web3.

🔍 4. Find your niche

Double down on sub-sectors within web3 that you’re passionate about.

🔨 5. Start contributing

Join a DAO to build out your network and start contributing to various communities.

🤝 6. Commit to your niche

Find a full-time role or part-time earnings opportunities in web3.

3. Learning by doing

Quick hands-on experience on various basic topics such as non custodial wallets like metamask & coinbase wallet, transacting on different blockchains like Ethereum & Polygon, trading or swapping crypto coins like ETH, DAI & MATIC , buying different NFTs like ERC721 & ERC1155 on OpenSea, transacting on centralised & decentralised exchanges, etc 

Learning by doing in partnership with Tony Mathew1

1. Buying crypto currencies in a centralised exchange

2. Experimenting with DeFi and DApps : Aave on Polygon Chain

3. Swapping coins on a Decentralised Exchange (DEX)

4. Buying an NFT on OpenSea marketplace

5. Importing NFTs to non custodial wallet like Metamask

6. Multiple non custodial or self custodial wallets using the same seed phrase or recovery phrase

7. Transferring between Ethereum and Polygon blockchains

8. Experimenting with wallets for other blockchains : Phantom wallet for Solana blockchain

Buying crypto currencies in a centralised exchange

A centralised exchange like Binance or Coinbase is similar to traditional stock exchanges in the sense that they allow to have an account with a simple login instead of dealing with private key or seed phrase. They abstract and handle these details for you. Also they allow you to buy or sell crypto coins using fiat money via different options including credit and debit cards. For this tutorial I am using Binance exchange and INR as currency.

To get started in an exchange or even a wallet, users are typically required to do an online KYC to verify their identity to ensure safety in such platforms. This is the screen that asks for such details. In Binance & earlier in Metamask also the committed time to finish KYC was 2 days, but it got completed in less than 2 hours.

On choosing Indian Rupees (INR) as currency, Binance gives me an option to buy crypto coins via P2P transactions , ie I am directly paying to a seller who wants to sell the particular coin I am looking to buy . Limitation with P2P is that it is a manual process. The exchange will hold the coins in custody from the seller, buyer transfers money to seller directly, then seller has to give confirmation to exchange on recieving funds and then exchange will transfer the coins to the buyer.

In this example I bought around 19 MATIC tokens on Polygon chain using FIAT money which is INR. Now the coins will reflect in trading wallet section of my Binance account. As a next step, I want to move it out of the centralised exchange to my fully controlled ethereum address so that I can manage the coins using my own non custodial wallet in a purely decentralised manner without any centralied exhanged acting as an intermediary. Remember once you have a private key and account(s) for Ethereum , the same is valid for other EVM compatible blockchains like Polygon and Solana and even testnets like Rinkeby and Kovan. So here I am using the address of my account 1 in my metamask wallet for ethereum chain to send the MATIC tokens on Polygon chain.

Since the transaction is happening on Polygon, you can see how low the gas fee is . If I had ETH and was trying to send to the same address on ethereum chain, then the gas fee would have been much higher. It may take upto 10 minutes as shown below for the transacion to be complete and the coins to be visible against your address.

Now in my metamask wallet, on choosing Polygon mainnet as the network, I am able to see the MATIC tokens against my address

Experimenting with DeFi and DApps : Aave on Polygon Chain

Once you have coins on a blockchian, you can also experiment with DApps (Decentralised Applications) especially DeFi (Decentralised Finance) apps . I have used some of the MATIC coins on Polygon that were purchased earlier to get hands on with Aave. As per the polygon blogpost https://blog.polygon.technology/polygons-defi-series-aave/

The Aave protocol is an open-source non-custodial decentralised liquidity protocol built on the Ethereum blockchain. It is the largest DeFi protocol in the world (by total value locked) and has a distributed team of over 70 people all over the world. The Aave protocol allows users to supply and borrow cryptoassets and earn yield on cryptoassets supplied to the protocol.

Go to aave.com and connect Launch App and then connect your wallet

When Ethereum mainnet is the chosen network on my metamask wallet, Aaave will show me the coins and the APY I can earn for them and also gives me option to borrow

On clicking supply you can see the the next screen that will show the gas fee. Since I am on ethereum network, the fee will be higher.

Now I switch to polygon network on my wallet and in Aave DApp to see my coins listed with option to Supply

On clicking Supply for MATIC it will show me the gas fee, which is very low on Polygon network as against the Ethereum chain

I went through with the transaction and then after it is complete , I can see that I have supplied 1 MATIC or approx 0.66$ to Aave so that I can start earning interest. I have the option to withdraw the amount or swap for another coin which will provide a different APY

Swapping coins on a Decentralised Exchange (DEX)

DEX or a Decentralised Exchange allows a crypto user to trade on crypto coins by swapping one coin for another. The process is achieved using a concept called Liquidity Pool which exists different pairs of coins. You can easily find detailed writings on the topic in the internet. Below you can see how this can be done on both Polygon and Ethereum chains.

1, QuickSwap on Polygon chain : QuickSwap is a DEX on Polygon chain. In an earlier part I had shown how I bough MATIC on Binance exchange and then sent them to my address. Now I will be swapping some of those MATIC tokens for WETH (Wrapped Ether) and DAI tokens. For example in the screen, I choose to swap some MATIC for DAI and then I need to click confirm

The my metamask wallet will ask me for confirmation and show the gas fee , which is very low and has to be paid in MATIC token , since this entire transaction is on Polygon Chain.

Similarly swapped some MATIC for WETH on Polygon.

The updated balance of all 3 tokens will show up in the coins dropdown option in QuickSwap and also in metamask web extension

Now, if the tokens are not appearing in metamask wallet, one needs to import the tokens. Click on Import Tokens screen after choosing Polygon Mainnet as the network. For WETH following are the details that can be obtained by seeing the WETH contract page on Poylgon scan. On import, the WETH balance is updated.

Below you can seen how to check in Polygonscan to find the contract address for DAI and then use that to import the tokens in metamask mobile wallet

2, UniSwap on Ethereum Chain : UniSwap is a Decentralised Exchange (DEX) on Ethereum blockchain. In the below I am trying to swap some of the ETH in Ethereum chain to get USDC on ethereum chain.

On clicking swap and then on the Confirm Swap on the popup, metamask wallet will popup to show the expected gas fee

In this case I cancelled the transaction after seeing the details as I did not want to execute a transaction with such a high gas fee on ethereum network.

3, Swap within Metamask wallet : Metamask wallet provides a swap option. It is not a standalone DEX like Uniswap or Quickswap, but instead it instead it fetches quotes from multiple DEX aggregrators and suggests user to choose the one with lowest charges.

Here you can see the price quote and gas price estimate for swapping ETH to USDT and WBTC. I did not execute the transactions and cancelled after seeing the price details.

Since gas fee lower in Polygon network , I switched to Polygon mainnet and did a swap of MATIC to WETH at a very low gas fee as shown below

Buying an NFT on OpenSea marketplace

OpenSea is the largest marketplace to buy and sell NFTs. Non-Fungible Tokens can be based on any of the two different standards ERC721 or EC1155. The latter standard actually enables the creations of tokens that are a mix of both fungible and non-fungible. Further, OpenSea allow transactions of NFTs that are based on Ethereum, Polygon or Solana blockchains. In this example below, I am buying a part ownership in an ERC1155 NFT on Polygon. I am doing this so that I can experiment at a very low cost.

1, Add Wrapped Ether for transacting on OpenSea : This is needed because OpenSea allows transactions using WETH which is an ERC20 token. For buying Ethereum NFTs, it must exist on Ethereum chain as WETH on Ethereum and for buying Polygon NFTs, it must exist on Polygon chain as ETH on Polygon .

If there is not enough WETH, more can be added by wrapping ETH balance or MATIC balance based on the chain in which balance is needed . See below example of wrapping ETH to WETH on ethereum

2, Then I searched for Polygon sports NFTs using the search filters and then sorted them by Price: Low to High

3, Checked the details section to confirm it is on Polygon and can also see type as ERC1155

4, To buy the chosen NFT click checkout, complete the Unlock and Sign parts of the transaction by clicking on the wallet , thus completing the purchase.

Importing NFTs to non custodial wallet like Metamask

To view any NFT bought on OpenSea in your metamask wallet , you need to import the NFT with the required details like contract ID and token ID . Go to your wallet and choose the network based on where the NFTs exist . In this example it is Polygon. On the NFTs tab, click import NFT and then enter the contract address and token ID that can be obtained form OpenSea. On completing the import, the NFT will be displayed in your metamask wallet.

Multiple non custodial or self custodial wallets using the same seed phrase or recovery phrase

For a non-custodial wallet , the 12-words seed phrase or recovery phrase is everything. Hence the major warning signs that you keep seeing on “never to lose this phrase” and to “create safe backups” . Ethereum seed phrases are based on BIP39 standard. It is a code generated when you create a new wallet for ethereum blockhain for the first time using a non-custodial wallet. You can play around on this site https://iancoleman.io/bip39 / to get an idea on the link between the 12-words seed phrase or recovery phrase, private key and public key.

This means that a user can reuse the same phrase in a new non custodial wallet to access the exisinting wallet without having to get a new 12-words mnemonic. I have used the seed phrase that I got while setting up my metamask wallet to import the wallet account to coinbase wallet app as shown below. This way I am able to see all my crypto coins that I hold on Ethereuem and Polygon chains in my coinbase wallet app . This is just by using the same recovery phrase or seed phrase that was provided to me when I had set up my metamask wallet.

Viewing transaction and coins holding details of an address using Etherscan and Polygonscan

Etherscan is the website where you can view details of a transactions and addresses in a more easy to read UI/UX.

You can view the details of the transactions against an address and also the tokens owned by that address by visiting Etherscan. Example : https://etherscan.io/address/0xad085736a7a27009dd346ecd1ce51cfab80c5e85 . If a particular address is also linked to an ENS (Ethereum Name Service) .eth domain, then that can also be used instead of the hexadecimal address. Example : https://etherscan.io/address/tonymathew.eth

As mentioned before, a user will have the same private key, public key and addresses in any other EVM compatible chain. So transactions and coin holdings of a given address on thePolygon network can be viewed by visiting PolygonScan and going to the page for that address . ENS name will work only for Ethereum chain and not for Polygon. Example : https://polygonscan.com/address/0xAd085736A7a27009Dd346ECd1cE51CfAb80c5E85

Transferring between Ethereum and Polygon blockchains

To view any NFT bought on OpenSea in your metamask wallet , you need to import the NFT with the required details like contract ID and token ID . Go to your wallet

1, Visit the website https://wallet.polygon.technology/bridge to do such inter chain transfers via the Polygon Bridge and connect your wallet

2, Ethereum to Polygon transfer needs just one transaction and cost gas fee on the Ethereum network

3, Polygon to Ethereum transfer has two stages with one on Polygon chain and other on Ethereum chain and will take upto 3 hours to be completed

Experimenting with wallets for other blockchains : Phantom wallet for Solana blockchain

Phanton Wallet is a famous wallet for Solana blockchain. If you want you can experiment with it. It provides an option to buy SOL using cards. Since minimum transaction is USD 300, i did not try any transactions. Here are the screens.

NFT craze has cooled down; DeFi TVLs are not breaking all-time highs; and people are wondering whether we are in the midst of bear market. However, building never really stops and new ideas are always coming up. One such concept that has existed for a while in crypto but hasn’t truly had its moment yet are DAOs. In the post titled The Future of Work, Ben Schecter argues that soon an average man won’t be working at a traditional company. But what does that exactly imply? And how are DAOs any different than traditional companies?

Let’s explore the potential of DAO (short for Decentralized Autonomous Organizations). We will go through a bit of history and then extract common properties of a DAO.

What does it mean?

The term was coined by none other than Vitalik Buterin who is known for his cheeky style. However, the necessity of a DAO comes from Bitcoin. One of the early challenges that Bitcoin faced was, due to its decentralized nature, it was quite difficult to agree on particular decisions. The classic example is the block size debate, whereby miners had the incentive to support bigger blocks whereas the developer community felt that a better solution to go with SegWit. There was no good way to settle the debate. This sparked a need for some sort of governing body. Vitalik in his article for the Bitcoin Magazine wrote a piece titled: Bootstrapping a Decentralized Autonomous Corporation where he attempted to address the question: do we really need the people? He then went on to introduce Decentralized Autonomous Organizations in the Ethereum White Paper.

The general concept of a “decentralized autonomous organization” is that of a virtual entity that has a certain set of members or shareholders which, perhaps with a 67% majority, have the right to spend the entity’s funds and modify its code. The members would collectively decide on how the organization should allocate its funds. Methods for allocating a DAO’s funds could range from bounties, salaries to even more exotic mechanisms such as an internal currency to reward work.

Today, the DAOs have evolved quite a bit. We have DApps such as Compound Finance running on ETH chain leveraging DAOs for making governance decisions. Governance tokens are distributed among early adopters and investors to allow for decision making. More on that later.

Vitalik’s definition of DAO is a little dated though now. In her post, A beginner’s guide to DAOs, Linda Xie gives a broader, more abstract definition of a DAO:

A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.

Perhaps that’s a bit too vague though. Packy McCormick of Not Boring breaks it down a bit more concretely.

More simply, DAOs are a new way to finance projects, govern communities, and share value. Instead of a top-down hierarchical structure, they use Web3 technology and rapidly evolving governance and incentive systems to distribute decision-making authority and financial rewards. Typically, they do that by issuing tokens based on participation, contribution, and investment. Token holders then have the ability to submit proposals, vote, and share in the upside.

Let’s take a trip through history. And see how this concept has evolved over time.

Decred: Humble beginnings

There are models of governance that pre-dates Ethereum. For instance, the origin of Decred can be traced back to 2013 when an anonymous Bitcointalk user named ‘tacotime’ started a thread highlighting the problem with Bitcoin stating that PoW miners have amassed too much power and proposed a new chain “Decred” that gives power to the people who hold the currency via a Proof of Stake model. It wasn’t the first chain to introduce Proof of Stake. Decred is still relevant to this day, with a marketcap just shy of $1B making it the #86 in the top cryptocurrencies by marketcap. However, it hasn’t been as powerful as Ethereum.

Enter “The DAO”

Ethereum whitepaper introduced the concept of DAO, but Christoph Jentzsch took the bold step to author it. It launched in April 2016 as a decentralized venture capital fund. Members contributed ETH and received DAO tokens in return that could be used for voting on which projects the funds should be allocated to. 11,000 people invested 11.5 million ETH, 14% of the total supply at the time, worth roughly $150 million, which they planned to collectively invest in crypto projects. It was one of the largest crowdfunding campaigns in history. But soon turned out to the most controversial of the projects too. Two months into the project, hackers were able to steal 3.6 million ETH by exploiting a bug in the code. Luckily, the funds were put on a 28-day hold based on the terms of the smart contract, which gave the community some time to think. Eventually, after a contentious debate, the Ethereum core team released a hard fork of the Ethereum blockchain since it was a substantial amount. History was rewritten on the blockchain and in the new chain, there was no hack. Bitcoin maximalist immediately pointed fingers at Ethereum saying that the hard fork by small group of people demonstrated that the chain was not decentralized enough and a small group of people were able to critical decisions about Ethereum.

Aragon: power of composability

Despite “The DAO” hack and the consequent Ethereum fork that made many question decentralization of Ethereum, DAOs were not done just yet. Developers were learning from their mistakes and they started writing code that could be composed. Aragon promised to provide the picks and the individual teams were to be responsible for implementing their own DAO. This is a common pattern in programming whereby the framework creator simply makes it easy for the developers to implement their code with less errors as they do the heavy lifting themselves.

Aragon was one of more successful ICOs that managed to raise $25 million in matter of 15 minutes. Their vision was to make new company setup a plug-and-play experience. Any entrepreneur would have the ability to set up company ownership (via tokens), issue tokens, and raise funds for a project in a matter of minutes. You could set rules for the new company’s governance by creating tokens with various voting rights and tweaking percentages needed to pass a motion. You can also set rules for vesting schedules. Hence, making the experience of setting up a company leveraging a DAO very painless. Aragon wasn’t just the only name out there that was building such capabilities. There was also the DAOStack, District0x and others.

Today Aragon boasts to have created 1900+ DAOs with 60,000 members. But it hasn’t really been able to capture the market that well. Possibly because they were too early.

MakerDAO: first real use-case of DAO

Rune Christensen, co-Founder of MakerDAO, came up with a novel idea in a Reddit post to create a stablecoin (token whose value is pegged to the US dollar) by leveraging the power of three tokens: DAI (stable), ETH (collateralized) and MKR (govern). DAI was issued as a debt and required ETH as a collateral. More specifics on that some other time, but for now it is worth noting down that such a system as Maker required adjusting risk parameters and deciding on future iterations of the product. It needed guardianship and right incentives. The consequence: a governing token (MKR) that gave users voting powers and incentives to make the right decision. MakerDAO is one of the earliest applications of Ethereum.

MakerDAO’s governance model has been adopted by many protocols. Similar to Maker, the Compound protocol wants community consensus on which new markets to add, what parameters to change, how to issue COMP governance tokens (as a reward to protocol participants so they can participate in the DAO as well), and what to do with their three billion dollar treasury! By owning COMP tokens, your ownership weight is your voting weight.

Another example is Curve DAO building an automated market maker (AMM) that generates fees and provides revenue sharing for token holders that lock their tokens. The longer the Curve token (CRV) is locked for, the greater the amount of voting power and rewards received for the DAO member. Unlike traditional companies where profits are paid out pro rata, this DAO is setup such that voting power and revenue share is weighted according to the length of time a token holder has remained invested.

Moloch DAO and treasury management

During the depths of bear market, Ameen Soleimani, founder of SpankChain, recognized a problem with the Ethereum ecosystem. The developers didn’t have incentives to work on the Ethereum and as a result, progress on ETH2 was being hampered. He decided to fix it by building a DAO. The design was kept purposefully minimal, and thus reducing risk. Using MolochDAO, the members were able to propose projects and then acquire funding. One interesting feature of Moloch DAO was the ability to ragequit, i.e if a member don’t like a proposal, they can exit with their funds before the proposal goes through. MolochDAO’s contracts have been forked many times to create other DAOs.

Building on MolochDAO was MetaCartel. MetaCartel Ventures is a for-profit fund that invests in DApps and is an early investor in many prominent crypto projects including Zapper and Rai. Members consist of experienced builders in the crypto community. Similarly, The LAO is another DAO made up of Ethereum enthusiasts that has invested early on in projects. MetaCartel Ventures and The LAO are both examples of DAOs that have strong access to deal flow in the crypto ecosystem. Today, you need a staggering amount of 375 ETH minimum to become a member of the LAO.

In addition to financial instruments, DAOs have also been used to manage funds that seek to invest in specific types of projects. Similarly, PleasrDAO is a group that leverages a DAO with the goal of buying art in the form of NFTs. Most members of this group have never met, and some are still anonymous, but this hasn’t stopped them from buying an NFT of Edward Snowden for over $5M in April. At the time of writing, FlamingoDAO has a portfolio of $1B USD owning 215 CryptoPunks and 22 Bored Apes.

