Let's talk about DeFi and crypto this morning and specifically how and why this could change the world.
I don't think I had really grasped the potential power of crypto until the last few days even though I've been dabbling with it for years.
So what changed for me?
Well, up until recently I viewed crypto as many people buying it as an investment vehicle do. I understood the concept of "the blockchain" broadly, got the gist of how it worked, but didn't really understand what was driving excitement or investment in a particular coin.
I got on the Metamask train about 6 months ago because I was curious about it and I wanted to trade currencies, and then when NFTs started popping up I played with them a little, but the gas fees made them seem like totally worthless and impractical toys.
I also vaguely understood that you could "build software on the blockchain" and that people were doing this with dApps, but I struggled to understand what this might do for users aside from letting them trade these weird investment vehicles that only nerds cared about.
What that whacked me upside the head about this was actually the NFT gaming space and BSC mainnet. On BSC, gas fees are on the order of 1-11 cents right now, which allowed me to play with the tech in a way that Ethereum was totally impractical for by the time I had Metamask.
If you haven't seen how this works, you have an addon in your browser (your "wallet") which contains crypto funds and you can one-click link it to a site you're visiting to interact with their services (of any kind, depending on what they've built).
Even JUST looking at this, the ease and security of this, where you click to approve every transaction in Metamask, is already better than a credit card even if you're auto-filling it in with Chrome, which is more like a 4 click process with multiple keypresses.
This might not seem huge until you remember that streamlining a few clicks is a massive game changer. Amazon's one-click ordering was revolutionary when it launched because it massively reduced the friction of buying stuff.
Okay so what do we actually have here? We have a piece of technology that ANY site can integrate with for financial transactions (txns), and those financial txns can be for fractions of a cent if that's appropriate for the use case.
Furthermore, it operates using tokens (money) that are completely liquid, external to both parties, and basically universal because of the ease of exchanging them on DeFi (decentralized finance) exchanges for a fee significantly lower than a standard fiat exchange.
I'm going to set the question of gas fees aside for a moment and will come back to that, but imagine that gas fees are near zero (fractions of a cent) for the purposes of this hypothetical, so it costs basically nothing to the user to approve a txn.
Why is this good and why should you care?
Incentives, baby. Money makes the world go round. Every ad you see, every site you visit, every email client you access, and every platform you're on is making money from you somehow. It's how they provide the service to you.
And often the value of that engagement is fractions of a cent. Ad purchases are often billed by either impressions or clicks and both have value depending on your goals (brand awareness or a purchase decision). But any individual impression is worth far less than one cent.
So often sites make ad revenue by offering a free service to users and then monetizing either exposure to eyeballs or selling information about those users to marketers who use it to move product. If the product is free, you're paying with your attention and your information.
If you could monetize your site engagement in an alternate way, you could free yourself from the hellish arms race of internet marketing by making it worth the platform's time to offer you a service without selling your information or making a costly purchase decision.
Some sites take advantage of this now by explicitly charging you up front for services as their monetization model, but no one likes having a million $10 to 99-cent subscriptions on their credit card for apps they may or may not use much, and less isn't feasible for anyone.
Remember that the actual value of the services you receive for an infrequently used app to either you or the provider of the service is somewhere BETWEEN $0.0001 and $0.99, but they can't really monetize you for less than a monthly charge of $0.99 unless they turn to ads.
Historically, ads have been the way to unlock the value of those fractional cents and they're what makes offering free services viable as a business model.
You can't charge an individual user $0.0001 cents every time they use your service, but you can charge an advertiser $100 for X impressions each of which are individually worth $0.0001 cents to that advertiser.
Even if you use an aggressive ad blocker you're in an arms race, your demographic (or personal) info is still being resold, and you're still fighting a constant uphill battle against novel marketing techniques which are calculated to absorb your attention (and thus your time).
This is actually shockingly costly for you in ways you might not realize. If you value your personal time at even $20/hour, the 5 seconds you spent distracted by an ad or annoyed by an intrusive message cost you personally about $0.03, but you can't do much about it.
And this doesn't even factor in the psychological toll of the onslaught of notifications and ads you're battling with every day, enabled by the platforms you use because it's their business model.
