The Future of Crypto

We recently explored a potential path forward for crypto, making the case that as regulators catch up, digital currencies will become more investable. But that’s not the only development that will shape the future direction. Several other key questions will determine whether today’s “crypto winter” will be lengthy, including:

• Which value-creating use cases will spur demand for the technology?
• Who will develop better user interfaces, and when?
• What balance will be struck between decentralized and centralized structures?
• How do players in the crypto ecosystem develop and maintain competitive advantages?
• Who benefits from the technology and where does the value created go?

A Technology in Search of a Problem?

We’ve written extensively about value-creating use cases for crypto and blockchain, and for good reason. The most widely adopted technologies tend to improve lives—by increasing efficiency, allowing us to do new things, offering entertainment, and so on. In the earliest stages of development, the knock against crypto and blockchain was that it wasn’t useful for anything. Yet we see a variety of potential use cases (Display 1).

Display 1: Crypto and Blockchain Have a Range of Use Cases

 

 

More broadly, the two most significant use cases we see involve technology as an enabler. Take digital property rights. As people migrate their lives online, owning digital property will become more common and more valuable. It largely underpins what we think of as Web3—an internet infrastructure that allows a broad community of content creators to reach their audiences directly via distribution channels that are less siloed than prevailing ones today. Ultimately, this will allow consumers and producers to capture value that currently benefits just a few major companies.

The second enabler is the tokenization of real-world assets—effectively creating stock- or bond-like claims on different assets or cash flow streams. This has the potential to transform the way capital is created and financed while altering risk-sharing in the economy.

User Interfaces Need Work

Better user interfaces—from search engines to improved graphics and eventually mobile web—propelled widespread adoption of the internet. And they’ll be equally important for the crypto-based web to reach the next level, too.

Right now, if you want to engage with this next generation of web content and commerce, you have few options. You can download a crypto wallet like Metamask to your browser and open games like Axie Infinity or access digital worlds like Decentraland. But the graphics lack the cinematic quality that make high-end videogames feel realistic and there’s a limit to what you can do. For broader uptake, we’ll need to see ongoing development and the incentives to keep upgrading hardware and software.

Which is Better—Centralized or Decentralized?

As these developments play out, the tug-of-war between centralization and decentralization will become a key proving ground for who survives (and thrives). Consider which is better for content creators and users—YouTube or a crypto-based version of it? Which has better economics for producers? Which is easier to use and adds more value for watchers? Now think of the world of stablecoins. In that realm, the choice comes down to a money market fund like Circle’s USDC stablecoin, backed by high quality assets (that may soon fall under financial regulation) or a decentralized and computerized (“algorithmic”) stablecoin which uses coding language and incentives to maintain parity with the US dollar.

For digitally native assets, decentralization holds a certain appeal. Ideally, if you own a digital asset, it can no longer be arbitrarily removed by the company powering the program you’re using. For instance, gamers who have secured hard-won upgrades could sell items to other players—rather than losing them upon closing their accounts.

Likewise, to the extent that the web of the future combines different protocols, portability of digital (or even real world) assets from one system to another would be transformative. Consider purchasing a song on Spotify but also being able to listen to it on Apple or Amazon Music.

Establishing a Competitive Advantage

As investors, our aim is to allocate capital to areas with growth potential where we’re appropriately compensated for taking risk along the way. To find these opportunities, we look for investments with a sustainable competitive advantage, or what Warren Buffett calls an economic moat. Such moats are well established in the technology sector. In fact, software and internet giants have some of the largest ones ever created—underpinning the value of businesses like Google/Alphabet, Microsoft, Amazon, and Facebook/Meta.

But how competitive advantages will evolve in the crypto ecosystem remains to be seen. In some ways, it’s anathema—the goal of decentralization in many cases is to remove the “tolls” that tech behemoths earn and distribute that value to the producers and users instead.

Where Does the Value Go?

That raises the final question: if crypto protocols do allow us to create more value in the future, who will capture the lion’s share of the economics?

Much of the value created by Web2 has been swallowed by Big Tech—and their shareholders. But as technology progresses from here, will that change? Can leading tech companies maintain their strong incumbent positions? Or will content creators and users benefit financially, too?

To the extent that value created comes in the form of an intangible, like efficiency, we could see something along the lines of what Google Maps did for consumers and companies. By reducing the cost of maps and GPS systems to roughly zero, they added significant value to consumers’ lives relative to the physical map-based world of the past. What’s more, that low cost spurred a proliferation of use cases based on geolocation, paving the way for companies like Uber and Seamless, which improved lives in other ways.

A Long Road Ahead

As we peer around the corner of the crypto space, an even bigger lift lies ahead. Like any major technology, we expect further developments to unfold over a multi-decade time frame. For all the speculative froth in the prices of cryptoassets, we expect progress to continue unabated—and at a pace that’s faster than we’d anticipated a year ago. There’s a long road ahead and we’re focused on both the journey and the destination.