Constitution DAO and the connection to traditional institutions

In mid-November 2021, an internet collective called Constitution DAO crowdfunded close to $47 million in Ether. The goal was to use the funds to bid on a rare copy of the U.S. Constitution at a Sotheby’s auction on Nov. 18. This wouldn’t actually result in a tangible outcome that donors could use beneficially, but rather it exemplified that people could come together in novel ways to upend a traditionalist institution. Although, they lost the bid to Ken Griffin, CEO of Citadel, the move was significant enough to create waves in media and at one point, it was the favorite candidate to win the bid. It signified the power of DAOs and how quickly it could align people towards a single goal. It issued an admonition to traditional institutions: innovate or be displaced.

In late Feb 2022, Russia declared war on Ukraine that sparks protests across the globe. Around the same time, Shevchenko a Ukrainian based in UK, started a DAO for fund raising and donating to Ukraine. By end of March, it has raised around $8 million from people donating across the globe. As a consequence, Ukrainian President Volodymyr Zelenskyy legalized cryptocurrency in the country to address the deluge of digital assets that people wanted to donate to support humanitarian aid and Ukraine’s defense. This demonstrated enormous potential for DAOs as use-case for humanitarian causes.

One big milestone in getting DAOs recognized as a legitimate entity was getting Bill 38 passed in Wyoming that clarifies the legal status of DAOs. DAO contracts can be viewed as an LLC. The legal aspect of DAO has really been capitalized by Open Law. Open Law further makes it easier to create real world contracts using Ethereum. They essential wrap legal contracts within smart contracts. And makes it possible to sign and execute such contracts. Another product SyndicateDAO introduces the concept of web3 investment clubs. It can attach legal entities, open bank accounts, and issue K-1s. And allow a group of individuals to collectively invest in the web3 products such NFTs or tokens. Thus, we are ushering into this new era where DAOs will have legitimate place in the legal world.

The many faces of DAO

DAOs have come a long way. It originally started as a mechanism for ensuring that miners don’t have all the power and influence to dictate changes over the blockchain protocol. The new mechanism transferred power to tokens that could be distributed systematically. This incited a spark to add more powerful controls. Aragon was born that attempted to disambiguate power and money by building a blueprint for governing structures. It wasn’t super effective as the needs of the community were constantly changing. Birth of DeFi apps such as Compound, Uniswap and Curve required controls to be baked into the native protocol. Governance dashboards were built. Tools for monitoring and voting on proposals were created. Seeing success of governance tokens, DAOs were built that were essentially funding instrumentation for web3. Being decentralized and easily accessible, they managed to amass quite a bit of funding. Seeing their success, there was a need to bridge the gap from a legal perspective. And legitimize DAOs.

Coopahtroopa has a great article that sketches out the lay of the land and puts DAOs in different buckets.

There are 300+ DAOs with more emerging every day: check out this list which compiles DAO Tooling Matrix.

Holy Trinity: Power, Capital, Community

I spent some looking at the various DAOs that exist today and extracted common elements from them. Broadly speaking, all DAOs have some form of interjection of roles, capital and community. As an example, Grant DAOs are heavy on the capital side of things whereas a Protocol DAO requires stronger controls and access privileges. Similarly, Social DAOs has strong sense of community alignment. Same for Media DAO. But an investment DAO might be more heavy on the capital and access controls.

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1. Community

One common mistake people make when valuing ideas is that they don’t put enough emphasis on community. Products that built around DAO should gravitate where there is already community present. Today, most companies are dependent on some social chat product for internal communication. The are two big competitors are: Slack and Microsoft Teams. You can’t have coordination in a decentralized, distributed organization with such chat tool. The crypto community isn’t using Slack or Teams. They are use Twitter for getting the latest news and updates; Discord for engaging in active discussions and Reddit for knowledge sharing.

DAOs are becoming exclusive investment clubs that you can join if you can set aside certain amount of capital. NoiseDAO is one such example of a DAO that you can join by putting in minimum of 2 ETH. You pass in your discord username and it gives you access to a gated discord channel where participants of the channels are all members of the DAO. This gives some sort of exclusivity to members.

What is even more interesting are tools such collabland that allow folks to verify that they are indeed true owners of a particular NFT or some tokens. This tool integrates with Discord.

2. Capital

One interesting thing that catches the eye when looking at the list of highest funded crowdfunding projects is that majority of them are blockchain in nature. Crowdfunding, as a movement, had already been growing, but crypto tokens has put that on steroids. Platforms such as kick-starter allowed for crowdfunding and in return, the investor would be the first ones to see the product. In world of blockchain, when you invest in a project, you aren’t just incentivized by getting first look at the product, but you are actually making money if you are an early investor. A lot of people have made quite a fortune from investing early in blockchain projects. And as an entrepreneur, blockchain has proven to be a great vehicle for raising money.

But raising capital is just one part of the story. You could be building decentralized internet, but it doesn’t necessarily qualify you as a DAO. In order to be a DAO, the capital has to be locked up in treasury and only accessible by some people. Thanks to the open nature of the blockchain, people can know where the funds are being spent and if they have the right governance structures in place then it would be very hard of someone with access privileges to send funds for personal interests. This makes DAO an ideal candidate for not just raising funds but also managing them and allocating it to right projects that are beneficial for the org.

For additional safety, you have products that allow funds to move only there is sign-off from sufficient number of people.

Balaji’s concept of a mirror table (inspired from cap table) is another example where blockchain solutions shine. The radical transparency of blockchains make it easier to understand the flow of funds.

3. Roles

An organization can not function effectively if all members of that organization are experts on the same thing. We saw Industrial revolution bring about assembly lines that lead to higher productivity as role became more specialized roles. Similarly, we expect a DAO to have members with various responsibilities and unique expertise. This is codified in the smart contract. There needs to be dynamicity so that these rules can evolve. As a result, we have upgradable contracts that grant/revoke accesses from members. However, for managing all of this complexity, we need UIs.

We already saw how Aragon attempted to build a framework such that it could take advantage of composability of smart contracts and build a foundation upon which all futures DAOs could be built. In practice, however, it had some challenges taking off. That being said, some patterns are starting to emerge. One such pattern is giving community tokens and letting them vote on proposals for a protocol.

💡 Member personas

Creators — founders, full-time instigators of the organization
Believers — motivated by DAO’s purpose, more interested in status rewards than financial upside

Early contributors — doing work for pre-token equity, potential upside, and resume building

Investors — buying equity at primary sale for upside and mission support
Mainstream contributors — doing work for liquid native token, stable coins, or fiat
Management — earning token-based rewards for recruiting, managing, and evaluating contributors
Utility buyers — buying tokens to access products and services from the late stage DAO

Our thesis on “Stripe Atlas for DAOs”

We are bullish on DAO infra companies such as Superdao that are building "Stripe Atlas for DAOs". In the current landspace, there are many pain points to be addressed:

• DAO formation often requires lawyers, smart contract developers, audits, and high fees.

• Legal uncertainty, particularly regarding SEC guidance on token sales.

• No proven reusable templates or one-click formation tools 

• No enterprise-grade support for DAOs with $10M+ AUM 

• Member engagement levels are low, DAOs can't efficiently reach their members 

DAO tools don't have interoperability standards and are hard to use together. It is not hard to imagine that in the next decade many of the world's next great orgs will start as DAOs, not Delaware C-Corps. A lot of people are choosing to work for DAOs: aligned incentives with the DAO, equity, career velocity, etc. With DAO employment you get paid in crypto, same upside across the globe. Customer investing becomes a norm: financial upside + owner benefits. More savings are put into DAO equity than into NASDAQ-traded equity (~$20T) DAOs adopt self-tax policies and create revenue base for "crypto economy government"

Launch Checklist for DAOs

Before you launch a DAO, here is a broad checklist of things for you to consider:

Formation

What forms of DAO membership are you planning to use in the next 2-4 months?

• NFT-based membership for access (content, events, etc.) and governance rights

• “Private” tokens for investors (SAFTs, warrants, locked tokens)

• “Private” tokens for core team, advisors, and partners (SAFTs, warrants, locked tokens)

• Exchange-traded tokens

If you plan to use NFT-based membership, what features will you need?

• Multiple tiers of membership

• Restricting NFT trading (lock period, approval required, rights lost on transfer, etc.)

• Collect royalties from secondary trading

• Core team can update NFT artwork after sale

• Core team can change metadata on NFTs, e.g. assign custom roles

• Ability to increase the membership limit (e.g. if community votes for it)

• Member dues / “property tax” — NFT owner needs to pay DAO to keep NFT

• Black list / Core team’s power to mark member NFTs as “banned”

• NFT recovery (for members who lost access to wallet)

What features do you need for NFT launch?

• NFT airdrop to core team, advisors, partners, influencers

• Whitelist collection + private mint website

• Whitelist collection + free airdrop

• Public mint website

• Primary sale revenue management. Sending proceeds to DAO treasury, operating entity, etc.

• Member data collection on whitelist application or mint site (e.g. emails)

• Releasing NFTs for sale in batches

If you plan to use private tokens, what features do you need?

• Private tokens for investors (SAFTs, warrants, locked ERC20 tokens)

• Private tokens for core team

• Private tokens for advisors influencers, partners, early customers, etc.

• Lockup schedules (e.g. locked until TGE + 1 year, then released linearly for 1.5 years)

• Support limited transferability (e.g. investor entity change or wallet change)

• Dual on-chain + off-chain system (traditional legal agreement + ERC20 token)

• Ownership transparency = owner table sharing

Chain preference

• Ethereum + Polygon

• Solana

• Binance Smart Chain

• NEAR

• Other

What are your technical requirements?

• Ability to upgrade or extend smart contract

• Ability to acquire/add ENS domain to your DAO

Which legal entity is right for particular use cases?

Operations

What access features do you need?

• Member directory

• Member-only newsfeed

• Token-gated content on other apps: G Docs, Notion, Airtable, etc.

• Member-only chat / Discord, Telegram

• Member-only events

• Cross-DAO access: members of one DAO granted access to another one

What asset management features do you need?

• DAO-owned wallets (stablecoin, ETH, NFT holdings, third-party tokens, etc.)

• Ability to own off-chain assets (real estate, fine art, etc)

• Ability to create SPVs for individual assets (e.g. for investment DAOs)

• Fiat-based bank account (via linked traditional entity)

• [x] Treasury dashboard tracking all assets in one place

What level of governance do you plan to use in the next 2-4 months

• No community governance in the early period, core team makes all decisions

• Limited governance (voting on investment deals, grants, budget, elected roles)

• Proposal-based governance with veto power by core team

• Full proposal-based governance

Contracts and SubDAOs

• Ability to create SubDAOs with localized governance and budgeting

• Ability to appoint agent-of-record for off-chain representation, e.g. property ownership, fiat banking, employment contracts

• Ability to sign contracts with off-chain vendors

• Ability for members to create their own DAOs (e.g. player guild DAOs)

Spend management

• Workflow for contributor payments, invoices, etc.

• Ability to delegate small spending decisions to individuals and small teams

• Ability to pay for SaaS products as a DAO, e.g. for Notion, Typeform, etc.

• Spend reporting and bookkeeping

Exit options

• Pre-built process for DAO dissolution

• A way to distribute DAO assets to members or appoint dissolution manager

• A way to sell DAO or conduct DAO+DAO merger

🚀 The DAO Lifecycle

DAOs are similar to humans, they grow in stages, from an embryo to a fully adult organization. Below is a typical growth sequence for a DAO but each journey is unique and has its own path.

Idea stage

Leader + purpose + name 

To get started, one needs a name for the DAO (can be a working title), a leader, and the purpose of the organization. The purpose needs to be stated from the perspective of members and supporters (why we want this DAO to exist) and not from the perspective of the creator. In other words, articulate what kind of good things the DAO will make for its members and the general public.

Believers

Founding members + written roadmap + public profile

Manually invite most ideologically motivated people and draft together a plan of action. How do you want the DAO to work and what are you planning to make. The decisions on tokens, NFTs, and governance system can wait, focus primarily on value creation at this point. With founding members and a draft roadmap, an “upcoming DAO” profile can be created to attract more members.

Early contributors

Contributor loop + reward system

Figure out the most common and repeatable tasks the early members can do to help your DAO. Then, propose rewards for those actions. Rewards can include special achievements NFTs (designed for status, not speculation), whitelist membership for future NFT minting and token airdrops, and options to buy future NFTs/tokens at an exceptionally low price. 

Initial capitalization

Token raise or primary NFT sale

Introduce DAO’s main token or its primary NFT collection representing membership. By this stage you will have two types of members — the ones who earn their membership via labor contributions and the one acquired through primary sale. In other words, you are now mixing “work to join” with “buy to join” models. You still can be pre-screening buyers and limiting the secondary market for memberships if it's important for your specific DAO. 

Governance setup

Partial decentralization + voting

Transferring some governance rights from creator to community. Typical decisions to delegate include financial parameters (“tax rate”), curation, investing, featuring, budget and grant approval, token allocations, and elected roles.

Treasury setup

Treasury composition + liquidity + spend management

Diversifying DAOs treasury to include its native token, unminted primary NFTs, major coins, stable coins, tokens from related DAOs (e.g. from the blockchain of choice) and fiat. Partnering with liquidity providers and lenders for loans, guaranteed exchange rates, and yield programs to generate more interest and currencies needed for contributor compensation.

Development program

Payroll + grants + project-based hiring + bounty program + programmatic incentives 

Recruiting contributors, including engineering, business roles, influencers, customers, and ecosystem partners. Using fiat, token and NFT-based compensation models. Automating rule-based compensation, including giveaways and airdrops.

Sustainable revenue

Member dues + secondary royalties + service review + licensing 

Longterm revenue models for DAOs include annual fees for holding membership NFTs (aka “property tax”), royalties from secondary NFT trading, paid services and gas fees, DAO-owned IP licensing.

Full decentralization

Governance layer + operating layer

Separating governance activities (policy, budgeting) and operating layer (an ecosystem of “labs” providing development and operation services. The main token may be split into a governance token (voting powers) and a utility token (ecosystem currency) at this point.

Future potential

DAOs aren’t a new concept. And have existed since the early days of blockchain. They have continuously been evolving from being just a great vehicle for fund-raising to managing treasury and distributing funds to areas that people decide need the most attention. As the crypto ecosystem continues to grow and draws more resourcing, it will create an even greater need for better management of capital. There are many areas where tooling can improve. Raising funds in compliant manner with no rug pulls. That’s where legal tech is going to play a pivotal role. You require better community management so that it is easier to voice opinions. And the community is adequately incentivized so that the ideas that are brought up are beneficial to the larger group. This could be mean some sort of payroll being incorporated. And having transparency in fund movements. All of these avenues for growth warrant their own exploration. But we will get to that a later point in time.

Why create a DAO?

• Growth incentive = give DAO equity for usage, referrals, social media activity

• Collective action = resource building, advocacy, co-marketing, standard creation

• Status systems = private communities with public display of membership

• Labor equity = share financial upside and governance with platform workers

• Liquidity = package assets to be traded on crypto exchanges, e.g. IP rights

• Investment = find, fund, and promote winners together: startups, tokens, NFTs

References & Further reading

• https://linda.mirror.xyz/Vh8K4leCGEO06_qSGx-vS5lvgUqhqkCz9ut81WwCP2o

• https://underscore.vc/blog/the-future-is-dao-a-primer-on-daos-and-their-explosive-growth/

• https://coopahtroopa.mirror.xyz/_EDyn4cs9tDoOxNGZLfKL7JjLo5rGkkEfRa_a-6VEWw

• https://1729.com/daos

• https://www.placeholder.vc/blog/2020/5/7/aragon-daos

• https://future.a16z.com/ dao-canon/

The creator economy is bigger than just entertainment and it’s bigger than just consumer—it’s about people being able to use technology to build in new ways, and then being able to use the internet as distribution to share and monetize those creations. The creator phenomenon avoids simple categorization; no industry will go untouched.

Currently, the creator economy is estimated to be over 100 billion USD: Creator economy startups are expected to raise funds up to $5B in 2021. There are 3 big macro-drivers for this:

1. Today, nearly 70 million Americans earn income as self-employed
   By 2028, that will swell to 90 million. And it’s not just the USA; this is a global trend accelerated by the pandemic

2. Freelancers want to control their destiny to achieve financial freedom faster

If freelancing appeals to workers for its autonomy, flexibility, and financial upside, freelancing’s growth is fueled by technological, macroeconomic, and cultural forces.

• On the technology front, internet platforms have enabled new forms of work. They connect worker and consumer, often making work more global, scalable, and frictionless. They make it feasible to earn a living wage online.

• On the macro front, the COVID pandemic accelerated the disaggregation of work. Many people found themselves out of work or more distrustful of traditional work. They turned to tech-enabled jobs or decided to dictate their own fate by going solo.

• And, most meaningfully, on the culture front, the disaggregation of work embodies the ethos of a new generation. It’s a reaction to institutional, centralized power, and a reaction to unprecedented inequality.

The Gini Coefficient measures income inequality, with a higher number equating to more inequality. USA’s Gini Coefficient has trended steadily upwards over the last 50 years. This chart helps explain why work is changing. The forces that led to Occupy Wall Street in 2011 are the same forces that led to GameStop mania in January 2021. As one r/WallStreetBets Redditor wrote during the GameStop craze, “This is the first time we all literally get to decide our destiny.” The disaggregation of work is about that control—that ability to control your destiny.

3. Numerous easy-to-use vertical Platforms have democratized access and broadened monetization

More than 4 Billion people, almost 60% of the human population is on the internet and are using creator platforms one way or another. However, only a tiny percentage is part of the creator economy, as most people are only generating social capital. Crypto economy will turn social capital into an economic value making every one of us part of the Creator economy. 

In the coming 5 years, there will be large number of platforms emerging which will broaden access to new forms of work, lower the barriers to entrepreneurship, democratize the means of production and distribution, and empower the community. Eventually, this will lead to the creator middle class, wherein not just the top 1% of creators make all money, but many creators will be making a full-time living using these platforms.1

Creators include chefs, teachers, DAO workers, NFT artists, gamers, fitness gurus, small business owners, coaches, community leaders and anyone doing non-commoditized work supported by digital platforms.

Credit: Li Jin

What’s striking about the creator phenomenon is that it’s not a vertical trend; rather, it’s a through-line that cuts across social, gaming, crypto, media, commerce. It is both the future of work, with creators forming a new class of digitally-native entrepreneurs and the future of leisure. And while the creator phenomenon is often thought of as a consumer trend, it encompasses both enterprise and consumer.

Products like Figma, Notion, Airtable, and more let everyday people build with the software. Each has a vibrant community of creators. They become creator economy companies—and become more than just tools—when they layer on a marketplace to let creators sell what they build. Airtable marketplace, for instance, lets you build an Airtable app and then earn income as others use your App. A mom-and-pop shop owner who builds an app to track her shop’s inventory can make money when other shop owners use her app for their own stores. This is the power of shared creativity, and is not new for developers who use tons of APIs and example projects when building something new; nobody has to start from scratch.