If you had some alternate means of compensating service providers for the actual value of engagement with their service at the same or better rate they get for selling 100 of your impressions to an advertiser, they have no need to do that.
Ads aren't my whole case here, by the way--this is just a very easy example to illustrate an area that this can enable.
So historically, even token-based compensation models where you buy X tokens for engagement are a terrible deal for users, which is why they don't work.
You need to deal with complicated mechanisms to store token balances and the overhead of getting users to make a token purchase decision and refill their balance and they can't cash out or move their tokens. Games use this model a lot.
The biggest barrier to adopting micro-payments like this are all of these annoying factors that prevent users from wanting to adopt any particular company's micropayment scheme (plus the company can just shred your tokens or change the contract when they feel like it).
But a universal wallet application that sites can seamlessly integrate with operated by a third party would solve all of these problems nicely. This hasn't been feasible before because the incentives to build and adopt such a system weren't there for anyone.
Plus, how do you then trust THAT third party with your money and manage your balances there and ensure that they don't just monetize you too and cut backroom deals with the companies they support? It's never happened because it's a c*f for everyone.
But crypto wallets don't have this problem because they're decentralized and automated. The protocol and the network exists. The nodes are compensated by fees. Everything in the service is laid out in public and can be examined by anyone who wants to, and built by community.
Companies don't have to build anything special. They just have to integrate with the existing network. And they're incentivized to do that because there's a business opportunity (monetization models that are better for users).
Users benefit by retaining control of how they pay and what they pay for and being able to pay the ACTUAL value of the engagement in fractions of a cent, as well as keeping their money as liquid as cash, especially as more sites adopt the payment model.
It's actually even better than this--the psychological effect of numerous "token spend" decisions is distasteful, but with smart contracts you can establish conditions for automated spend that are publicly examinable, approve them, and not think about it anymore.
This means that with something like a Metamask integration (and near zero gas fees) you could one-click one-time approve something like Twitter to auto-bill you for usage at like 1 cent per month and never have to worry about ads creeping into your feed from the arms race.
But it gets even more interesting when you start thinking about mutually beneficial relationships. The value to Twitter of me writing a thread that gets a lot of engagement is not zero, due to platform attention. Other users benefit too from entertainment or new information.
The same contract could compensate me with fractions of a cent for every like or every bit of engagement I get equivalent to the actual value of that engagement for the service provider based on clearly established rules laid out in the smart contract.
This means that by just hanging out and making the space welcoming and inviting and having fun and positive interactions, the service could still be free for me to use or even net positive in a way that makes everyone happy and no one is annoyed by.
This would all be governed by a community-vetted smart contract with publicly examinable code and conditions that I opted into with a single click. Net positive better world than the current state of affairs. Everyone makes money. Everyone has more control over their attention and time.
Okay so this is (maybe) cool, but so what right? This is all contingent on businesses actually building on this technology, everyone having something like MetaMask to use it, and gas fees for a txn being basically near-zero from my perspective, none of which is true... yet.
Also this is another obvious objection--no one wants to think about whether to spend $0.000001 every time they like a tweet. It feels scary and clunky.
Let's tackle each of these, starting with the last one.
In this model you don't actually have to make a purchase decision every time you like a tweet. The contract governs that and it could bill you in one txn every so often once intermediary software supports this, as just one example.
When your monthly Twitter bill doesn't even register for you because it's on the order of $0.02 cents and it's totally opaque to you due to the smart contract and your one-click agreement, this FEELS the same as free.
It's just like ad monetization now: feels free, not free.
You never even see the bill (unless you want to) and you pay for exactly what you use, potentially offset by the value of utility you provide to the site community. If you're having fun and creating a lot of value for people, it actually MIGHT be free or net positive for you.
Next up is the classic catch-22 of user adoption and network effects: No one wants to install MetaMask without a good reason (because it's complicated and scary) and no sites wanna build on tech no one uses no matter how cool it is or what new biz models it might enable.
Well, guess what? Here's a fun metric:
"In July 2020 the platform saw 545,080 MAUs and by April 2021, Metamask had 3 million MAUs. Today, Metamask has 10,354,279 MAUs and has grown 1,800% since July 2020."
