A Blockchain Investment Thesis
Warning: This post is actively undergoing changes and does not constitute financial advice
Thesis
The world has moved extremely fast over the last 20 years giving rise to a proliferation of online services and internet companies. Despite the advantages and value that the internet has provided the average individual, many pain points have emerged as a result of the control centralised internet companies have over our information. Data leaks are a common occurrence despite the security and revenue of internet based companies and stolen data is then sold over the black market. Sensitive data from consumers is requested several times a day through passwords, transactions and signing up to services. Consumers are expected to remember 100s of passwords for various websites and services and the similarity usually seen across all passwords place the consumer under potential danger from hacks. Consumers are incentivised to upload personal information on social media and sophisticated hackers are able to piece together this information for malicious activities. The abundance of personal data is likely to increase with wearable electronics that measure health based statistics such as heart rate alongside the regular use of mobile phones. Consumer preferences are highly sought after with primary market research data collected regularly and secondary data sources such as clicks and psychographic data. Given the value of such information, an individual would be right to question whether or not it should be hosted on centralised databases and whether the exchange of such information for usually free services is a good deal.
In addition to the development of internet based services, the economy itself has gone through changes with public debt ballooning to potentially unsustainable levels. A significant driver of Government expenditure is public health with a majority of the budget spent on preventable diseases like obesity or diabetes. The current state of US debt and the loss of purchasing power of the dollar is a pain point that concerns everyone due to its default status the world’s reserve currency. Public demand to spend creates unrealistic budgets which means there is no incentive for politicians in power to create a budget surplus and reduce the debt of the American economy. The results of this are showing across the world with other large economies such as China and Saudi Arabia attempting to settle trade in native currencies and reduce demand for the dollar. The fragility of the world is further highlighted with centralised banks utilising fractional reserve banking to take risks on deposits and only partially hold the full amount. Such policy has historically created bank runs in a financial crisis. The capital being risked belongs to the individual and the one who loses is the individual despite them not profiting from any of this. A question then arises whether such institutions should be able to custody an individuals finances and whether individuals should take more responsibility for ones health especially given the availability of data that can be leveraged to improve ones fitness.
In the developing world it is common to observe weak property rights due to corruption and lack of regulatory or legal infrastructure. Consequences for this can be seen on a micro and macro level such as citizen’s hesitation in developing or buying land due to potentially other citizens claiming it and foreign countries hesitation to pour in investment despite potential returns because of the country’s fragility and propensity for conflicts. It is trivial to prove that if assurances on ownership are sound then this creates a positive environment for economic growth. Citizens of the developing world also observe centralised decision making on the currency they earn in due to heavy debt burdens and trade deficits. Such an individual already probably earns less than the world average salary but experiences a higher decline in purchasing power as a result of these policies. It is vital to provide alternative saving vehicles that allow for hedging against such currency devaluations or possible implosion of fragile highly debted financial systems to safeguard the value derived from years of hard work.
As a result of weak healthcare facilities, it is normal to observe high numbers of health tourists to foreign countries to obtain what is perceived as better quality health advice or services. Such an approach results in fragmented acquired healthcare services with information provided defined by the data collected at that one point in time. This means a patient will receive differing advice on a vital health issue with an inability to justify which one should be followed. Fragmentation with health advice and prescription may be able to be solved if deep data on a health tourist is available to medical practitioners similar to developed countries with a large database of patient data. Health data property rights gives health tourists more power in discussions on health advice but also gives them the opportunity to leverage their unique data by selling some information to third parties for analysis.
The brief outlines of different situations for individuals around the world intends to demonstrate current pain points that exist but are not necessarily actively considered as such due to the lack of perceived alternatives available. It is obvious that society can benefit significantly from trustless processes, decentralisation and self ownership of sensitive information however the conveniance of trading away these benefits in exchange for subsidised online based services and custody of finances will exist until such pain points are exacerbated. Increasing inflation, corruption from centralised organisation, leaks of sensitive information, misinformation from artificial intelligence on social media and exploitation of consumer data will become unattractive to tolerate if real alternatives become available to switch to.
Blockchain technology has opened up a possibility for an alternative and the earliest innovation seen from this area in the real world is the Bitcoin Blockchain which presented a geographically distributed ledger which records transactions via a group of miners who use electricity to validate the transaction. Bitcoin was born out of the financial crisis in 2008 which demonstrated how a pain point can reach a level where significant value was lost and retail deposits subjected to bank runs. How bitcoin, the currency of the Blockchain Bitcoin, differs from a centralised bank and fiat is that it allows you to self custody your own money, transact peer to peer without a third party, have safety from monetary policies by fixing the rules around its’ supply schedule and preserve value through a fixed supply. This innovation has provided an alternative to staying within catastrophic events as a result of fragile systems and acts as a schelling point for hedging against fiat debasement.