Part 2: Evolution of Creators (Web 2 to Web 3)

We are seeing an inflection point where the top creators are straddling 2 worlds - a) Web 2 centralized platforms (Instagram, TikTok, Twitter etc) where their audience (distribution) & engagement lives, and b) Web 3 platforms which promise to give the creators direct control and monetization opportunities.

Web 2 stack

Influencers of every stripe can monetize their passions and build an audience in nearly any category—writing a food newsletter for baking enthusiasts, creating TikTok dance choreography for followers to mimic, or playing Fortnite with thousands of onlookers.

Focus on investing in creators has led to a Cambrian explosion of creator tools entering the market, competing alongside incumbents and newcomers. This wide range of creators means a category-specific section of the tech stack, with each influencer curating and culling a list of their essentials—a photographer might include photo editing tools while a podcaster relies on audio editing apps.

Moving to Web 3

Creator tools enable micro-economies. The shift from Web2 to Web3 creates revenue streams which prioritize community ownership over individual ownership. By intertwining financial assets with social capital, we’re now witnessing a new type of asset class dominated by online community coordination.

This is the rise of micro-economies.

In Web2, creators monetize their work via SaaS or advertising models; they’re paid for a newsletter, artwork, or craft on a regular basis, or earn through platform-inserted ads around their content.

In Web3, creators monetize through the issuance of a social token or NFTs directly to their fans, with non-fungible tokens acting as digital media ownership.

How are crypto marketplaces and NFTs changing the game for creators?

The big picture is that emerging “tokenization” models, including non-fungible tokens, or NFTs, are creating new ways for collectors and investors to buy, sell, and trade digital art. More broadly, these innovations open the door to the tokenization of any products or collectibles that can be captured and owned digitally, and many new business models for creators.

Marketplaces powered by NFTs open up new revenue streams for creators, because anytime digital work is resold or their tokens traded on these platforms, the creator automatically gets a percentage of those secondary sales. It’s all transparent and governed by code on the blockchain, and it’s a big shift in creator economies.

1. NFTS: NFTs introduce a kind of digital scarcity and uniqueness that aims to give power back to creators. In the past creators have tried to adopt direct monetization in a bid to create scarcity. Using e-books, albums or even subscriptions. The major drawback has been the illegal duplication and distribution of these resources. Here’s where NFTs come in. This technology with its verifiable on-chain records enables creators to maximally utilise the passion of a few 100 true fans rather than millions of fans. These 100 true fans could then be incentivized with digital bragging rights and other forms of exclusive access. While the masses keep enjoying the almost free content. An example of a platform already pushing this model with the music industry is Catalog.

2. Social Tokens: social tokens would enable creators to have control of their relationship with their fans encouraging more direct engagement. The fans on the other hand would see supporting the artist, not as an act of help but rather as an investment. These fans would do all they can to assist the creator’s success. As the creator’s success would determine the token’s success leading to profit for the community of fans hodling the token.

3. Data ownership and portability: The current web 2 structure puts creators at a loss whenever they attempt to leave a platform or even get de-platformed by the platform itself. Such would mean leaving behind their audience on these platforms. Future-centric platforms like substack have already begun to give creators total ownership of their audience. Substack allows writers to take along email lists of their subscribed audience if they ever decided to leave the platform.

4. DAOs - community ownership and decision making : DAOs - decentralized autonomous organizations are a perfect model of community-focused platforms. They are online communities owned and operated by their members. Membership is mostly through a community token. Bringing this into the creator economy would mean decisions on algorithms, monetization and even what features to be developed on these platforms would be jointly made by the community. Decisions that would previously have been made by the profit-oriented platforms alone. A great example of this model would be Mirror.

Part 3: The Need for Developers tools (Bridging Web 2 <> Web 3)

Prior to 2006, startups weren't a thing. With the launch of AWS, the startup ecosystem boomed - Airbnb, Instagram, Uber & millions of companies launched due to AWS.

Plaid started in 2013 and post 2015 - every company wanted to offer fintech products. The launch of Plaid, Marqueta, and other fintech infrastructure players enabled new kinds of use-cases like embedded banking.

We are now at beginning of the second renaissance - a digital renaissance led by creators who are traversing both Web 2 and Web 3 worlds with their fans. This will give rise to platforms that enable the next generation of creator economy companies to be built. We see this as the inflection point from where the size of the market will grow exponentially by lowering the barriers to entry for new startups.

Why we need Developer Tools for Creator Economy

Today, the best way to move data around for developers and creators is to share screenshots. That doesn’t sound right for the year 2022!

The problem is that the developer tools available today for the above-mentioned creator economy developers are akin to website development in the early 1990s - primitive and archaic. We aren’t kidding! History has shown that whenever a new computing platform emerges or a behavioral shift happens - it’s preceded by the developer tools needed to build great products. This was the case for desktop computers, the internet, and mass smartphone adoption. We are currently in the tools boom for the creator economy.

💻 Jobs to be done for developers:

Their biggest pain point is finding a verified source for the data of their customers, the creator. While these developers could build their own APIs to the top creator platforms, their jobs to be done are to outsource a non-core function so they can focus on their core product, achieve aggregate coverage across platforms, and go to market in the fastest possible way.

1. 👨🏻‍💻 Outsource a non-core function so they can focus on their core product: Integrating with creator platforms’ APIs is hard enough, but maintaining the integrations after changes and updates makes it a full-time business. Hence, developers prefer to focus on their core product offering and outsource the API management part.

2. 𝍑 Achieve aggregate coverage across platforms: There are a lot of creator platforms out there, well into the hundreds. For a developer to attract the right creators, they must have coverage across the platforms where their creators live. This is a challenging problem for developers to attain coverage across all platforms and anticipate future platform shifts.

3. 🚀 Go to market in the fastest possible way: For each integration with a creator platform, there’s a cumbersome and time-consuming process including app approval by the platform. All of this takes time. Developers want to use market-available APIs to launch to market in the quickest time possible

🎬 Jobs to be done for creators:

The best creators have their identities intertwined with their data on the biggest creator platform of today. Hence, their data on these platforms is their most valuable currency. Their jobs to be done are to use their data to prove their legitimacy, to ensure that it is transported in a secure manner, and to have the power to cut off access to their data whenever they want.

1. 🙋🏼‍♀️ Use their hard-earned reputation as a part of their identity: Creators do not have formal W2 or employment verification documents. Hence, they need to use their creator platform data to prove their identity. Using this data, creators should be able to apply for loans, build influence dashboards, and even claim social-based airdrops of tokens.

2. 🔐 Ensure that it (their data) is transported in a secure manner: Privacy and security are of utmost importance. For creators who have their identities established on these platforms, they need to ensure that their data and content are safe without the risk of being hacked, plagiarized, or leaked.

3. 🎛 Have the power to cut off access to their data whenever they want: Creators need to be in control. They want to audit and revoke access to their data at any time and for any reason.

Potential Use cases

1. Empower brands to discover niche and upcoming creators. APls will enable the scaling of engagement reporting and CPM tracking through technology rather than manually (leading to the rise of a creator middle-class)

2. Enable creators to build a professional profile-based on their on-chain (NFTS, POAPs, Tokens, Votes, etc) and off-chain data (Discord, Discourse etc). This way, they can show the rest of the world what they've done, while relying on
   'proof of work'.

3. Access to financial products like loans and insurance to creators at fair rates

4. Enable developers to build tools for creators to build their own websites (link-in-bio)

5. Social identity verification of a creator for Web3 companies. Acting as a bridge between web2 & web3.

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Part 4: The market for such Dev Tools

The TAM for developer tools for Creator economy across Web 2 and Web 3 is sizeable with an estimate of $4-5B. This can span multiple use cases (proof of identity, proof of work, proof of income etc.) across a host of sectors with multi-billion address able markets - notable gaming, NFT, gated content, content marketplaces, creator financing and business management tools.

Fans also need to be continuously verified by these creators for gated content, content marketplace, crypto, web3.0, NFT and Gaming. There are 300M users of these services today and influencers/platforms can engage with dev tools to verify their fans/users.

Many new players are emerging who are building APIs in tangential categories and could expand to use cases in the Creator economy.

Part 5: Betting on Phyllo - ‘Plaid for Web 2 <> Web3 Creator Economy’

Phyllo builds APIs for secure and on-demand transport of a creator's data from creator economy platforms like YouTube, Twitch, OpenSea, Discord etc to developers that are building and serving the creator economy. These developers range across influencer and affiliate marketers (#paid, creator.co), creator financing platforms (Karat, Pixel Card), NFT marketplaces (Opensea), social tokens (Rally, Autonomy Network), and many more.

As one of the earliest investors in Phyllo, I have seen the small but mighty founding team of 3 grow to 30+ strong in less than a year and solve some of the most challenges problems in the space with user-centric design. I am bullish on Phyllo and many others developer-first API businesses that will transform creator economy in the coming years!

How Phyllo Helps

Developers need access to creator data from the creator platforms for various reasons that are core to their business models.

The challenge with access to such data is that developers either integrate with public APIs of multiple platforms and hence spend immense energies in going through multiple docs, building apps, getting necessary approvals, and then maintaining the integrations. Or, in cases, where the creator platform does not provide public APIs, developers write custom scrapers and try to hack their ways to somehow get the data; an approach that eventually becomes unsustainable. Needless to say, many organizations resort to manual methods of getting creator data that are both expensive and cumbersome.

Phyllo solves this challenge in the following ways:

• Phyllo provides you a single API pipe to integrate with multiple creator platforms, whether they provide public APIs or don't.

• Takes away the headache of integration, version maintenance, platform permissions, and relationships

• Simplifies the integration process by normalizing API responses across various data attributes

• Secures the data following industry best practices of encryption, data protection, and infra security

Supply Side Coverage
Phyllo's singular focus is to give developers a single, reliable data pipe to access creator data. While they are quickly progressing to 100% coverage on all major creator platforms, their intermediary approach is tranche-based.

Phyllo's pricing for the core products are designed to mimic the current status quo - a usage-based business model charged per API pull. Over time, due to catering to large enterprises, Phyllo will shift to a subscription-based business model that will allow for continuous access

Some amazing Product demos that just scratch the surface of what dev tools can enable in the creator economy!

Phyllo APIs Use Case - NFT Marketplaces | Demo Video - Watch Video

IDFY Bot User Experience! - Watch Video

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OpenSea is telling a canary in the coalmine for NFT growth. In June, OpenSea facilitated over 211,000 NFT sales across nearly 40,000 active traders.

In the month of August, NFT exchange OpenSea hit $3B in monthly volume as over 1.5 million NFTs changed hands. Its August volume alone exceeds that of every other month in its history, combined. OpenSea’s August volume is on par with $3B in gross sales Etsy put up in all of Q2: another sign of just how big the NFT market has grown relative to other online marketplaces in a very short timespan.1

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NFTs and Web 3.0

We spent the last 20 years building networks on the internet. Social media platforms like Instagram, Twitter, YouTube, and Discord are networks, which can be divided into billions of smaller networks, consisting of followers, friends, subscribers, backers, etc. These platforms gave many people an audience who didn’t previously have one. But due to fundamental structural misalignments between the networks and the companies that own them, we’ve seen increasing tension around these networks’ rules and economics. For example, social media companies that control large networks routinely kill off promising 3rd-party developers, fight cross-network interoperability, charge excessively high take rates, and adopt intrusive advertising models. This is not due to bad people or motives. It’s the logic of the model. If you don’t do these things, your competitors will, and you’ll be out of business.

We are now entering a new era of the internet — Web 3 — where we have the chance to upgrade these networks into economies, and in the process build systems where the incentives of the network owners, network participants, and third-party developers are fully aligned. Economies (as used here) are networks with various crypto assets freely flowing through them, from any node to any other node, directed by the decentralized participants and not by the centralized network owner.

At the end of the day, non-fungible tokens (NFTs) are simply a primitive of blockchains, like fungible, ERC-20 tokens. But the narrative of NFTs as a category has taken off to refer to a broader trend and thus, similar to DeFi, the term “NFTs” now encompasses its own ecosystem - Chris Dixon

The next evolution of content platforms is starting. Using crypto primitives – like NFTs, permissionless protocols, programmable royalties – content creators are set to control the next era of content – The Ownership Era

The Distribution Era: The key value in this era for consumers was aggregation while creators received wide distribution of their content(e.g. songs). However, as users realized that their content had value, beyond views and likes, individuals started to create their own brands.

The Subscription Era: Distribution is no longer worth the tradeoff. Personal websites are ubiquitous. Influencers host their own podcasts where advertising is the key form of revenue or have transitioned to Substack/Patreon where they directly monetize their connections to users.

The Ownership Era of Content: Platforms are partially owned by their content creators. The creators earn tokens for their work which provides ownership in the network. The platform-creator relationship becomes more synergistic as opposed to parasitic.

Content will remain king, but this time creators, not corporations, will control the reigns. As society shifts from valuing firms to individuals, creators who leverage these new web3 platforms will be poised for greater success - Mason Nystrom

NFTs - explain it like I am 10

NFT stands for non-fungible tokens. It’s easiest to think of NFTs as a file format. People use file formats – like jpeg, png, or gif – to transfer information or value on the internet. NFTs are a file format that transfers data and value on blockchain networks like Ethereum. Since NFTs exist on blockchains, these tokens (or files) contain properties similar to bitcoin, primarily digital ownership (a token in a person’s wallet) and transparency (all activity is recorded on a blockchain). We’ll get into some of the other noteworthy benefits that come with NFTs further below.2

The term non-fungible refers to the concept of fungibility. A good is said to be fungible if it is identical and interchangeable. For example, one dollar is worth one dollar. You would happily swap dollars with me since we all agree they have the same value. Comparatively, an item is said to be non-fungible if it is unique. Lots of items are non-fungible including diamonds, houses, and baseball cards. No two of these items are the same, diamonds have different colors and cuts while houses even in cookie-cutter neighborhoods have different locations which affect how light comes into the house. An NFT is simply a token (or piece of information) that is unique. A common example of an NFT might be a digital trading card or piece of digital art.

An amalgamation of a few factors was the perfect dry powder to ignite NFTs’ explosion into the mainstream psyche:

1/ Bitcoin’s insane bull run to 3x all-time highs from 2017

2/ The emergence of NBA Top Shot

3/ The convoluted monetization structure of digital content (inclusive of music & video)

4/ The growing digital collectibles market — especially during the covid pandemic

Characteristics of NFTs

While NFTs are simply a way to transfer information (data), they provide various benefits because they are created on blockchain networks.

While the value of an NFT can vary depending on how it’s used, generally speaking, NFTs provide the following characteristics:

• Unique – The hallmark trait of non-fungible tokens is that they are unique and this can be verified on a blockchain.

• Permanent – NFTs have permanent information and data that is stored within the token. This information can include a message, image, music, signature, or any other piece of data.

• Programmable – An NFT is just a piece of code on a blockchain. This means it can be programmed to have various qualities. One of the most useful qualities of NFTs to date is that royalties can be programmed (or built-in) to the tokens. This means an artist obtains a royalty on all secondary sales of their artwork.

• Permissionless – NFTs can be used in multiple ways if they exist on a permissionless blockchain like Ethereum (not all NFTs are on Ethereum). For example, Sorare – a sports trading card game – has third-party games (not built by the Sorare team) that use Sorare trading cards.

• Digital Ownership – whoever possesses an NFT in their wallet, owns and controls the NFT. Digital assets like domain names (Google.com) aren’t actually owned by Google, but instead by middlemen like GoDaddy or Verisign even though they control the rights to the asset.

These qualities empower various new use cases for NFTs.

Benefits of NFTs

The main benefits of NFTs are closely related to everything that distributed ledger technologies (DLT) have offered in recent years. Blockchain technically secures the authenticity of the NFTs, and it guarantees direct payments to content creators.

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NFT Categories

Art

Digital art has taken the world by storm over the course of the past several months. Digital art combined with the digital property rights of NFTs (verifiable ownership) and perpetual royalties for artists makes NFTs a 10x improvement upon the current system. Most recently, the global auction house, Christie’s auctioned an NFT-based work of art created by Beeple, the top NFT artist by sales volume.

Digital Trading Cards

Sorare and NBA Top Shots are two of the most popular sports trading card collectibles. Sorare cards can be used in Sorare’s fantasy football (soccer) leagues while NBA Top Shots by Dapper Labs is developing a game that uses their NBA NFTs. Other digital trading card games include GodsUnchained which resemble strategy games like Magic the Gathering or Yu-gi-oh.

Provenance Tracking and Digital Certificates of Authenticity

Various items, especially collectibles and high-value items come with digital certificates. These certificates are often either stored as paper records or digital pdf copies. The benefits of digitizing these certificates and issuing them as NFTs means that any can verify the authenticity of the digital certificates and nobody can alter the information or misplace the document.

ConsenSys backed company, Treum has already piloted a program with the NBA that would authenticate memorabilia such as in-game worn jerseys that are sold during an NBA game via live auctions. While there’s always the possibility of a physical object being tampered with, digital NFTs can act as a better and more automated certification than existing practices.

Gaming items

Gaming assets are already digital in nature, so creating them as digital assets that individuals can own presents various benefits. There are multiple game studios building games that run on blockchain rails including Blockade and Horizon. Axie Infinity, a pokemon-style game has issued creatures called “axes” as NFTs that are used in Axie Infinity’s battling feature. Lastly, there are several platforms like Enjin which are building their own platforms that facilitate game development including the issuance, or minting of gaming assets.

Domain Names

Blockchains inherently make for great asset registries and one of the largest digitally native assets are domain names. Domain names are digital assets that map IP addresses to more human-readable names(e.g. 13.57.64.34 to Messari.io). Ethereum Name Service, Unstoppable Domains, and Handshake are three projects taking different approaches to enable domain names on blockchains.

Content

Music, blogs, tweets, memes, and other digital content can all be issued as NFTs. While that doesn’t make the content valuable it does present unique opportunities for digital ownership and on-chain royalties. Although the distribution of content may remain free for blogs or music, NFTs present unique monetization opportunities for crowdfunding content or selling a blog/song similar to how one might buy vinyl records or old edition books. Decentralized publishing platform, Mirror is enabling writers to crowdfund blogs and sell them as NFTs. Other experiments include the Kings of Leon selling albums as NFTs that provide additional value including lifetime concert tickets or exclusive experiential artwork for an album.

Tokenized luxury goods, e.g. wine

Another interesting area NFTs could have a real-world impact could be luxury goods. Luxury goods are constantly under attack from forgers trying to replicate products. An example of this is Fine wines. One interesting project to note is OpenSea. In February of 2020, OpenSea formed a collaboration with WiV Technology, a blockchain-based unique asset technology designed for wine producers and merchants, to support ERC-721 NFTs that represent physical wine bottles. This is the first time that a physical asset has been brought to the OpenSea platform. As NFT platforms evolve, NFTs will be used to help verify unique physical asset items.

Financial Products

Many types of financial products aren’t interchangeable. For example, your mortgage is unique to your house, length, interest rate, and more. Any simple financial contract can be issued as an NFT and stored on a blockchain. The real estate sector, in particular, suffers from serious barriers to entry, especially for younger people. The application of blockchain technology has the potential to radically change this industry for the better by broadening access, increasing transparency, and streamlining complex transaction processes. Nori has tokenized carbon removal credits as NFT where each Nori NFT acts as a certificate representing carbon removal.