What's driving this adoption is people starting to catch on to the vision, users actually playing with crypto in the ways it was envisioned to be used, and businesses starting to support this.
Just kidding, it's largely speculation on being able to make $$$ on crypto.
But that's TOTALLY okay! In fact, that's great. The speculation >>> understanding the tech >>> buying into the vision pipeline is real and it's a GOOD thing.
Remember how financial incentives make the world go round? People follow the money.
There's a TON of money to be made by bringing micro txns into services. Finance platforms front-ran this, but we're seeing it with games now too beginning in earnest this summer.
Axie Infinity did $42 Million in sales in June 2021 alone. That's $500M in annual revenue.
For comparison, Marvel Strike Force has been one of the top grossing games in the app store forever and did $300M in revenue last year. It's a major brand backed by major players designed to monetize its player base.
Financials like this make everyone perk up.
Stop and think about that for a sec. You're an investor looking to grow your wealth. A random game comes out of nowhere and does almost 1/6th of one of the top grossing apps in the app store in revenue in its first month of operation.
Financial incentives drive interest.
Furthermore, all of this interest and money flying around gets USERS more interested. People wanna know what this new hotness is. People see crypto price growth in this sector and wanna learn to play with it. People (hi its me) install MetaMask just to play around.
This creates a self-reinforcing cycle where there's more money in play, more tech is being adopted, and more businesses want to get in on a piece of this because time to market == $$$. Both businesses and users have incentives to get involved.
Adoption in some specific sectors and some nerdy circles sparks interest and adoption in other sectors, as people with specialized industry knowledge start to grok the concept and realize that they can adapt it for use in THEIR domain too.
As this radiates out and more users begin to understand it conceptually, they can better explain it to their friends, who then have more confidence in trying it themselves. I explained how crypto tech actually works to my roommate last night and blew her mind.
She just bought into Solana for $1000 and actually understands what she's buying and why it might appreciate now. This is different from crypto investing a year ago for most retail investors.
This is better than aping in because it's an investment in the vision and an understanding of how this might actually translate to financial growth and gains which is closer to traditional investing (compared to my very dumb dabbling with dog coins for fun).
So this potential future vision is really cool, right? You can see how it's self-reinforcing and incentives are there for growth and how it's not just a ponzi scheme.
One big glaring problem with this nice utopian vision: scaling and gas fees.
If you, like me, have wanted to play in the NFT space and poked around with MetaMask because it's hot, you've probably been absolutely appalled by gas fees. It's like $100-$200+ dollars for ANY transaction on the ETH network right now.
You couldn't claim the totally free NFTs I posted the other day without spending over $100 for the privilege to own a collectible which didn't benefit me at all and might not appreciate ever.
This makes the crypto micro txns vision look absolutely insane to anyone with a brain because when most people can't cover a $500 emergency, no one is going to spend $100 to send a fraction of a cent to someone.
But tech, fortunately, isn't static. Last-gen crypto provided a concept template that we're already iterating on.
You might have heard about this little altcoin Solana that's grown 7000% since launching.
Dumb apes doing dumb ape shit amirite? 🙄
But actually maybe not. Why is Solana so cool?
To understand that, you have to understand why the gas fees on ETH are too damn high.
The way that crypto works (roughly) is that every node talks to every other node to agree on the transactions that occurred using a technology called Proof of Stake (and previously Proof of Work).
Right now, the way that your transactions get processed on the blockchain involves bidding for your transaction to get included in the next processed block that validates transactions. This is what you're paying for when you pay gas fees.
But the processing power available for this AND the need for the nodes to all communicate and agree on the conditions of the txns are computationally expensive and create bottlenecks. Only so many slots can be processed as it scales. More use = higher bids to get a slot.
Ethereum is working on solving this problem by trying to move from a PoW to a PoS system, which is what ETH2 is all about.
A PoS system dramatically improves the efficiency of the network to process txns.
Remember that reducing gas fees is what moves us closer to ACTUALLY usable micro txn tech at scale, because the cost of the txn has to be low enough to make txn worthwhile for both parties. You can't build a micro txn system when the cost of doing business is a mega txn.