The innovation of Bitcoin was further extended by Ethereum, a project that proposed to leverage Blockchain technology to go further than just transactions and build decentralised applications with a native programming language on a settlement layer. This extends the usefulness of the Bitcoin Blockchain and presents a parallel to the internet where services such as lending can be offered with the underlying advantages of Blockchain. The variety of current applications are small with services ranging from lending to decentralised trading to yield farming. However, there is significant potential to create applications beyond those use cases that can provide stable online services that can on-board millions onto the Blockchain. A current widespread use cases is Stablecoins which at the point of writing has a market cap of roughly 70 Billion USD and is very popular within countries where the currency suffers from ongoing inflation. They provide easy access to the world’s reserve currency, self custody (to a certain extent) and peer to peer transaction with speedy finality. The more applications built, the more demand for the native token Ether, the higher the competition for block space and the increase of network effects. Innovations are continuing on top of Ethereum which provide faster transaction speeds while using the layer 1 for settlement. Recently Ethereum switched from proof of work to proof of stake which has changed the monetary issuance patterns of Ether and shown more deflation due to the burning mechanism.
There are many layer 1 Blockchain competitors around that compete on decentralisation, speed and security however the main question is will individuals around the world simply be using a public Blockchain, or will there be several public Blockchains with some interoperability protocol or will we end up using private and permissioned Blockchains owned by centralised organisation like a bank? If networks such as Ethereum keep increasing their capabilities and diversity of applications, it has a strong probability of retaining a strong presence amongst all Blockchains. Similarities with the monopoly of the internet can be applied here where it would make sense for there to be one global standard for a network. We do however observe large institutions such as private banks or central banks already migrating some activity to private Blockchains as the priority for them will be to safeguard and retain control of large sums of capital. Constant hacks on DeFi make for a strong argument against using public Blockchains and their applications. Subsequently, at least in the medium to long term, it start to become obvious that a mixture of private and public chains will coexist unless a public chain reaches a threshold of strong dominance that makes it impossible not to engage with it.
Through the creation of unique applications that provide ease of access to citizens of developing countries in particular, we believe that this will fast track the growth of Blockchain networks. An example, as mentioned before, is stablecoins/bitcoin which has already presented itself as a known alternative to an exacerbated pain point of inflation and currency mismanagement. Fragmented health services may give rise to a decentralised application that enables a patient to store life long health data with encryption onto a Blockchain and provide controlled access to medical practitioners. The maintainance of several passwords and the necessity of filling in Know Your Customer applications despite the high risk of such data falling in the wrong hands will give rise to a digital ID application where applications can be sent data without revealing the underlying sensitive personal information. Advancements in Zero Knowledge Proofs will be able to facilitate this.
Innovations within Blockchain oracles and smart contract are giving rise to transparent, trustless processes with a need for real world data. As touched upon earlier, if the pain points of corruption and lack of regulatory/legal infrastructure can be bypassed with such innovations, such innovations can herald significant progress. Corruption can be described as a misalignment in incentives where the public desire stability and opportunities while the politicians desire self enrichment and career progress. Developing countries are not the only countries that suffer from this issue, however strengthening of systems does lead to more implicit corruption compared to explicit.
Trustless processes can remove the desperation of citizens hoping for an individual to remain clean under the pressure of the system. Automation of decision making, accountability of financial budgets, automated management of resources, creating a transparent tendering processes, Blockchain based arbitration etc. Oracle networks are best placed to facilitate such transformative developments and represent a “pick and shovel play” for an investor.
Governments are not the only entity that can benefit from Blokchain solutions. Attracting hard currency for businesses in developing countries can be difficult and tokenisation of shares can instantly create new shareholders all over the world who are looking for new opportunities with high returns and provide the business with much needed cash at difficult periods. This will need to come with proof of earnings, automated share purchase/sell policies, token holder property rights and right to vote for share of dividends etc. Another area tokenisation can improve is infrastructure developments which in such countries usually require debt or large sums of money which usually is not available. By tokenising a well planned infrastructure project, the development of the country can be fast tracked but also create a culture of accountability due to the number of shareholders. Debt driven infrastructure in developing countries usually come with kickbacks, wastage and inefficiency. The current developing country’s playbook revolves around obtaining IMF loans, or for some - issuing bonds. This forces a country to then increase taxes on their poor population out of dire need for higher revenue in order to simply service the current debt and obtain more loans. Due to most countries adopting a short term presidential cycle, the incentives for such loans are high as they can provide large amounts of capital to inject into the economy.
There are also opportunities to onboard citizens from developing countries and Islamic countries with application that focus on community finance. An example is an on-ramp platform that allows exchange between mobile money and a Stablecoin in conjunction with smart contracts that provide insurance payouts based on conditions such as extreme weather conditions for agriculture or livestock sectors. Note that the additional value here is in the trustless process and automation which explains why the conversion to Stablecoin is necessary.
We could go into additional application ideas but the main point of the thesis is; to outline the idea of pain points with potential black swan events, the thought that if an alternative is available then self ownership is mostly preferred over giving away ownership and that the take over of Blockchain technology through directly applicable applications in the real world can create network effects which propel the value proposal of modular Blockchains and ultimately the value of its token.