Event Tickets

NFTs can also play a role in combating ticket fraud if every ticket was registered on the blockchain as an NFT. With blockchain-registered tickets, they are tied to their digital counterpart. This means that you can sell them through an online exchange by simply transferring the token. The exchange makes sure that you don’t charge extra, eliminating the risk of ticket scalping. A recent example of this was when the UEFA revealed it will use a blockchain-based ticketing system to distribute Euro 2020 passes to fans’ mobile phones. The digital tickets will only produce active QR codes via Bluetooth once fans are in close proximity to the venues, in a move designed to deter ticket scalping.

Tweets and Social Media Posts

NFTs present an opportunity to turn media into tokenized content. For instance, selling social media posts such as Tweets are the latest use case for NFTs. You have probably seen by now, but Twitter CEO Jack Dorsey is auctioning his first-ever published tweet as an NFT. Dorsey shared a tweet with a link to a digital platform called "Valuables," that facilitates buying and selling of tweets autographed by their creators. This new use case for NFTs opens up the possibilities for selling speech or iconic cultural moments on the web.

NFT Stack - Ecosystem

At the end of the day, non-fungible tokens (NFTs) are simply a primitive of blockchains, like fungible, ERC-20 tokens. But the narrative of NFTs as a category has taken off to refer to a broader trend and thus, similar to DeFi, the term “NFTs” now encompasses its own ecosystem.

However, non-fungible tokens will utilize many of the same financial primitives as DeFi and thus the stack ends up looking fairly similar but with a more consumer-centric lens.

Layer 1: Layer-1s

To date, the NFT landscape has been dominated by Ethereum, Flow, and to a lesser extent Wax. It’s likely that most NFT applications will need to transition from Ethereum mainnet onto a Layer-2 solution or sidechain while relying on Ethereum for the settlement layer. The exception to the rule may be for high-end digital art or blue-chip collectibles that require more robust censorship resistance.

Other base layers (Layer-1s) like Solana are actively building out their NFT infrastructure like Metaplex which enables individuals to set up their own NFT storefronts and issue NFT collections with customizable royalty splits.

Layer 2: Layer-2s & Sidechains

Most consumer-centric applications of non-fungible tokens – gaming, sports, virtual worlds, utility assets, etc – have experienced turbulence on Ethereum. After building CryptoKitties and CheeseWizards, Dapper Labs decided that Ethereum would never provide the robust scalability that the gaming studio required and opted to build Flow. Similarly, even projects like Sorare – that correctly determined where the scalability puck was going – built on sidechains like Loom that eventually shuttered – have struggled in their attempts to achieve the fully desired scale of their NFTs on Ethereum mainnet. Unwilling to rely on another third party, Axie Infinity took the path of building their own sidechain, Ronin, which to date has been very effective at reducing gas costs and increasing user adoption.

As an Ethereum hybrid Layer-2, Polygon’s biggest advantage to date has been its compatibility with Ethereum, which lowered the learning curve for both users and developers. Additionally, Polygon’s use of its token to incentivize bridging onto its network has been incredibly effective. Notably, Polygon is doubling down on NFTs with a new a $100 million fund for gaming and non-fungible token projects.

Layer 3: Storage

Blockchain layer-1s are often limited in the amount of on-chain storage capacity. Because not all NFTs – and the images or websites they reference – are stored on the layer-1 or layer-2 level, NFTs require another storage solution. Arweave offers permanent storage for NFTs while Filecion or Sia can also offer cheaper real-time storage.

Finally, individuals can use services like Filebase or Pinata which provide clean interfaces and enterprise desired services like S3 Compatible Object Storage and service-level agreements (SLAs) for companies that want to use IPFS or other storage layers but have formal and legal agreements in place.

Layer 4: Verticals / Applications

While non-fungible tokens are created and transferred at the Layer-1 or Layer-2 level, the application layer is one potential interface for the issuance of these tokens. Virtual worlds like Decentraland and Cryptovoxels have slowly grown over time as individuals enter the worlds for conferences, art galleries, casinos, and upcoming use cases.

Other applications like fantasy sports have experienced wild speculation, but continue to accrue new users. To date, crypto-based sports applications have been incredibly successful. Non-fungible token sports applications have generated over $800 million in secondary sales and likely over $1 billion when factoring in primary sales.

While issuance protocols that offer the creation of their own unique NFTs (i.e. SuperRare tokens or Zora’s zNFTs) may fit within the application layer, the primary benefit from marketplaces comes from their liquidity which is why I’ve placed those protocols in the financialization layer.

NFT issuance is a commoditizable layer that multiple layers of the stack can facilitate including:

• Layer-1 or Layer-2 blockchains and scaling solutions

• White label issuance protocols (e.g. Nameless is used for Veefriends)

• Marketplace protocols (e.g. Rarible)

• Individual applications (i.e. Sandbox, Uniswap, etc)

• Front end interfaces (e.g. Zapper)

Ultimately, platforms will have to rely on unique utility proposition that they can provide to their users. Virtual worlds can license content while Top Shot cards will be utilized in NBA Top Shot’s game Hardcourt.

Layer 5: Secondary Applications

Composability ensures that other developers can build atop existing applications and protocols.

Decentraland and other virtual worlds will undoubtedly have various applications within their ecosystems such as the online casino, Decentral Games. Additionally, Sorare has created a partnership with Ubisoft which is developing its own fantasy league – One Shot League – utilizing existing Sorare cards. The composability of this layer means that applications or protocols that facilitate third-party application development will have the opportunity to capture more value.

Layer 6: NFT Financialization

Similar to assets within DeFi, non-fungible tokens require similar primitives like lending, liquidity, and asset management. Additionally, while NFTs value proposition lies within their uniqueness, fungibility is important for increasing liquidity and the financialization of NFTs. To date, the projects focused on the financialization of NFTs are attempting to, unironically, make non-fungible tokens as fungible (and liquid) as possible.

Most protocols aiming to increase NFT liquidity have done so by either creating liquidity pools whereby individuals can deposit similar NFTs or fractionalize individual NFTs in order to encourage greater speculation.

NFT Fractionalization

• Fractional – Collectors create fractions of an NFT into fungible tokens which can be combined to redeem the token or the underlying NFT can be purchased for above it’s the reserve price.

• Niftex – NFT owners create shards (fractions) of an NFT into fungible tokens. The underlying NFT can be recovered by acquiring 100% of the shards or via a special buyout clause.

NFT Liquidity Pools

• NFTX – Collectors can deposit NFTs into an NFTX vault and mint a fungible token (vToken) that represents a claim on a random asset from within the vault or redeem a specific token from the same vault.

• NFT20 – A decentralized exchange where individuals can deposit NFTs into pools in exchange for fungible tokens (e.g. 100 $Punks tokens) that are redeemable for one NFT (e.g. CryptoPunk) in the pool.

• Unicly – Fractionalize an NFT collection into uTokens which can be traded. The specific collection (e.g. uPunks) is locked until

Yield Bearing NFT Assets

• Charged Particles – A protocol that allows users to deposit fungible or non-fungible tokens into an NFT. Charged particle NFTs can be programmed with yield-bearing aTokens.

• Uniswap V3 LP positions – By providing liquidity, LPs receive fees based on three tiers of fees for each pool - 0.05%, 0.30% and 1% – corresponding to various price ranges.

Marketplaces

NFT issuance platforms and marketplaces currently make up one of the largest categories of NFT protocols, and are one of the more obvious market opportunities given the business model.

In this regard, NFT issuance protocols and marketplaces will compete based on the following traits:

• Brand value

• Liquidity (depth and breadth of assets)

• Unique features (i.e. unique token standards, royalties, collectors fees, etc)

• Additional service offerings (e.g. partnerships)

While unique features such as royalties and collectors fees can one day be commoditized and built into token standards, they are currently non-standard and therefore act as a key value proposition for many NFT creators and companies.

Long term, marketplaces may aim to become closer to social networks in order to cement users to their platforms. This ironically would be a reverse of social networks like Facebook and Instagram which started as social networks and developed marketplaces afterward.

Layer 7: Aggregators

Aggregators can come in various forms. Some protocols aggregate supply while others focus on the demand (consumer) side. Within the NFT sector, there are really only two primary aggregators – OpenSea and Rarible. Both marketplaces aggregate supply by integrating various smart contracts and eventually blockchains. Since Rarible has only recently integrated the ability to buy and sell non-Rarible tokens on its platform, OpenSea has been the de-facto aggregator in the space.

While many view OpenSea simply as a marketplace, it also aggregates a significant amount of NFT data and metadata – data about the data – which is accessible via its API and can potentially be used for other purposes. Both OpenSea and Rarible continue to create full-purpose platforms for projects and individuals to issue non-fungible assets. As aggregators compete for growth, they’ll continue to expand their asset offerings across multiple blockchains.

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So who captures the value in NFT ecosystem?

NFTs make the internet ownable - we are a point when we already established that scarce, permanent, ownable digital content has value.

Most of the NFT exchanges (i.e secondary issuance platform) charge a fee/commission today from the user/or the creator. However, the real value here lies in how the creator/artist is able to extract value compared to the platform and token issuer as part of the smart contract tokenomics.

NFTs flow through a number of layers from creation to collection. In the near future, all marketplaces will feature curation tokens as an incentive to release on a given platform. Tokens enable curators to signal towards which creators (and individual NFTs) are most valuable. Curators that attract the most sales earn the most rewards.

Curators share in a marketplace’s upside by earning tokens or receiving a percentage of sales when a purchase is made through a referral or based on a curator’s delegated stake. This is drastically different from today where fees are captured exclusively by the core team, rather than a global community of tokenholders.3

When this transition happens, the most active curator (measured by volume and usage) will receive the largest allocations of retroactive airdrops, drastically boosting their signal and curation abilities.

Moving forward, the largest rewards will be captured by those with specialized knowledge of undiscovered talent - essentially playing matchmaker between creator and collector to boost sales on their preferred marketplace(s).

• NFT value is directly correlated to the strength of its underlying community.: NFTs retain and increase their value by creating a diverse network of curators that share in that collection. This is the primary reason why CryptoPunks have performed so well.

• Curators decide which NFTs have value, and which do not: Curators signal to value and offer services like distribution and strategy to enhance that value.

Tl;dr: Key trends you need to watch out for

1. NFTs can unlock the Creator Economy by allowing creators to monetize directly; revolutionizing industries such as Music and gaming first

NFTs are revolutionary because ownership is immutable and irrefutable (for more background, read my first piece on NFTs here). NFTs also expand the pie by letting creators capture future upside. After a piece is sold, its value will continue to rise from the effort an artist puts into future pieces and into building his name. In the past, the artist could never capture that value.4

Spotify captures only ~33%, while artists receive less than 10%. This is in contrast to self-serve marketplaces like OpenSea, Zora, and Rarible, which let anyone mint and list an NFT. More recently, RAC and Zora teamed up on $RAC, essentially the singer’s own currency. Fans can’t buy $RAC, but only earn it by, well, being a fan. Fans earn $RAC by buying merch, supporting RAC on Patreon, and so on.

2. Social tokens can play a key role monetizing individuality for larger creators

Social tokens fall into two categories: personal tokens (fan clubs) and community tokens (social circles.) Both give holders exclusive access to a person or community. Personal tokens can be launched more quickly versus community tokens, which require coordinating a group towards a shared vision. However, community tokens may benefit from broader distribution, which has proven important in web2. As of Sept 2021, the total marketcap of all social tokens was $2B.

Social tokens build on various existing concepts. Fans financially support creators (Patreon), invest in their “stock” (Robinhood), and unlock special treatment for being a superfan (OnlyFans). Social tokens are different from NFTs in that they’re fungible. The brands of the future are people: if Nike, Starbucks, and Apple were the defining brands of the last 30 years, David Dobrik, MrBeast, and Addison Rae are the defining brands of the next 30. Social tokens will let everyday people support their favorite creator, both enabling communities to help create value and to participate in that value creation.

3. Its not about NFTs - the end goal is scarcity & social Networks on Web3

Arguing about whether DeFi is more important than NFTs or whether NFTs, DAOs, or Social Tokens will reign as the dominant social networks of web3 misses the point. Their interconnectedness is what makes web3 so powerful. NFTs create an impetus for people to quickly spin up DAOs, which then serve as NFT market makers. NFTs will act as keys to DAOs, governed according to social token ownership. The metaverse is comprised of the combination of these things, which, in turn, only increase the importance of being able to prove digital ownership.5

If the mantra of web2 was “come for the tool, stay for the network”, the mantra of web3 is probably closer to “come for the culture, stay for the returns.” And the returns are why most people are involved right now. NFTs combine elements of Instagram (influence and image) and LinkedIn (status and prestige.) Depending who you ask, owning a Punk is either like owning a Ferrari or having gone to Harvard.

But there is something more going on with NFTs. It’s not just about status anymore than they’re just a store of value. People held Punks long before they were a flex, and if you ask anyone trading NFTs, they’ll tell you that selling them is the worst part. Maybe that’s because when you sell your NFT, you also lose your tribe. An NFT bonds you with your fellow Apes and communicates to everyone that you belong to a certain group. The public ledger also ties you to a lineage of everyone who has ever owned that NFT. This not only adds a whole new dimension of value to digital art, it elevates you into a new social standing and even ensures your legacy in a way (you’re now an unforgettable part of history). I recently got 75 $FWB tokens to join the revered Friends with Benefits DAO, and can start relating to the sway a close-knit community.

4. DAOs are a crucial aggregation layer for Social Circles

Decentralized autonomous organizations are internet-native collectives that share resources, build products, and work together toward common goals. DAOs, literally and figuratively, are a Discord. DAOs also enable Wall Street Bets (partybids) to actually win against Wall Street sharks (whales) and turn web3 into a massive multiplayer online role-playing game. Amidst this explosion of NFTs and social tokens, DAOs will play the role of aggregator. Aggregators accrued most of the value in web2 and, in web3, DAOs will aggregate by collecting, curating, and moderating.

Social DAOs are the most explicit mechanism by which to combine both social and financial capital. They create digital social circles and can also empower a collective of individuals to flip power dynamics against wealthy individuals. In NFT bidding wars, they can empower a group of individuals to overtake an individual whale (sometimes causing them to switch sides and join the DAO). They also enable co-creation and collective participation in a way that isn’t really possible on web2.

The biggest opportunity web3 has relative to web2, is that web3 doesn’t have to be zero-sum. It’s multi-player and participants literally have a vested interest in each other and the quality of the communities they build. The value generated by web3 should at least accrue to those creating art, contributing content, and building lasting communities rather than siloed monopolies. Participants will finally have a voice and a vote.

5. Whether NFTs are a bubble or not, the underlying use cases can solve real pain points, starting with the creator economy

Big challenges today: Emerging creators lack upfront financing, top creators want to grow their audience, early fans want validation in being part of a creator's community and equity ownership > subscriptions.

NFTs can attempt to solve these through creator-issued collectibles (concept of equity ownership), exclusive, limited edition NFTs for early fans; NFTs to confirm participation to an online program, NFTs with "voting rights" to a selected group of super fans, build online communities weaving in NFT rewards etc. For the fans out there, scarcity and investment attractiveness, social validation, autonomy from centralized platform censorship can be powerful motivators.

5. Utility of NFTs will expand pretty quickly beyond trading and displaying

In 2021, some of the most interesting utility cases for NFTs will be around using as collateral in DeFi, lending/renting, creating social experiences around NFTs, using as an in-game item, membership (access, permissions, status) within a community or cross-communities etc.

NFTs being issued as tokenized carbon offsets and uses to enable national governments to issue and exchange ParisAgreement carbon credits to enable cross-border collaboration on emissions reductions. In-game asset nfts in "metaverses" such as Decentraland, cryptovoxels, AxieInfinity are land, clothing, creatures, weapons, etc, and even galleries showing off art NFTs. Once NFTs take off in the gaming industry, it will blow art NFTs away.

Some resources to keep up with the ever changing NFT landscape

Starter Guides

• NFTs and a Thousand True Fans

• WTF are NFTs?

• Collecting NFTs and Digital Art

• Beginners Guide to NFTs

• Non Fungible Tokens - NFTs are Transforming the Digital Art World

• Into the Metaverse

• NFT Skeptics Guide

• Analyzing Cryptoart Marketplaces

• The First $100M in NFTs

Data Platforms

• Crypto Art

• Crypto Art Pulse

NFT Newsletters

• Metaversal

• Zima Red

• Cup of NFT

Podcasts / Youtube Channels

• DCLBlogger

• Metaverse Musings

• The Bull Case for NFTs

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When excluding the $9.7 billion capital injection by Block.one into the crypto exchange venture Bullish, the second quarter saw $6.2 billion in private funding directed toward the digital asset industry, as shown in the chart below. This represents an approximately 90% increase quarter-over-quarter!

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Let us dive deeper into the VC space in blockchain and crypto to see how the industry has matured over time and what emerging areas are getting investors excited.

Crypto deals are becoming bigger

In the past year, Crypto financial services companies and infrastructure-focused companies drew the most venture interest. The increased funding was driven by several big rounds from firms included in this top 10. These companies raised a combined total of ~$4B.

The largest rounds were - FTX (Crypto exchange valued at $18B in $900M funding round) and Circle (creator of USDC which now wants to be a bank raising $440M)

In comparison some of the largest deals in 2020 were tad bit smaller, but also had similar themes with largest funding rounds going to exchanges & custodians (Bitso, Blockfi, Bakkt) and infrastructure (Paxos).

In 2021, with Andreessen Horowitz launching $2.2 billion crypto fund, and many others reserving dry powder for the industry - blockchain and crypto deals are only set to become more competitive and larger in nature. Historically, one of the most active firms is Pantera Capital. Based in the US, Pantera Capital focuses exclusively on projects related to blockchain technologies. The company has had 113 investments since 2014 and is the lead investor of 31 organizations. Even as the older funds continue to be very active, 2020 also saw the emergence of strong activities from highly focused and fast growing funds. In particular, TRGC stands out with its 23 investments across the layer 1 and 2 DeFi project category. For most active VCs see this list.

Blockchain VC industry is maturing

An increasing number of traditional venture capital firms are investing into this space; however, blockchain private equity still amounts for less than 1% of the global venture capital market. This signals the high level of risk associated with blockchain private equity, but this also signals just how early we all are in this space and that there is still room for significant growth in the future. During the 2017 crypto bull run, blockchain venture capital almost reached 2% of the VC market. 2021 may be similar due to market momentum surrounding the Bitcoin halving and the stimulus action of governments.

In comparison with the trajectory of “internet-specific” VC investments, this puts the blockchain industry in a period similar to the early 1990s, about a decade before the dot-com bubble. Between 1990 and 1994, internet-related deal flow grew from 0% to 5%, peaked at over 45% in 2000 and has since corrected to a stable 10% – 20%1

Over the past few decades, we have seen a gradual shift from fully centralized economies to platform economies. This process is characterized by the realization of large companies that they cannot effectively compete with crowd-sourced contributions. Some examples of this are social networks, such as Facebook or YouTube, where content is exclusively produced by the platform users (both with and without external incentives). Similar examples are Airbnb and Uber, where the company does not possess the infrastructure for the offered services but, rather, just facilitates transactions via its platform.