Even with Proof of Stake, we still have some significant processing power required for agreement between nodes at scale to sort out the txns, and it's unclear to what degree PoS will solve the current gas woes (in spite of big claims).
It might work really well! It might even get them down to where they need to be. Either way it's an improvement.
But enter Solana: Solana introduces a new model called PoH (proof of history) that they say in an improvement even over pure PoS.
Without going too deep into the guts of how this works (go read the article if you wanna learn more), PoH says it can make txns even more efficient by reducing the computational aspect of timestamp agreement between nodes.
This is very exciting if it works out, because it means that we're potentially in reach of txn volume on the scale of Visa but with txn costs at many subfractions of $0.01.
Suddenly the economics are feasible again. Solana is out today and already uses this model.
The businesses and users looking at these models like the tech, but need it to be financially viable. Solana (and ADA and ETH2) are the frontrunners right now that seem to be capable of making this model financially viable or at least moving us MUCH closer than we were.
Txns at fractions of a cent at scale, widely used by a rapidly increasing number of users and businesses, open a whole world of possibilities for the design and implementation of smart contracts and actually make some of these micro-engagements I described earlier viable.
This is a big part of why Solana is shooting up right now. It's not just aping (although there's plenty of aping). It's that people looking toward future financial incentives, who "get" crypto, are looking for solutions that solve the core problems of the existing protocols.
Laying a bet on Solana (or ADA or ETH2) is making a bet on the future success of this economic model given the factors I've described here whether you realize what you're doing or not.
Right now you might think that crypto seems like a wasteful, useless toy for nerds.
But consider that this is also what computers looked like in 1980 to most people because they were staring at the present landscape and didn't fully grasp how it would evolve to be integrated with all levels of business as a _superior solution_.
"Why would I buy an IBM and pay a monthly fee to a telecom company for a janky and complicated 14.4 modem connection so that I can email my friend when I can just call her instead?"
Good point. But you're not appreciating a future state with this objection.
"Why would anyone have a website or hand their credit card information over to some faceless company you can't even see when they can run away with your payment info? The site is useless anyway."
Yes, true in 1998. Today it's not and seems silly to imagine.
Businesses and users who _do_ get the potential and move in early get to reap the benefits of being early movers in the space and will continue to grow it whether you think it's dumb or not, like the guy making fun of PCs in 1990.
So anyway, this is all why I'm crypto-pilled now. Some of it is just ponzi schemes and aping. But the underlying technology _isn't_ and is poised to rapidly explode and generate entirely new consumer-oriented business models as we work to solve these problems.
Let's look at some of the original comments on this thread: Sai makes a great point about disclosing incentives. FWIW, I'm heavily invested in crypto and particularly in ETH2, ADA, and SOL, plus a bunch of speculative bets. Do your own research, don't just trust what I say.
Jessa makes a good point about the total value of crypto vs other total wealth allocation. This amount is WAY up over the last few years and seems likely to continue to grow. More self-reinforcement via financial incentives.
Rohit makes a good point about resistance from legacy incentives. This is all so new there are absolutely downstream issues and conflicts with existing systems and incentives that aren't immediately visible to everyone. As with any new tech (like the internet) we'll have to solve them for wider adoption.
Sai isn't wrong about it maybe being too early even for value-based investment in the underlying technology of coins that aren't just ponzi schemes. We haven't seen it really work yet. But we're on the precipice of that as a potential!
Charlie is correct that the tax situation is a nightmare right now. But we already have services like Koinly coming out to help ease the burden of tax calculation. This is a big enough problem that solutions will spring up quickly.
A cool thing about blockchains is that solutions can easily be built to calculate your reporting requirements and tax burden if you enter all your wallet addresses.
Today, Paypal eliminates the burden of 1099s for contractors paid through their platform.
I expect that we'll see a LOT of innovation in this space as micro txns become more mainstream that will virtually eliminate this as a burden, and as businesses begin to make money they'll lobby to ease the tax reporting issues because it'll be an adoption barrier for them.
It's true that the signal to noise ratio is REALLY bad right now, which is why threads like this are important so that you understand the potential of what you're aping into and why some coins are better than others as long-term investment vehicles.
Got more comments or questions? Hit me up on Twitter @liminal_warmth.