In a decentralized protocol-based economy, the protocol is the intermediary and the protocol itself is maintained by community contributors. There can still be centralized services offering interfaces to the protocol, but the success of the protocol itself no longer relies on any individual company.

We are also seeing many top banks become active: 55 of the top 100 banks by assets under management have made investments in the blockchain space as of July 2021.

They invested in 71 companies in 17 different areas, through a total of 99 investments. An impressive 68 of these companies are still active as of July 2021.

The companies that have received the most investment by top banks are Circle ($711M), Dianrong ($649M), Ripple ($392.9M), NYDIG ($355M), Paxos ($340M), Digital Asset ($262.12M), Fireblocks ($179M) and Lukka ($97.3M).

Areas in Crypto attracting most VC funding

With the fundamental blockchain infrastructure already built, venture capital focus is now shifting to higher layers of the tech stack: (1) functionality and (2) apps. For example, if TCP/IP and HTTP are the foundational protocols for the internet, Ethereum and other smart contract platforms are becoming the foundational infrastructure layer on top of which various blockchain applications are built. As each layer develops, it becomes the foundation for the next one. The currently thriving world of decentralized finance would not have been possible without Ethereum as a base layer (to read more, refer this article on Cryptechie)

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In 2020 capital went into these areas, by order of magnitude:

1. Blockchain infrastructure: 38%

2. Trading infrastructure: 23%

3. Wallets: 15%

4. Crypto exchanges: 12%

5. Payments: 11%

6. Compliance and regulation: 3%

In my opinion, “access to crypto” theme will continue in 2021 with exchanges, wallets emerging locally in each region/geography. This implies that funding to crypto infrastructure, compliance and regulation will only become bigger in 2021. Investors are still betting on custody, tax, data, and protocol infrastructure to improve the industry’s user experience.

According to the Block, out of the most active investors, year-to-date, Coinbase and its venture fund have made the most blockchain investments, coming in at 25 deals. The firm invested broadly across the ecosystem, with no one category making up more than 20% of its investments. By contrast, the second-most active investor this year, Alameda Research, has adopted a more concentrated approach. More than half of Alameda’s investments are DeFi projects, with the Trading & Exchange category as the second-most popular category. The Hong Kong-based quantitative cryptocurrency trading firm’s deal flow has noticeably risen this year, with strategic-style investments benefiting FTX and Serum. Of all the funds, Digital Currency Group remains the most focused on the Banking & Payments category with investments in Avanti Financial Group, Circle, Coinme, Lolli, Transparent Systems, & Wyre.

Investing themes in 2021 to watch out for

1. Existing companies raising larger rounds in a shorter time span will get an egde in key markets & verticals

Exchanges and wallets (both centralized and decentralized) are likely the first battle frontier which benefit from economies of scale, brand and distribution. We are likely to see investors ‘double-down on many of the companies as the massive need for supporting the crypto-economy unleashes a spike in growth for many players putting ‘growth capital’ in play quickly. While there will be unintended consequences and many large companies may not survive when metrics come under a microscope, the overall crypto-economy will be the ultimate beneficiary.

The majority of blockchain investment deals have been in the seed round. Between 2012 and 2020, there were ~1,500 recorded deals in the seed round compared to 248 angel investor rounds and 378 Series A. Interestingly till last year, only five companies had done a Round D or E including: Circle, Coinbase, High Fidelity, TradAir, and Robinhood, although Robinhood’s crypto trading abilities does not really make it a “blockchain company” like Circle or Coinbase.

For example, Chainalysis, a blockchain analysis company, secured $100 million in Series E financing in June 2021, bringing its total valuation to a staggering $4.2 billion. It had previously closed on $100 million in Series D financing in March 2021, doubling its valuation to over $2 billion. The round came just four months after the company secured a $100 million Series C round at a $1 billion valuation. This highlights the tremendous growth of the cryptocurrency industry.

Internationalization will be a key growth catalyst for companies as in the de-centralized world, its easy to unlock crypto-to-crypto transactions globally. Investors will seek out companies that can strike a balance between de-centralization & regulation as crypto company rapidly scale across geographies.

2. Crypto infrastructure will remain a key focus, as ‘arms dealer’ in the global arms race for digital assets

Overall, the industry is maturing as each crypto cycle attracts a new wave of first-time retail and institutional investors and exchanges, wallets become larger. This could result in an “arms race” to become the arms dealer to crypto companies similar to the one we have seen unfold in fintech. In fintech, we have witnessed vertical infrastructure players such as Galileo, Marqeta, Drivewealth etc. (refer this Cryptechie article) arm the neo-banks & tech companies to launch fintech products faster. We are likely to see a similar trend unfold in Crypto, where companies such as Paxos, Circle, Coinbase Cloud, Chainalysis, Taxbit etc. will create the new infrastructure API layer across identity, compliance, trading, wallets, payments, DeFi, NFT etc. to empower “any company to become a crypto company”.

The accelerated pace of financial service crypto announcements through the back half of 2020 should provide incremental motivation for new entrants on the margin to consider "exploring" the digital asset industry in 2021. What do they have to lose at this point when you have Square selling billions of dollars of bitcoin a year, and PayPal, Visa, and Mastercard all ramping up ways to get more active in the space? One of the most apparent use cases for crypto has been trading and speculation — and it's not just native crypto exchange and brokerage businesses that have capitalized on this. Fintech discount brokers, wealth management platforms, and even more traditional financial services companies like Fidelity are in on the secret that offering crypto purchase and trading capabilities is an easy way to: a) increase monetization per user, and b) build stickiness and goodwill with key demographic

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PayPal made headlines when it announced that it would offer crypto services similar to those available in Square’s Cash App. The firm partnered with Paxos and used its brokerage service to obtain a conditional license from the New York Department of Financial Services. Firms such as PayPal will be tasked with either producing its crypto services and offerings in-house and through partnerships, or if it is better served acquiring a company in the space. Logistically, it may make more sense to start with partnerships, build relationships with existing players, and evaluate the demand/utility of crypto services before making any significant deals. Naturally, Brokerages & Custody firms that provide the infrastructure needed for mainstream companies to offer crypto services will be an area of interest.

Some interesting examples here to watch out for:

• Compound Treasury: designed for non-crypto native businesses and financial institutions to access the benefits of the Compound protocol. They offer High-Yield Interest Powered by USDC of upto 4%. By working with Fireblocks and Circle, Compound Treasury has built a product and flow-of-funds that enables neobanks, fintech startups, and other large holders of U.S. Dollars to access the interest rates available in the USDC market of the Compound protocol, while abstracting away protocol-related complexity including private key management, crypto-to-fiat conversion, and interest rate volatility

• Circle: Circle API Services comprise a suite of infrastructure for diverse digital currency payments and treasury use cases. Their yield services allow anyone to earn interest on USDC lent into collateralized borrowing markets.

3. VC funds will seek M&A of portfolio companies and start driving some consolidation

Crypto exchanges have spectacular revenue generation capacity, and — unlike miners for whatever reason — are much more likely to expand into new industries, as well as acquire down the value chain. Adjacent opportunities abound given the industry’s long term Metaverse thesis, as well as the need to catalyze institutional financial adoption, thus leading to acquisitions across the banking, data, gaming, and media sectors.

Over time, we think the value chain will be controlled by fewer players and end up more coherent and standardized. Vertical integration examples include institutional investment shop Galaxy buying crypto custodian BitGo (to be able to have more control over assets under management), Coinbase acquiring Xapo , PayPal acquiring Curv (to get closer to onchain assets), or Binance buying CoinMarketCap (to acquire customers into the exchange). As a company, you want to be fast and take out manufacturing costs.

Coinbase, Binance, and Kraken led the way in 2020 according to data from The Block. If we were to consider 2021, the story would also include FTX — the $18 billion crypto derivatives exchange which bought portfolio app BlockFolio and has a tight connection to specialist blockchain Solana.2

Binance kept its top position as the industry leader in trading volumes and acquired data giant CoinMarketCap for $400 million to strengthen its top of funnel. FTX was one of the fastest growing and most innovative exchange operators of the year, and it acquired Blockfolio for $150 million for many of the same reasons. Kraken-backed Cryptowatch entered the list of top data sites. And Digital Currency Group leveraged CoinDesk’s (virtual) events business for a financial advisor event that introduced its prime brokerage and asset management services to new clientele. Oh, and DCG even went the other direction too, acquiring an exchange of its own in Luno.

4. The unbundling of centralized exchanges

Exchanges remain at the center of the crypto universe for three reasons: 1) they make all the money in an industry fueled by trading fees; 2) they haven’t yet been forced to unbundle certain functions for technical and regulatory reasons; and 3) most users are complacent, and trust exchanges as de facto custodians.

Most crypto services boil down to exchange, custody, and information. If you want to buy or sell, send or receive, lend or borrow, or create or redeem a blockchain-based asset, then you need a centralized exchange or a smart contract with similar capabilities. Then you’ll need somewhere to store those assets (by yourself or via a hosted service), and stake and vote as needed in crypto’s participatory economies. Finally, you’ll need quantitative data to feed your services, events monitoring to ensure your custodial setup stays in sync with network developments, and general research and education tools for buy/sell/ hold updates.

This year’s primary crypto infrastructure question is simple: do you believe exchanges will continue to aggregate all of these critical functions under one umbrella? Or are they at risk of being replaced or unbundled. In three years, Uniswap has grown from a proof-of-concept built by a novice developer (former mechanical engineer) and funded by an Ethereum Foundation grant to a top ten global trading “venue,” and a multi-billion dollar token project!

One of the ways other tech companies are driving a wedge in this space is through the Crypto debit and credit cards which have the potential to onboard millions more into the ecosystem. A growing list of crypto-to-fiat debit rewards programs on the market (that is nearing close to +50 unique card programs) is an indication that this market has surely evolved in 2020. Beyond BlockFi credit rewards card, news that Square Cash App offered a 5% bitcoin-back boost reward for any three transactions using its Cash Card— a special Boost promotion over two days and for a max payout of $7.50 — offers a completely different calculus in terms of onboarding new users into bitcoin, especially relative to other crypto card programs. For context, Cash App sees ~30 million monthly active users base (and more than 80 million customers in to total as of 3Q’20). Venmo credit cardholders can now also use monthly cash back in their Venmo account to auto-purchase cryptocurrency of choice, with no transaction fees. Should other recent fintechs that have launched a crypto offering (SoFi, Robinhood, M1, etc.) look to use crypto-rewards tied to debit card transactions, this could significantly expand the number of people that own crypto in the U.S.

5. Institutional adoption will drive need for full “prime
services" offering

One of the most common investing themes that will emerge in 2021 will be the clear need for a "full prime services" offering for institutional investors who need a piece of crypto action. This phrase refers to a company or service that exists in the middle of the market and offers a single source of spot and derivatives trading aggregation, margin extension, custody services, capital introduction, and even trade offerings from different core starting points: custody, market-making/OTC, borrow/lending, derivatives, clearing/settlement functions and execution. Looking ahead, the consensus view among market participants is that many institutional digital asset providers will expand their offerings across these verticals to become the crypto sector’s version of a traditional prime broker. In 2020, a handful of companies made strategic acquisitions or launched new lines of business in order to build towards full prime offerings.3

6. Blockchain data, analytics and tax is attracting a lot of attention

An expected increase in regulatory and compliance mandates for the industry will make data, tax, compliance & analytics companies more attractive. Chainalysis’ recent $100 million raise valued the blockchain analytics firm at $4 billion. More consolidation within the sub-sector should be expected as firms compete to become the premier data provider. While the deal was small in magnitude, CB Insights’s acquisition of Blockdata may signify what’s to come in the M&A market. Specifically, more external players could potentially become interested in entering the crypto market. From CB Insights’s perspective — which is likely shared by other external players — the development and deployment of digital currencies by central banks and financial institutions have brought credibility to the industry. This sentiment, paired with banks and fintechs entering the space with new crypto offerings, has also provided an extra degree of credibility to the industry. Specifically, more external players could become interested in entering the crypto market, particularly in sectors prone to consolidation, like crypto data and analytics and infrastructure providers. Branching from data & analytics, crypto tax software companies like TokenTax or Lukka, which analyze users' trading data and determine taxes owed, will be potential targets for exchanges, external players such as Turbotax, or even brokerages that want to add to their product suite.

Crypto tax software Taxbit raised $133m at a $1.3bn valuation. Taxbit provides reporting software to the IRS for institutional clients.  This is a timely raise given the infrastructure bill and the global push to tax the Crypto industry. Keeping up with Crypto tax reporting is hard; this software is selling shovels in a gold rush.

7. DeFi continues to dominate the pie for VC investments

The investment of capital in DeFi applications was a dominant theme in 2020.You can read more here on Cryptechie on how “How DeFi is eating financial services”.

The success and quality of new projects have attracted involvement by some investors who previously had little exposure to this sub-sector before this year. As per the Block, the DeFi segment was the most popular category and accounted for roughly 20% of all venture deals. In aggregate, of the 121 companies, the most active investors allocated toward, roughly 31% were DeFi-related.

Decentralized Finance Decentralized platforms for financial products connect the real world to the digital world via wallets and on-ramps, driving mass adoption and engaging noncrypto users through financial rewards and other benefits.

VCs made the first steps in the field of DeFi back in December 2017 when MakerDAO raised $12 million in a round led by Andreessen Horowitz and Polychain Capital. Following that, 2018 can be categorized as the year of the first big wave of VC capital inflow to the emerging segment. The backbone projects of the DeFi industry, such as dYdX, Compound, Universal Market Access, Argent and Set all raised funds during 2018. In aggregate, the five startups collected $28.2 million in equity and token sales during those early days of DeFi.

From 2019 on, the sector has been growing exponentially in total value locked in decentralized finance protocols, and so has the importance of VC-led funding. After the explosive “summer of DeFi” in 2020, venture capitalists are more confident about the product-market fit of their portfolio projects. During late summer and autumn of 2020, funding rounds for DeFi protocols were publicly announced at a quickening pace, with venture capitalists, such as Polychain Capital, Framework Ventures and CoinFund, being heavily involved.

There are five main verticals inside the decentralized finance segment: trading and exchanges (including liquidity and derivatives projects), lending, infrastructure, data and analytics, and a side category for other startups. With 18 funds active in funding DeFi projects, the map comprehensively represents the fundraising activity in the DeFi industry as well as portfolios of the dominant players. Of 220 venture capitalists that participated in at least one publicly announced funding round, 28 have carried out 6 or more DeFi investments in 2020, and more funds are joining the group of DeFi backers.

The biggest boon for crypto in the past year has been the explosion of crypto credit markets. Centralized, retail-facing services like BlockFi; institutional lenders like Genesis, BitGo, and Galaxy; and DeFi lending protocols like Compound, Aave, and Maker, all had banner years, and helped bring greater liquidity and stability (long-term!) to the hyper-volatile crypto markets. At the same time, they helped drive usage of new applications that require stable base currencies, tighter trading spreads, and fewer inter-platform price dislocations. Most importantly, credit kept assets locked in the crypto economy, and away from the taxman.

In the past, if you had a major expenditure like a down payment for a new home or a student debt repayment, and you wanted to fund that payment with crypto gains, you’d take a massive capital gains tax hit and miss out on upside for the underlying portfolio. Today, things are different. It’s reasonable (if not smart) to take on over-collateralized loans with healthy margins of safety to pay for one-time expenses like a new home. The availability of on-chain collateralized credit in both DeFi and centralized services could seriously reduce selling pressure in the next uptrending market. That’s true for both retail and institutional investors alike. A shock that sparks cascading liquidations is always a doomsday scenario, but that seems like more of a risk later in the cycle than early on. It’s more likely the crypto credit market’s maturation makes this the most liquid bull run yet.4

8. Gaming, metaverse and other media & entertainment will emerge as mainstream application for NFT, Web 3.0

2021 will be the year for non-fungible tokens. NFTs are virtual data units stored on a blockchain—often used to certify unique ownership of a digital asset that could represent a myriad of digital and real-world items, such as art, music, games, videos, or collectibles. We’re already starting to see their very early development in 2020, but 2021 will be the year of more mainstream amplification for these digital collectables. You’re going to see gaming companies tapping into fashion-inspired NFT companies as they create unique skins and collectables designed by and for their community at large. You’ll see more artists leverage the power of unique digital collectables to amplify their value offering to their fans. You’ll continue to see more exciting experimentation done around digital art, new mainstream collaborations, and more.

Investors have poured $90 million into NFT and digital collectibles companies so far in 2021, according to data shared with CNBC by Pitchbook. That’s almost triple the $35 million that NFT start-ups raised last year. The largest deal was for Sorare, a blockchain-based fantasy football game, which raised about $50 million in February from VC heavyweights like Benchmark and Accel, as well as soccer star Rio Ferdinand

Polygon, a maker of a crypto-based platform for nonfungible tokens (NFTs), has set up a $100 million fund for projects aimed at combining the hot blockchain technology with gaming. To cater to game companies, Polygon is setting up Polygon Studios to focus on gaming projects so that developers can fuse their Web 2.0 games with the Web 3.0 decentralized technology.

Ultimately, NFTs are a vehicle by which one can sell specific ownership rights of an asset, without granting full benefits of the ownership itself, provided that the asset’s value is not dependent on physical use. Although NFTs are trending primarily in the art world at the moment, there are other assets , such as diamonds, gold or land, that could be the next NFT trend.  The marketplaces will need to adapt to these new asset categories to survive. “NFTs are digital assets where we are seeing increased interest from our clients, whether that be NFTs of art or sporting moments -look at Kinsale Spirit’s recent auction of a digital representation of a rare cask of 20-year single malt which raised over €80,000.17 The convergence of digital and physical experiences are what NFTs can enable. As digital assets continue to evolve, we’re closely watching NFTs and exploring how we support clients today, and in the future.” 5

The most cited example here is Axie Infinity— a crypto-meets-Pokémon game in which players raise, battle, and trade cute NFT pets called Axies —which caught the majority of the crypto world by surprise with its impressive growth and revenue figures through the vertically integrated ecosystem created over time. There are currently over 500,000 players engaged with the game and many using it to make a living in the Philippines. In the last week alone, Axie Infinity  generated roughly $40 million in revenue, more than all of Ethereum's gas fees in the same period. In the chart below, Axie Infinity shows a revenue of $300M+ in last 30days - more than next 10 protocols combined, including uniswap, binance smart chain, aave etc.

Virtual worlds & gaming will drive tokenization of assets and mass adoption and blockchain interaction by non-crypto consumers, who are active users of large gaming projects. Gaming, media and entertainment are likely the first industries we start seeing product-market fit for protocols. We’re having digital first generations who are going to live in the Metaverse, who are buying land, who are buying clothes, who are buying experiences there, it creates almost like a second huge market for consumer goods and experience.

9. Every Venture fund will become a Crypto VC; VC DAOs may emerge to upsize traditional investing

For consecutive years, six of the 10 most active funds in 2019 were once again among the most active funds in 2020. These firms include Coinbase Ventures, Digital Currency Group, Dragonfly Capital, NGC Ventures, Pantera Capital, and Polychain Capital. Now, we are seeing many all types of funds - traditional funds, large marquee VCs, hedge funds etc. - jump into this space. The chart below shows the ever expanding universe of VCs with Corporate VC arms leading the way, including AU21 Capital, Binance, CMT Digital, IOSG Ventures, ParaFi Capital, and SNZ Holding. The three most common investments between the most active funds were Acala Network, Amber Group, and Dune Analytics.

Future trend: The death of VC funds? Someday, there might be a different way of investing — VC DAOs. A decentralized autonomous organization has certain features that make it ideal for fundraising, investing and supporting a project through a period of rapid growth. The network effect and ability to crowd-source investment are particularly effective at raising awareness among potential users, investors and developers, with fewer formalities associated with raising capital via a VC. Some DAOs are encroaching on the early-stage fundraising market, an area previously controlled by VCs and angel investors. Investing in a DAO is relatively easy, especially if you know how to buy Ether and already have a crypto wallet. DAOs have much more flexibility to invest in novel strategies beyond equity investing and even basic token investing. They can make OTC markets for unlisted assets, invest in managed trading funds, sponsor teams in competitive crypto gaming leagues, buy and securitize NFTs, and generally monetize any new trend the crypto-native asset class spawns next. VCs still maintain a number of key advantages, such as more legal and regulatory clarity, strategic support and personal connections to other industry players. Those VCs looking to innovate can consider how a DAO uses network effects and influencers to rapidly conduct due diligence, fund and raise awareness for projects. Not all of these advantages are unique to DAOs but, instead, are a bi-product of open and transparent business operations. Notable examples of VC DAOs as per Cointelegraph:

1. MetaCartel Ventures is a for-profit community that targets Ethereum DApps and includes prominent Ethereum developers, such as Stani Kulechov of Aave and Hugh Karp of Nexus Mutual

2. The LAO is a member-directed venture capital fund registered in Delaware that has already backed over 30 blockchain projects

With around 300 million users as of 2021, crypto is more ubiquitous than ever. That being said, there’s still plenty of room for crypto to grow and spread worldwide; despite the growing numbers, 300 million crypto users is only 4% of the world’s population. This is the most exciting stat on the crypto space and what gets me going everyday!

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With the upcoming upgrades, Eth is evolving to be the ultimate triple point asset - as a capital asset, a store of value and a consumable asset (more on that later). I have invested more than half of my crypto portfolio in Eth, which also represents a sizeable share of overall investments. Mark Cuban said on a recent episode of  The Delphi Podcast that his portfolio allocation is broken down as: “60% bitcoin, 30% Ethereum and 10% the rest”. Why is everyone so bullish on Ethereum?

Let’s take a simple analogy, comparing PayPal and Ethereum as money transfer networks. It is really interesting to note that Eth moves more payment volume, is leaner with resources, growing faster and has not even unlocked its full potential yet.

The main thesis why Eth has been called ‘ultrasound money’ and might be the most investable asset class right now is based on the following arguments:

1. If you believe in Blockchain and its evolution to be as revolutionary as internet, then Ethereum will emerge as the underlying code infrastructure

2. Smart contract functionality of Eth (due to turing completeness and composability) makes Eth the “Excel of Blockchains”

3. Eth is emerging as a ‘world computer’: the backbone of a decentralized internet and the settlement layer for web 3.0

4. Eth adoption has already gone mainstream: there are strong long-term demand drivers and network effects in place

5. Ethereum holders will start making a lot of money: EIP 1559 together with ETH2 improve performance while dramatically altering where value accrues in the Ethereum ecosystem (lower supply + deflationary)

6. Eth may emerge as world’s most efficient triple-point asset simultaneously serving as ‘Store of Value’, ‘Consumable Asset’ & ‘Capital Asset’; making it ultra-sound money

7. ETH will be the dominant Layer 1, despite challengers (Solana, Cardano, Flow etc.) as most will be complementary to Eth ecosystem

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Lets dive deeper into each of these and unpack the arguments

1. Ethereum will emerge as the underlying code infrastructure for blockchain

“The most bullish thing for Ether is to be understood.”

What if I told you about a business with strong network effects and 200x YoY revenue growth that was preparing to offer a 25% dividend and implement a permanent share buyback program? Is that something you might be interested in?

That’s pretty much Ethereum. It’s one of the most fascinating and compelling assets in the world, but its story is obfuscated by complexity and the specter of crypto.1

Launched in 2015, Ethereum is a decentralized blockchain like Bitcoin, but is far more programmable, meaning other applications and currencies can be built on top of it. Its native cryptocurrency is Ether, which today stands as the second most valuable cryptocurrency after Bitcoin. Perhaps even more interesting, transaction fees on the Ethereum network have recently approached $15 million per day, meaning there's a real and growing demand to use the Ethereum network.

Historically, we've seen all sorts of things, like one simple non-financial application, is called ENS, the Ethereum name system, the equivalent of DNS but on a different network. The idea is that it's just a name registry service and it maps human-readable names. For example, Justin.eth to a machine-readable address, which is a long string of numbers and digits. This will be the equivalent of translating, let's say, google.com to an IP address. The beauty of doing it on Ethereum is that you remove the very messy infrastructure of registrars, ICANN, and DNS, whatever the root nodes and whatnot. Basically, you collapse all this messy trust infrastructure into just code, and you just need to read the code. It's very few lines of code, and that's this registry, which is the mapping from human-readable names to machine-readable addresses. Now, that was one of the early use cases. What we're starting to see right now in terms of real traction is really in the financial space. We call this space generally decentralized finance or DeFi. But now we're kind of basically expanding the layers of complexity of DeFi. Now, we're starting to see all sorts of crazy things happening on DeFi. We have lending platforms, like Maker and Aave. We have prediction markets. We have insurance markets. All of these are basically what we call money legos. They're pieces of infrastructure, which are credibly neutral, and trustless, and the public good. Even though they have a well-defined creator, that creator has no unfair advantage over this piece of infrastructure. You have these money legos and they have a superpower, which is that they are compostable. We're starting to see organically these somewhat complex economic structures forming just by mushing together and mixing and matching these various money legos. Right now, we're in a period of extreme experimentation, which is very thrilling and exciting.2

How Blockchain is similar to Internet in early days

Because it’s Ethereum’s native asset, ETH has a privileged position inside Ethereum’s economy.3

• It is the only asset on Ethereum that wasn’t issued by a smart-contract, and therefore has no smart-contract risk.

• It’s native to the Ethereum protocol, so it has no counter-party risk.

• It has assurances towards its scarcity, because any monetary policy failure is a risk to the Ethereum network, not just the DeFi apps on top of it (aka, we’ll have bigger things to worry about). 

ETH is the most trustless asset on Ethereum because every asset other than ETH has some compromise to its trustlessness. Without ETH, DeFi apps would be forced to capture value in tokens that have centralization risk dependencies - Bankless

2. Smart contract functionality makes Ethereum the ‘Excel of Blockchains’

Blockchain is essentially a coordination platform for people on the Internet, who don't necessarily trust each other or know each other. It's kind of extending the superpowers of the Internet. The Internet, in its first stage, gives us incredible communication powers with real-time video and whatnot. Now, we're extending this to the ability to be this trust platform for people who don't trust each other. It's a way to build ties, and that's very powerful because trust is everywhere in our society. The way that trust is mediated today is largely through companies, corporations, institutions and, to large extent, mediated through legal contracts. Here, we have an opportunity to have programmatic trust, if you will, or trust that is native to the Internet, which does not involve so much human intervention. It's more trust in the code, trust in the mathematics, trust in the technology. And this really opens up all sorts of exciting innovations as per John Colossus, a researcher at the Ethereum Foundation

Ethereum is a Turing complete, programmable blockchain that lets anyone build full-blown applications using smart contracts. People can build all sorts of decentralized apps (dApps) on top of Ethereum, plugging into the blockchain and the surrounding ecosystem to provide everything from security to identity to payments. Decentralized Finance (DeFi) apps, NFT marketplaces, Decentralized Autonomous Organizations (DAOs), and games and virtual worlds can all be built on top of Ethereum, all fueled by the native currency, ETH.

If there is a core product design lesson to learn from Excel, it’s that combining usability with flexibility is both incredibly difficult and incredibly rewarding….

A design principle for developers is to make any one piece of software really good at one specific thing, deliberately constraining its capabilities to a specific domain. Excel is a truly remarkable exception to this rule - it is something of a choose-a-phone, and clearly hundreds of millions of people do want to compose for it.

You could replace “Excel” with “Ethereum” and it works perfectly - Packy McCormick from Not Boring

• Turing Completeness. If something is Turing complete, it means that it can solve any reasonable computational problem. With the introduction of Lambda, which lets users create their own formulas, Excel became Turing complete. With Ethereum, you can write smart contracts that can solve any reasonable problem.

• Composability. In Excel, “You can chain functions, passing the output of one function as the input to another, allowing for an enormous number of potential computational pipelines. Each time Excel adds a function, the power and flexibility of Excel is multiplied, since that new function can be chained to a large number of existing functions.” This is very similar to the idea of composability, or “X Legos,” on Ethereum.

Together, Turing completeness and composability mean that you can build smart contracts to compute anything, and then chain them together to build increasingly complex things, more quickly. It takes time to get the engine revving, but it should move quickly once it’s moving.

The smart contract technology has made it possible for artists, meme-makers, and musicians to sell their virtual wares is also fueling a new, decentralized alternative to the current financial system. In that alternative system, which is designed to economically empower individuals, capital will flow through open-source protocols that are faster, cheaper, more transparent, and available to all.

NFTs are mostly issued on the Ethereum blockchain — taking advantage of its “smart contract” functionality — and can generally be bought or sold on marketplaces dedicated to them. (While they’re getting huge buzz now, NFTs aren’t actually brand-new. You might recall the 2017 craze around Cryptokitties, a digital-cat-trading game.)

3. Eth is emerging as a ‘world computer’ and the backbone of a decentralized internet (web3)

Ethereum is so much more than a cryptocurrency. It’s a “world computer,” and the “value layer” of the internet. It lets people build apps and products with money baked into the code. If you believe that web3 is going to continue to grow, then you likely believe that over time, Ethereum will become the settlement layer of a new internet. All sorts of transactions, whether they happen on Ethereum, another blockchain, or even Visa, will turn to Ethereum to exchange funds and keep secure, immutable records. 

Owning ETH is like owning shares in the internet. Demand for ETH will go up with increased web3 adoption, while upcoming changes will decrease the supply of ETH and let more value accrue to holders. It’s like a tech stock, a bond, a ticket to web3, and money, rolled into one.

In addition to the ultra sound properties of ETH found at the protocol level, DeFi is in relentless competition to make ETH the most capital-efficient asset possible. These applications need to win this competition to stay relevant. As we know, competition is good for the consumer… and the way it becomes good for the consumer is by making the assets they hold more capital efficient.

Every asset is different, and each one captures these positive externalities of DeFi’s competition in varying amounts. The measure of how well different assets on Ethereum are capable of capturing these capital efficiency tailwinds is likely

Ethereum is so many things at once, all of which feed off of each other. Ethereum, the blockchain, is a world computer, the backbone of a decentralized internet (web3), and the settlement layer for web3. Its cryptocurrency Ether, is a bunch of things, too such as internet money, ownership of the ethereum network, yield-generating asset, a store of value (SoV) and a bet on more on-chain activity, or the web3 future.

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4. Eth adoption has gone mainstream with strong demand drivers and network effects

In the world of crypto, Bitcoin is king. But in the years since Ethereum's 2015 arrival, the second-biggest cryptocurrency has been gaining ground via innovations (from DeFi to NFTs) made possible by its smart-contract compatible blockchain — leading fans to claim that ETH could one day overtake BTC in market capitalization. In crypto slang, this is an event known as the flippening. Now, some major analysts are making similar predictions. Is it really a possibility?4

• Ether "looks like the cryptocurrency with the highest real use potential," argues a new Goldman Sachs analysis, which predicts that ETH’s value could eventually overtake BTC’s. Ethereum’s advantages include the ability to run applications like DeFi protocols. (Goldman also predicted that England would win the Euro 2020 final, so maybe take this with a grain of salt.)

• Mad Money’s Jim Cramer is also betting on ETH. "I think [Ethereum’s] just got a little more game… Because when you go buy an NFT or anything like that, everybody wants it in Ethereum."

• ETH proponents are watching a major upgrade planned for this summer, which they believe will have an impact on prices. Among other changes, the upgrade (called EIP-1559) is designed to reduce the supply of new ETH over time — assuming demand remains constant, prices should rise.

• As of Aug 1 2021, ETH’s market cap ($310 billion) is more than 40% of BTC’s ($775 billion). But ETH has often surpassed BTC by other key metrics. In June, the number of active addresses using Ethereum briefly surpassed Bitcoin. The daily value of Ethereum transactions also regularly exceeds Bitcoin’s. On July 7, for example, ETH settled $9.4 billion worth of transactions compared to BTC’s $6.7 billion.

Why it matters… Of course, many observers remain skeptical. Bitcoin is more valuable and has been adopted as a gold-like store of wealth by a range of corporate treasuries and Wall Street funds. But popular use cases for Ethereum’s flexible blockchain continue to bubble up (how many people were talking about NFTs a year ago?) — and with emerging technologies anything is possible. Regardless, there’s plenty of room for both ETH and BTC to grow.

Another indicator of rising mainstream engagement? Reddit message boards dedicated to Ethereum (as well as crypto generally), have seen a surge in new subscribers in recent days:

Institutional adoption of Ethereum: In large part due to stablecoins’ popularity as a non-volatile method of sending value between exchanges and DeFi protocols, the Ethereum blockchain has become one of the most popular vehicles for U.S. dollar payments. The Grayscale Ethereum Trust (which allows investors to gain Ethereum exposure via traditional brokerages) has grown substantially over the past year. The fund now holds 3 million ETH at a value greater than $4 billion.

Use Case Explosion. DeFi, NFTs, and DAOs have emerged as real use cases for crypto, and have grown spectacularly over the past year.

We are already seeing dozens of strong teams leaving traditional startups each week to build DeFi, NFTs, DAO & web3 products, many on top of Ethereum. More products and better experiences will attract more users. ETH is an indexed bet on that growth more than a bet on the success of any one project.

Strong trends, lower prices, better experiences, and new products = growing demand.

As these use cases continues to explode, Ethereum’s network effects are too strong to overcome as developers, users, and even other L1s are building on or compatible with Ethereum. The longer something has been around, the more people can expect that other people will continue to use it. Network Effects. As people recognize the quality of a thing and as it lasts longer, more people use it, so more people build on top of it. That creates a Two-Sided Platform Network Effect. More users attract more developers, more developers attract more users, and so on.

In Ethereum’s case, more dApps on Ethereum means more users on Ethereum, and more users mean it makes sense for more developers to build dApps.

OS is an example of Two-Sided Platform Network Effects. The more people who have iPhones, the more likely developers are to make iPhone apps, and the more iPhone apps there are, the more likely someone is to buy an iPhone. In Apple’s case, this network effect is so strong that it takes a 30% cut of all App Store revenues -- whether through the purchase of an app, or through in-app purchases.

Collectively, the Ethereum economy’s market cap — defined by the total market cap of the biggest ERC-20 tokens issued on top of the Ethereum blockchain — has soared in recent weeks to more than $300 billion (not including NFTs, because it’s hard to make apples-to-apples comparisons).

5. Ethereum holders will start accruing a lot more value

How does more activity on top of Ethereum translate into a higher price for ETH?

In the near future, the answer will be that more transactions mean higher yields for ETH holders and a decreasing supply of ETH.

Currently, the price of Ethereum is based on a combination of supply and demand, and the price it costs miners to secure the blockchain. To participate, you need ETH, and you need to pay the gas. Miners receive ETH in the form of newly-minted supply and your fees. Miners pay for hardware and electricity and taxes, and keep ~5% of their earnings. Today, most of the value accrues to GPU makers, electric utilities, and the government, with the miner’s portion competed down to close to 0. - Packy McCormick from Not Boring

1. It’s Slow. The Ethereum blockchain currently does somewhere around 19 transactions per second. Visa, for comparison, does about 1,700.

2. It’s Expensive. The simplest transaction costs about $5 in gas fees

3. It’s Volatile. Gas fees are based on auction, and change all of the time based on demand. That makes it hard to transact with confidence or predictability.

4. It’s Inflationary. Unlike Bitcoin, there’s no hard cap on the number of ETH that could theoretically be minted, and Proof of Work requires minting a bunch of new ETH, which means growth leads to dilution for existing ETH holders.

5. It’s Environmentally Unfriendly. Mining means using a lot of electricity.

6. It’s Inefficient. Most of the money spent on transaction fees leaves the system -- miners are forced to sell the ETH they earn to pay for electricity, hardware, and taxes.

Once EIP-1559 is implemented and the Eth2 merge is complete, value accrues to the people who hold ETH, in a few ways:

• Tips and Issuance. Tips and new issuance go to ETH holders and are retained in the system (net of taxes) instead of going to miners to pay for hardware and electricity.

• Burned Gas. Burned gas permanently removes supply from the ecosystem, and at certain transaction rates, actually decreases the overall supply of ETH each year.

This week on August 04, we're going to have an upgrade called EIP 1559, which is going to take these transaction fees and destroy them. A good analogy here is actually oil, like gasoline, there's a fixed amount of gasoline in the world. It doesn't grow very fast. You need millions of years or whatever it takes to produce gasoline. The total amount of gasoline is just keeping on reducing, reducing, reducing. There's a similar effect with Ethereum where the total amount of ETH will basically deflate. It will reduce over time because of this burning aspect.

Taken together, EIP 1559 (make ETH deflationary by changes how gas fees work by splitting them into two parts -- a base fee and a tip) and Eth2 (shift consensus from Proof of Work to Proof of Stake and introduce sharding) could be revolutionary for ETH holders because they improve performance while dramatically altering where value accrues in the Ethereum ecosystem.

There are a lot of ways to earn money on your ETH -- staking, yield farming, liquidity pools, validating, and more -- but let’s look at the simplest, just owning ETH like you’d own a stock. Lower Supply EIP 1559 means that ETH becomes deflationary. With Eth2, new issuance to reward validators is expected to drop dramatically versus Proof of Work rewards. With EIP 1559, by burning ETH in every transaction, assuming a conservative amount of daily transaction fees and that 70% of the gas fee is burnt and 30% is sent as a tip, then more ETH will be burnt than issued every day. Together, the supply of ETH will actually begin decreasing after EIP 1559 and the Eth2 merge. With the upcoming implementation of EIP 1559, Ethereum will likely become deflationary, knocking out its biggest monetary weakness.

ETH ownership also grants the right to do work for the Ethereum network as a validator and earn a share of fees. Another Drake model estimates that people who stake their ETH (meaning lock it up to secure the network) can earn a 25% APR including new issuance and tips.

Ethereum 2.0 isn’t just a scalability upgrade to the Ethereum network, but it’s also an economic upgrade to Ether—the money that powers and protects the Ethereum economy

The combination of Proof of Stake, a consensus mechanism that minimizes the need to issue ETH, and EIP1559, a mechanism that burns ETH as a function of the magnitude of the Ethereum economy, turns ETH into a monetary unit with what can only be described as having ‘Sci-Fi’ economic fundamentals behind the currency unit.

Additionally, the more ETH is worth, the harder it is to attack.

In Ether: A New Model for Money, Hoffman said that fees paid to Ethereum validators act as a wall that protects Ethereum: “The height of the wall is highly correlated with the total fees produced by the network. The height of the wall is the cost of attacking Ethereum.”

6. Eth may emerge as world’s most efficient triple-point asset

A 1997 Journal of Portfolio Management paper by Robert Greer, What is an Asset Class Anyway?, says that there are three asset superclasses:

• Capital Assets are productive and generate value or cash-flow. Examples include equities, bonds, or rentable real estate.

• Transformable/Consumable Assets can be consumed one time, transformed into another asset, and their consumption produces economic yield. Think energy or commodities.

• Store-of-Value Assets are scarce, cannot be consumed, just transferred, and their value persists over time and space. Examples include gold, currencies, art, or bitcoin.

These three phases can occur simultaneously with Ether:

• Store of Value. ETH is locked up as collateral for DeFi transactions. For example, you can put up ETH to secure a loan or to provide liquidity to a DEX. Currently, nearly 10 million ETH are locked in DeFi.

• Consumable Asset. With EIP 1559, gas fees will act like gasoline in a car. Any time something happens on Ethereum, gas needs to be burned, decreasing the overall supply.

• Capital Asset. Ether acts as a capital asset in a few ways. Owning ETH represents a share of the Ethereum network, like owning equity in a company. Once staked, ETH gives its owner the right to do work for the network by becoming a Validator and a right to collect fees generated by the network.

DeFi is on an unstoppable march with its eyes are on capital efficiency, and Ether is the best asset available for DeFi to achieve its goals.

While the Ethereum protocol is busy turning ETH into ultra sound money, Ethereum’s application layer is simultaneously trying to make it the most capital efficient asset in the world.

When you can achieve the same financial results with less capital, capital will flow into the asset that enabled the capital efficiency. If it takes $10 USD to achieve the same outcome that $1 of ETH can provide, it is simply smart capital management to purchase and hold the asset that allows you to achieve your goals with the least amount of capital. The optionality that ETH can offer you will be overwhelming from a capital efficiency standpoint.

Over time, the path towards achieving specific financial goals will be increasingly routed through using ETH as capital. At this point, ETH will become the internet’s reserve currency, and its economic bandwidth will be massive.

DeFi is turning ETH into the best Store of Value inside of its internal ecosystem. If ‘DeFi’ ever just becomes ‘Fi’, then ETH will therefore also become the world’s best Store of Value.

Every new DeFi protocol that finds success, finds it because it was more capital efficient than its competition. Every protocol upgrade that any DeFi application has gone through has been in an effort to become more capital efficient. In DeFi, capital efficiency is the name of the game.

Ether, as the native asset to Ethereum, and therefore DeFi, is the asset that receives all of the tailwinds of this competition. When DeFi becomes more capital efficient, Ether becomes a more efficient asset.

DeFi is on a march towards capital efficiency, and ETH will receive all of it.

7. ETH will be the dominant Layer 1 solution

A handful of blockchains/L1s are aiming to thrive where Ethereum is weak. Ethereum, Bitcoin, and other blockchains are Layer 1 in the Web3 tech stack. For Bitcoin, pretty much everything, aside from Lightning Network, happens at Layer 1. Hold BTC, send BTC, track BTC. For Ethereum, most of the magic comes in the interaction with Layer 2, the application layer. 

Source: readthedocs.io, NotBoring.co

Because of Ethereum’s current shortcomings to date, a handful of L1 competitors have sprung up that seek to challenge Ethereum’s dominance, or at least pick off some of its use cases.

The reality is that most of the competitors are either in development (like Cardano, so your conviction levels have to be much higher) or are inter-operable with Ethereum (e.g. Polkadot). Solana and Flow are actually also, in some ways, a complement to Eth.

By optimizing for a high-speed trading use case not currently possible on Ethereum, Solana is bringing more financial activity on-chain. By enabling micro-transactions like votes and likes, on-chain, and improving the user experience for products that also run on Ethereum, Solana is improving the web3 experience and onboarding more users. Plus, Solana is building compatibility with Ethereum that would allow it to behave like an Ethereum L2, but with the functionality of a L1, including the ability to deposit USD directly at miniscule fees. More on-ramps is net positive for the ecosystem as a whole, and Ethereum sits at the center of the ecosystem. As Flow brings more non-crypto people into Web3, both Flow and Ethereum benefit. Given the nature of web3 and how early the ecosystem is, more complements bringing more demand is a positive.

But what about competition from more centralized solutions like Binance Smart Chain, which comes with a built-in user base of millions of people who trade on Binance, are decentralized enough and more performant? Binance Smart Chain shows the total value locked in its DeFi smart contracts at $34.7bn, 60% of Ethereum’s figure, with a growth of 152% in the 30 days between mid March and mid April 2021. 

Binance Smart Chain is not decentralised by its own admission, which can have its own risks highlighted here. But there are signs that projects will just go where the users are and the fees are lowest. 

Closing thoughts

Ethereum isn’t just another form of digital money. Ethereum’s blockchain was created to be a highly versatile decentralized computing platform — one which allows developers to build things like markets for digital art and which also runs “decentralized finance” (or DeFi) tools like Compound and Uniswap that have seen hundreds of billions of dollars in value flow through them.

If you believe that Web 3.0 will continue to grow, then EIP 1559 and Eth2 upgrades can level up Eth as a triple-point asset class and solidify its position as the main L1 for web 3.0. Strong network effects will create a flywheel effect among developers, users and other L1/L2s in the system to increase adoption and inter-operability of Eth.

For investors, I'd say learn, learn, learn. People always ask me, "Should I invest in Ethereum?" I tell them," just don't invest in anything until you know what you're talking about". The market is so extremely volatile. You'll follow in on the way up and then you'll panic sell on the way down. Really what you want to be having is long-term conviction, and the only way that you can have long-term conviction is basically understanding this stuff. One word of caution here is that if you're intellectually curious and you go down this route, you're never going out of the rabbit hole. This rabbit hole is extremely, extremely deep. You might spend 10 years of your life going down the rabbit hole, and whenever there's something you don't understand, don't be shy to ask questions. There's a lot of information out there.

Curious about the diving deeper and understanding more about Ethereum? Do read the white-paper here!

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This is not investment advice. Bitcoin and Ethereum are highly volatile. Only invest what you can afford to lose. You must decide how much of your investment capital you are willing to risk with Ethereum or Bitcoin. No warranties are expressed or implied.

Stablecoins are blockchain-based digital currencies that are linked to the value of
an underlying asset. Blockchain technology enables a marketplace to operate without assigning control to any single participant. This can create good economic properties for fostering competition and innovation in the long run.

Owing to their peg, stablecoins are not subject to extreme price volatility, which has otherwise prevented mainstream adoption of applications built on top of
cryptocurrency protocols. The most commonly collateralized stablecoins are the ones linked to fiat currencies such as the USD, EUR, or GBP.

Stablecoins are free from the volatility of non-pegged cryptocurrencies, while inheriting some of their most powerful properties:

• Stablecoins are open, global, and accessible to anyone on the internet, 24/7

• They’re fast, cheap and secure to transmit

• They’re digitally native to the Internet and programmable

How Stablecoins are formed

Approaches to developing a Stablecoin

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There are three general types of stablecoins:

• Asset-based stablecoins commonly use fiat currencies or precious metals as a peg to ensure stability. For example, Digix Gold Token (DGX) uses gold for its backing while Libra and Reserve were designed to rely on a basket of currencies.

• Crypto-collateralized: Maker Dai (DAI) remains the largest cryptocurrency-collateralized stablecoin. The two cryptocurrencies backing DAI are ETH and MKR. Dai also uses smart contracts to ensure timely response to the main market tendencies in terms of changes in the demand and supply levels.

• Algorithmic stablecoins rely on the rules written in the software code of the coin with the sole goal of matching the demand for the currency and its market supply. Kowala and Ampleforth are examples of non-collateralized or algorithmic stablecoins. Their mechanisms automatically adjust the levels of the supply, effectively ensuring stability.1

Quick history of Stablecoins

Total Stablecoin supply has reached $110B+ in July 2021, with USDT’s share at 60% (declining) and growing popularity of USDC now at ~25% share.

Stablecoin history begins with Tether, which runs USDT. Originally known as Realcoin, it began in October 2014. Tether’s model was always simple: It promised that for every USDT there would be an actual redeemable dollar in the bank somewhere. Tether faced various question marks and traffic bumps over the years - it shifted its collateral mix but still claims to be fully backed.

While this part of the market is established and it has worked well, those who want more regulatory confidence than USDT affords tend to turn to the CENTRE Consortium’s USD coin (USDC). The USDC stablecoin is fully backed and can be traded for the U.S. dollar on a one-to-one ratio through platforms like Coinbase and Circle. Like many other stablecoins, USDC currently operates on the Ethereum blockchain.

There are many others as well, such as Binance USD (BUSD) and TrueUSD (TUSD).

The next phase comes from over-collateralized but more decentralized stablecoins, such as MakerDAO’s DAI. DAI began as a stablecoin collateralized only with ETH, the cryptocurrency that runs the smart contract chain Ethereum. This required it to be seriously over-collateralized, at a minimum 150% but in practice usually much higher.

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What are the main use cases of Stablecoin?

Without stablecoins, there would have been no decentralized finance (DeFi) booms, which means there probably would have also been no non-fungible token (NFT) boom. Stablecoins have been table stakes for what the industry has achieved so far.

1. Cryptocurrency Wallets/Trading: A digital wallet that stores private/public keys
   and interacts with various blockchains, allowing users to send/receive digital
   currency. Stablecoins could be used for crypto-trading on exchanges that cannot access banking services. It is also useful compared to legacy payments as they are instant and available 24x7. You don’t need a bank account to hold stablecoins

2. Fiat Proxy in Decentralized Finance (DeFi): One can convert bank-based U.S. dollars into USDC and deposit it in a protocol like Aave to earn interest.

3. Global Currency: A stable digital currency can become a global medium of exchange (e.g., remittances), in markets with either hyper-inflation, economic
   uncertainty, or capital controls.

4. Cross-border Payments: Currently, global remittances can take days to settle and cost can be as high as double-digit percentages in some Emerging Markets. With stablecoins, remittances could be sent instantaneously around the globe at very low cost.

5. Trade Receivables Market: MakerDao, for instance is working with supply chain management startup Tradeshift, to tokenize unpaid invoices by selling them at a
   discount to crypto investors, so that small businesses can receive their payment upfront.

6. Offers individuals a cold store for USD/fiat by storing crypto in a medium that's disconnected from the internet and secured by one's own private keys.

7. Earn interest There are easy ways to earn interest (typically higher than what a bank would offer) on a stablecoin investment.

How These Projects Make Money

The key approaches of generating returns include their issuance and purchase. More often than not, stablecoins practice fractional reserve banking, meaning they do not represent 100% of the value as they claim. Other  lucrative methods include:

• the issuance and redemption fees

• market-making activities, namely bid/ask spread and trading volume

• a short-term lending

• an annual reserve interest

However, other reasons can be branding and fund protection. Companies developing a stablecoin may want to create a safe virtual currency to pay their developers seamlessly. Furthermore, they aim to avoid losing money over time or attract users to other products in their portfolio, which is a vivid case of exchanges like Huobi, Binance etc. The investors purchasing stablecoins may use them to diversify their portfolio and preserve the capital during the bear market. The entities purchasing stablecoins may also generate return during the periods of small fluctuations.

How does it all work

Behind all of these new generation stablecoins, there’s one key insight which all of them rely on: the only thing that matters for a stablecoin is how well it can maintain $1 parity. Over the past year especially, we saw MakerDAO despite being 150%+ collateralised, failed to maintain an accurate peg.

Why would a coin which has tons of collateral backing it fail to maintain its peg? The short answer is the forces of supply and demand apply to everything including so called “$1” coins. So really, what all of these new stablecoins attempt to do is balance out the forces of supply and demand through their own unique ways. What’s fascinating to see is that the idea is rapidly evolving and each model iterates on the one prior to it.2

There are 4 stablecoins mechanisms today:

1. Reserves: This means that the stablecoin can be redeemed for the underlying reserve. The reserves then were gold but today it could be a lot of things like on-chain collaterals or off-chain collaterals. It could be like a MakerDAO where you have a lot of different kinds of currencies like $ETH, $YFI or $AAVE. Or it could be off-chain collaterals like gold, US dollars, Japanese yen, etc. Reserves are used to create mechanisms to determine stablecoins with low volatility.

2. Dual Token: This model has one token that is stable while the other token absorbs the volatility. When prices go up or down the secondary token absorbs the volatility. The secondary token could do a lot of other things but the main purpose is to absorb volatility so that it does not impact the stablecoin.

3. Algo stablecoins: Stablecoin is defined by math. You can change the math if you want (e.g., multi-sig governance) or if the governance votes for it (e.g., DAO)

4. Mixed: A mixed mechanism is a combination of two or a combination of all of the mechanisms; these mechanisms need not exist alone. You can hedge against volatility in a variety of ways.

Wait, how is stablecoin any different than money?

Stablecoins vs. e-money

Money can be broadly defined to have the following attributes: (1) a unit of account;
(2) medium of exchange; and (3) store of value. While cryptocurrencies have often
been compared to money, a major deterrent has been their extreme price volatility,
making them an unreliable unit of account over time.
Stablecoins are cryptos designed to minimize price volatility. They achieve this by
pegging their value to a stable fiat/other assets. Despite their similarities to fiat
currencies, below are a few points that distinguish them from e-money:

• Privately issued, not linked in regulatory framework: Stablecoins are
  privately issued. For instance, the most popular stablecoin, USDT, is issued by
  Tether International Ltd, a privately-held company. They are also not
  automatically linked in the regulatory framework with central bank money.

• Underlying technology: Classic e-money tends to be limited to the purpose and
  infrastructure of the issuing institution/business, while operating in a closed loop
  system. In contrast, issuance of stablecoins on a decentralized network allows
  for transfer of funds between businesses and people.

• Cost of liquidation into fiat: Costs for liquidation of stablecoins into fiat
  currency can be higher versus e-money which tends to be near costless.

Stablecoins vs. Decentralized Cryptos

Decentralization, in essence, means no single central party has the authority or
power to control the operation or outcome of the process. A decentralized network
relies on host of computers to complete the process. Hence, blockchain technology
needs a P2P network. On the contrary, stablecoins tend to be backed by a single
base, and work more in a centralized pattern.
Decentralized cryptos do not have a central repository which could wipe out all the
holdings in case of a server crash or if the user misplaces his private key. This is not
the case with collateralized stablecoins which have equal or more asset base to rely
on. An interesting point here is that while private keys get lost all the time and the
pool of coins diminishes, coins could get over-collateralized with time.

Another difference would be the reason stablecoins were invented i.e., price
volatility. It is possible for decentralized cryptos to have large price variations as
opposed to stablecoins which are not very price sensitive (at least in theory). Some
coins are also pegged to the U.S. dollar, which links them to the U.S.
banking/financial system, and thereby rely on a centralized infrastructure.
Depending on the protocol, stablecoins can possibly transact faster than classic
cryptocurrencies. The Libra protocol technical document highlights “the system is
likely able to meet the demand of 1,000 transactions per second (TPS)”. By
contrast, Bitcoin has a transaction capacity of 7 TPS. Visa handles around 1,700 TPS (or 150 million a day) and claims to be able to handle up to 24,000 TPS, in theory.

Stablecoins vs. CBDCs

CBDCs, or central bank digital currencies, aren’t stablecoins. They’re just fiat in digital form, and fiat isn’t stable. The difference between a stablecoin and a CBDC is that one is a synthetic derivative of a fiat currency created by a private company, and the other (CBDCs) is strictly a fiat currency produced by a central bank. CBDCs, in relation to other CBDCs and cryptocurrencies, aren’t stable at all. Their only purpose is to allow transactions and show transactions transparently to make taxation easier for governments.

So, are there any risks with stablecoins?

What are the risks of putting cash into stablecoins? The risk is that the stablecoin collapses. Tether, as others have mentioned, has a somewhat sketchy history, while USDC is well documented to be much more organizationally stable. Maker/DAI functions using a complicated set of economic incentives and smart contracts, and there is a potential that either the economic incentives don't hold up, or that there is a bug in the smart contract. However, even in USDC, which uses a very simple smart contract, there's still the risk of a critical flaw being discovered.

Future of Stablecoins

It may be easy to forget, but the original idea of bitcoin was to create a decentralized and distributed payment system; that has not yet happened. What has happened instead, and a testament to the free market process, is that an alternative (some would say better) version of crypto has emerged in the form of stablecoins. To function effectively as a currency alternative, crypto must be liquid, possess relatively low price volatility, and be integrated with established financial institutions.3

Stablecoins have gained quite a lot of traction, mainly due to their price stability linked with collateral reserves. Stablecoins are used as base currency for trading and are commonly used on DeFi platforms which earn high interests for stablecoins lent/borrowed on the market. 

Tether is already deemed ‘too big to fail’ - disclosures in May 2021 suggest Tether has become one of the world’s largest investors in the US commercial paper market, rubbing shoulders with the likes of fund managers Vanguard and BlackRock and dwarfing the investments of tech giants like Google and Apple. Its reserves include $30bn in commercial paper; such holdings of companies’ short-term debt would make it the seventh largest in the world.

Visa crypto cards have already racked up $1B in spending in 2021. The company’s crypto card program is part of a larger push that Visa is making to merge the crypto world with traditional banks that includes adding stablecoins to Visa’s payments network and plugging banks into cryptocurrency buy and sell features.

The global financial economy requires a payment system where you can make payments without any delay, and that is cost-effective and free from intermediaries; stablecoins can fulfil this need. With new stablecoins constantly being launched, soon there may soon be one that’s pegged by every fiat currency in the world or a basket of currencies.

As the governments are inclining more towards central bank digital currency (CBDCs), you may see state-issued collateralised stablecoins in the future. But the government may have all rights reserved for such coins. If you prefer decentralised tokens, you can opt for crypto-backed stablecoin.4

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Today we have a financial system that depends on status, wealth and geography - where you were born and how much access to wealth & education your parents have a disproportionate correlation to financial outcomes in your lifetime.

Now imagine a global, open alternative to very financial service you use today, accessible with little more than a smartphone and internet connection:

1. Borrowing loans automatically from a stranger in any part of the world with no middleman (e.g. Compound)

2. Money in your account automatically finding the highest yield & return, given your risk appetite (e.g. Yearn.finance)

3. Make real-time, instant payments to friends, family and pay for goods and services anywhere in the world without exorbitant fees (e.g. DAI Stablecoin)

4. You can remain pseudonymous/anonymous to preserve your privacy, build reputation on the blockchain and use your digital identity to access financial services on the internet - all while keeping out the bad actors (E.g. Bloom)

5. Enter into a smart contracts with a stranger for engaging their services or betting on sports - with no worries about payments & settlement

According to DeFi Pulse, the value of digital assets locked into DeFi applications grew 10X from less than $1 billion in 2019, to over $10 billion in 2020, and over $80 billion at its peak thus far in 2021. Yet the DeFi applications and underlying infrastructure are still in its nascent stage of development.

Dune analytics chart below shows the explosion in # of unique addresses (proxy for users) reaching ~3M in June 2021, growing 10x from last year in June 2020

While it’s been a few years for DeFi, its associated economy is already large and consequential: Ethereum, the backend infrastructure for DeFi, settled about $1.5 trillion in transactions last quarter, or 50% of Visa’s payment volume; decentralized money markets are issuing billions of dollars worth of loans every month; with similar volumes for individuals and businesses using platforms like the Uniswap protocol.

While arguments for Defi are grounded in greater choice to consumers, lower costs to legacy finance 1.0 system and greater return on capital - there are detractors who don’t believe in Defi given the complexity of onramps, lack of financial education (i.e. scams), security concerns and regulatory overhang (KYC/AML/financial crimes). I believe these are short to-medium term challenges which exist with any emergent technology. Let’s focus on the underlying use cases and real value of Defi - it starts becoming clear that its a 10x improvement to today’s financial primitives

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Centralized/Traditional Finance (CeFi or TradFi) Vs Decentralized Finance (DeFi)

Your Chase Bank or Wells Fargo bank works well for you, but not for everyone. You can feel the pain of those merchants who don’t get money due to antiquated ACH rails for 3-5 business days, immigrants without documents & unbanked users cannot open an account easily and sending a cross-border remittance can be as pleasant as a root canal. Try getting a mortgage from your bank and telling them you want to put up your Robinhood/Crypto account as collateral :)

Compared to traditional financial applications which use core banking systems such as Fiserv & FIS as the underlying ledgers of record, DApps (decentralized applications) use blockchains as their underlying core ledger. DeFi allows users to custody their own funds or engage directly with smart contracts. Censorship-resistant, permissionless use promotes financial inclusion. Faster, borderless operations 24/7/365. Cheaper transactions than TradFi (assuming gas prices eventually come down). Stablecoins act as a hedge against local currency debasement. High yields…. and many more 10x improvements!

Source: Race Capital

The first wave of crypto relied on centralized finance (CeFi) wallets and exchanges such as Coinbase and Gemini for storing, buying, selling, or trading different cryptocurrencies. And like traditional financial services (TradFi), CeFi customers had to go through standard know-your-customer (KYC), anti-money laundering (AML), and other compliance procedures before they could deposit funds, and they had to initially use fiat funds to buy crypto. Funding accounts or withdrawing funds could take days and often involved high transaction fees.

Enter DeFi. Instead of relying on an intermediary for custody, clearing and escrow services, DeFi relies on smart contracts operating on a blockchain, often Ethereum. This provides resistance to censorship: central financial regulatory bodies are unable to dictate monetary policy or compliance procedures, and there’s no native state-sponsored currency. Instead of relying on a trusted party, users trust the code in the smart contract, which can be audited.1

So what is DeFi?

The term decentralized finance (DeFi) refers to an alternative financial infrastructure built on top of the Ethereum blockchain. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way. 

The main benefits that DeFi combines are as follows:

1. Permissionless (most important!): No permission is required to create or access DeFi applications which can serve anyone in the world with an internet connection

2. Non custodial: DeFi protocols' creators do not have control or ownership over your assets

3. Programmable: Rules are written in code; computers can make commitments
   Contracts run without human intervention

4. Openly auditable: In theory, smart contracts and application logic are open source and can be audited by anyone

5. Composable: DeFi protocols can be used as building blocks and programmed into higher order applications. This is DeFi’s core property: new applications can be built by combining same and new protocols differently. Devs can do more with less: more rapid and compounding innovation

6. Natively global in nature: The absence of geography specific regulation and the distribution of crypto users, DeFi is built with a global user experience in mind

7. Flexible user experience: Because protocols are open source, forkable, and composable, different UX can be built on top of them

The Defi Stack

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1. The settlement layer (Layer 1) consists of the blockchain and its native protocol asset (e.g., Bitcoin [BTC] on the Bitcoin blockchain and ETH on the Ethereum blockchain). It allows the network to store ownership information securely and ensures that any state changes adhere to its ruleset. The blockchain can be seen as the foundation for trustless execution and serves as a settlement and dispute resolution layer. 

2. The asset layer (Layer 2) consists of all assets that are issued on top of the settlement layer. This includes the native protocol asset as well as any additional assets that are issued on this blockchain (usually referred to as tokens).

3. The protocol layer (Layer 3) provides standards for specific use cases such as decentralized exchanges, debt markets, derivatives, and on-chain asset management. These standards are usually implemented as a set of smart contracts and can be accessed by any user (or DeFi application). As such, these protocols are highly interoperable.

4. The application layer (Layer 4) creates user-oriented applications that connect to individual protocols. The smart contract interaction is usually abstracted by a web browser-based front end, making the protocols easier to use. This is layer users interact with;It earn fees as it wants, sometimes it shares them with their users

5. The aggregation layer (Layer 5) is an extension of the application layer. Aggregators create user-centric platforms that connect to several applications and protocols. They usually provide tools to compare and rate services, allow users to perform otherwise complex tasks by connecting to several protocols simultaneously, and combine relevant information in a clear and concise manner.2

Unravelling the DeFi Ecosystem

The most prominent blockchains used to build DeFi apps are Ethereum, Solana, and Binance Chain. These underlying blockchains store the ledger state of what is deposited into the DeFi apps, what is stored within the smart contracts, all of the transactions, and withdrawals. All of the core accounting functions to ensure matching inputs and outputs are handled by the blockchain itself, the DeFi apps don’t need to create external systems to reconcile balances, because all of the transactions are queryable across the various block explorers. In addition, compared to the traditional system there is no separate process of settling & clearing transactions. The transaction processing, clearing, and settling all happen at the same time when the transaction is broadcasted. 3

The DeFi apps themselves are composed of all of the core financial applications which can be used directly, or embedded into other various apps within the crypto ecosystem.

Use Cases DeFi can unlock

1. Payments, including remittances and cross-border

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Let’s take the example of a typical consumer transaction with the consumer having to pay the merchant in exchange for goods or services. Under the existing set-up the process of transferring money from the consumer to the merchant is rather complicated involving several parties, i.e. an issuer, an acquirer, a payment network like Visa or Mastercard and in most cases a gateway provider. All of these parties exert a centralized type of control.
In a DeFi version of the same transaction there would be only one reference point between the two parties, allowing direct communication, validated only on a distributed ledger. The decentralization refers exactly to the fact that there is no company or party association behind the ledger. Although there seems to be an obvious saving in terms of fees, the discussion is far from complete given the fact that there is no standardized DeFi set-up or solution with the final outcome depending on factors such as the protocol type, the network speed or the network fees, which tend to be fixed rather than variable.

Algorithmic stablecoins (there are decentralized) are a seamless, faster, and cheaper way to make domestic payments, remittances and cross-border payments. In Korea, ~$60M monthly of Ecommerce transactions are already taking place using the Chai Wallet with KRT, the Terra Korean Won-pegged algorithmic stablecoin.

2. Yield seeking (Lending, Borrowing, Spending rewards etc.)

There are 100s of dApps, which utilize trustless smart-contracts to create a market of buyers, sellers, lenders, borrowers, and service providers. Three of the top five DeFi protocols relate to lending & borrowing. By depositing funds in these dapps you are eligible for yield/returns. However, DeFi is still risky as crypto accounts are not FDIC insured and leverage amplifies risk.

Note, when you use Defi, oftentimes you see two types of yield. One is denominated in the token(s) you are depositing in the protocol, and another is denominated in the native protocol/dApp token that some protocols give out for users of the dApp. DeFi protocols enable high yields of 10-50% due to the ability to borrow for leverage:

• Yield farming: Borrowing crypto from one protocol and depositing it in another that offers higher interest rates

• Liquidity mining: offering tokens to an exchange that lends them to others, offering you a percentage of their returns

For instance, when you “Yield Farm” $USDC on Compound, you are effectively lending money to the protocol PLUS getting equity (in the form of the protocol token, $COMP). You will be paid out yield in USDC (minus a small fee to compound for providing this service) and “yield” through $COMP.

Yearn Finance is a suite of products in Decentralized Finance (DeFi) that provides lending aggregation, yield generation, and insurance on the Ethereum blockchain.

3. Trading (Exchanges & Liquidity)

To broaden access to advanced trading & financial services across border without permission, DeFi can solve this through three innovations: using decentralized exchanges (DEXs), Automated Market Makers (AMM) and trading synthetic assets.

Decentralized exchanges
DEXs like Uniswap allow anyone with a crypto wallet to swap tokens directly using self-executing smart contracts called Automated Market Makers (AMMs) without an intermediary organization for custody and clearing transactions. This dynamic enables more asset pairs and instantaneous trades on DEXs

Automated Market Makers

• Non custodial; trade is executed close to market price; everyone can become liquidity provider and earn share of the transaction fees

• Liquidity is provided by token holders who receive fees proportionally to the share of the pool

• Price of the asset is not driven by order book but deterministic, depending on the relationship between the size of the liquidity provided to each side of the pair

Synthetic assets

• Those who cannot easily access the US capital markets can trade synthetic assets that track real-world assets, giving them price exposure without holding actual shares.

• For example, Mirror Protocol allows you to trade synthetic shares of Tesla (TSLA) using smart contracts that guarantee you the difference in TSLA’s real-world price between the time you buy and sell your mTSLA shares.

Through DeFi, you can invest in Gold. You can invest in stocks like Amazon and Apple. You can short Tesla. You can access the S&P 500. This is done through crypto-based synthetics — which gives users exposure to assets without needing to hold or own the underlying asset. This is all possible with protocols like UMA, Synthetix, or Market protocol. Maybe your style of investing is more passive. With PoolTogether , you can participate in a no-loss lottery.

Maybe you’re an advanced trader and want to trade options or futures. You can do that with DeFi protocols like Convexity, Futureswap, and dYdX. Maybe you live on the wild side and trade on margin or leverage, you can do that with protocols like Fulcrum, Nuo, and DDEX. Or maybe you’re a degenerate gambler and want to bet against Trump in the upcoming election, you can do that on Augur.

With as little as $1, people all over the world can have access to the same investment opportunities and tools that used to be reserved for only the wealthy, or those lucky enough to be born in the right country.

You can start to imagine how services like Etrade, TD Ameritrade, Schwab, and even Robinhood could be massively disrupted by a crypto-native company that builds with these types of protocols at their foundation.4

How do know which tokens to buy?

As the crypto market goes through a cycle of volatility, when it comes to DeFi tokens, the optimal way to invest is to “do your own research”. Try to study projects and learn some of the fundamentals before putting any significant amounts into them. 
A basic approach on how to do some high-level research when it comes to DeFi tokens or NFT projects:

#1 find token in CoinGecko
#2 check market cap, fully diluted valuation, volume and Mkt Cap/TVL ratio
#3 check website
#4 study tokenomics & pre-sale
#5 analyze team
#6 check github activity
#7 visit telegram/discord rooms
#8 search ticker on twitter
#9 check reddit/4chan
#10 analyze holders
#11 chart & trade history

For NFTs, determine how on-chain the NFTs are and analyze on-chain activity (using tools like OpenSea's Rankings page and NonFungible.com's Market History hub).

Pick a DeFi token today that you want to get familiar with and do your own research by applying some of these steps.

Risks in the DeFi system

1. Smart contract risk (Contract bugs, attackers finding exploits) E.g. bZx incident

2. Poor protocol design and parameterization (gaming incentives due to flaws in token)

3. Liquidation risk (volatility in collateral, inability to source specific currency to repay borrowed funds)

4. On-chain congestion (scalability is a challenge but many L2 solutions are addressing this)

5. Protocol change risk (Maker system breaks down and DAI loses its peg)

6. Changing interest rates

7. Front-end risk (DDOS, single point of easy access)

So how is DeFi going to evolve?

DeFi is really in a position to disrupt financial services from the ground up. The basic concept behind Decentralised Finance is an open, permissionless and decentralized set-up without the need to trust centralized parties that are controlling financial services as we know them today. With the additional promise to lead to significant improvements in terms of decreased costs, increased security, enhanced accessibility and higher privacy levels.

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Revolut is made of following components:

1. DriveWealth powers commission-free trading

2. Truelayer unlocks funding instruments

   • Data API enabling customers to connect their external bank accounts to Revolut in a few clicks

   • Payments API to enable customers to top up and access funds instantly, in real- time, without having to enter card details or share their bank credentials

3. Simplesurance: cell phone insurance made simple

4. Lending works: Make borrowing simple for Revolut users by delivering instant Credit

Each layer of the Product stack of neobank is increasingly being served by third-party providers who specialize in the layer (or aggregators)

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Revolut…

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The new breed of challenger banks and fintech players have used payments as hook into a broader ecosystem aimed at gathering service fees for distribution of financial products. Globally, the biggest testament to this is Ant Financial’s Alipay and Tencent’s WeChat Pay who dominate China’s $41T mobile payments market. In the US, Amazon, Facebook, and Google have their sights on winning the growing but competitive digital payments landscape, especially in emerging countries such as India.

As per CB Insights, Amazon has lent billions of dollars to its 2.5M sellers and over 45M people use Google Pay in India. Apple plans to launch a credit card with Goldman Sachs, and over 100M people in China are using all five financial features of Ant Financial’s Alipay app (payments, wealth management, insurance, lending, and credit scoring) in China. Today, 43% of the 900M global iPhone users have enabled Apple Pay, as Apple focuses on expansion into international markets such as Eastern Europe. Meanwhile, Facebook has declared ambitious plans for its forthcoming digital coin offering (Libra), which would allow users to transact with each other and make purchases on WhatsApp, Instagram and across the internet.

Big tech companies are leveraging their access to massive e-commerce marketplaces and high-frequency partners such as ride-hailing and food delivery services, and have also starting to engage directly with developers to integrate specific payments features. Newer fintech challengers will need to understand how big tech companies are attracting users to their platforms and how payments will be reshaped as they expand their payments strategies to new markets.

Ultimately, payments is being used as a 'tip of spear' strategy by these players who are tapping into high frequency customer use-cases, developing stickiness of balances and gathering massive consumer data to eventually build enough trust and monetization through these four large, high-growth verticals:

·      E-commerce (sale of products)

·      Financial services (e-banking, wealth management, lending, insurance etc.)

·      Social interactions (ad-based revenue)

·      Volume-based interchange fee

To further the discussion on how payments is being used as the 'tip of spear' strategy, a hook into a broader ecosystem mentioned above, lets look at some of the mega-trends and key moves by industry players that are defining this dynamic landscape:

1.    Every tech giant is attacking payments

Payment evolution in China with Ant Financial & Tencent: Launched originally as the online payments gateway for Alibaba’s Taobao marketplace, Ant Financial is today the largest fintech platform in the world, spanning payments, wealth management, lending, credit scoring, and insurance. To drive revenue, Ant has historically focused on payments through its mobile wallet Alipay, which has grown to over 900M users worldwide. Now, it’s using its mobile wallet Alipay as a hook into its broader financial services ecosystem, where it charges financial institutions tech and service fees with high margins. Because Alipay now serves largely as a hook, Ant is aggressively doubling down on offline payments by promoting Alipay use cases in fast food, department stores, public transportation, and more in order to bring more users into its ecosystem where it can serve them loans, insurance policies, and wealth products.

Like its rival Ant Financial, Tencent is rapidly expanding beyond its start in digital payments into lending, wealth management, and insurance. Tencent’s fintech strategy has hinged on its ability to cross-promote financial products to its massive WeChat and QQ user base of 1B daily active users and to leverage its expertise in gamification techniques to boost growth.

Apple: Apple is undergoing a strategic shift away from one-time hardware purchases and toward recurring “services” businesses that boost revenue per user. The company hopes to boost Apple Pay adoption as it opens up opportunities into a broader financial services platform that encompasses payments and credit cards as well as personal loans, wealth products, and more.

Amazon: For now, Amazon’s strategy in financial services has been focused on supporting its core strategic goal: increasing participation (both from buyers and sellers) on its platform. However, Amazon has previously built core product pillars for itself and then transformed those into key, outward-facing lines of business. This was the case with Amazon Web Services (AWS), which was originally server infrastructure for Amazon’s e-commerce marketplace, and then re-purposed for external clients and third-parties. Amazon is finding ways to attract merchants to the Amazon Pay network: The company announced it would pass along savings it gets from card networks (which process Amazon’s payments at a lower cost due to Amazon’s large payments volume) to merchants that adopt Amazon Pay. Of note, Amazon Pay is also a key product in Amazon’s strategy in India, where it’s both a digital wallet (which consumers can load with cash) and a payments processor. Amazon also launched peer-to-peer payments via Amazon Pay for Indian users, allowing them to pay friends and family, as well as Amazon merchants and delivery workers.

Facebook: To jumpstart its payments initiative, Facebook reportedly plans to hire more than 100 people in London and Dubai to build out WhatsApp Pay. Meanwhile, Facebook’s broader plans in financial services may hinge on its development of the digital coin offering, Libra that would allow users to transact with each other and make purchases both on Facebook and across the internet. As of early 2018, WhatsApp had 1.5B users in 180 countries and 1B DAUs (daily active users). WhatsApp Pay is a peer-to-peer money transfer feature that is currently only available in India. Since February 2018, when WhatsApp launched a trial in India, the service has processed an average of 1M transactions per month. As users transact over WhatsApp Pay, Facebook can (1) earn payments processing revenues, (2) acquire and analyze a treasure trove of transactional data, and then (3) create an ecosystem of additional financial services products within WhatsApp. In January, Facebook announced plans to integrate its messaging services — WhatsApp, Instagram, and Facebook Messenger — under a single, unified technical infrastructure, allowing for cross-platform communications. Given this push, a single payments platform looks like it might also be in the works. A unified payments infrastructure would transform Instagram, WhatsApp, and Facebook Messenger into interoperable digital wallets. The move would also catapult Facebook into a potential major player in both digital payments and cross-border payments – both markets worth trillions of dollars.

Google: To avoid conflicts with its core search business, Google has largely focused on driving payments through its digital wallet, Google Pay. In Europe, Google Pay recently obtained an e-money license from Lithuania, while in India, Google Pay has grown to 45M monthly active users. Google Pay is another step in developing a deeper relationship with the user through both online and offline payments use cases, with the aim of boosting internet adoption and, eventually, future ad revenue through Google services. The success or failure of Google Pay will likely influence Google’s broader moves into financial services around the world. Thus far, India has provided a test site for such efforts. For example, Google Pay started offering instant bank loans from HDFC Bank, ICICI Bank, Federal Bank, and Kotak Mahindra Bank. Users can obtain a customized loan in the Google Pay app and get the money deposited directly into their bank account.

2.    Lack of closed-loop ecosystem in US has led to inefficiencies and opportunity to eliminate high-fees intermediaries