One of the hottest topics in the crypto world right now are stablecoins. They first appeared in 2014 and have since grown to reach a market cap of over $120b. At the time of writing there are over 200 stablecoins in existence or development.
Stablecoins are essentially crypto currencies that are backed one-for-one by some underlying reserve asset. The most popular are those backed by a fiat currency like the US dollar (USD). This means that for every stablecoin issued (e.g. Tether’s USDT) there is one USD collateralising it. As a result, the stablecoin’s value remains pegged to the dollar allowing a holder to exchange one USDT for one USD at any time. In effect they are fiat currency tokenised on a blockchain.
While stablecoins can be seen as an abomination to the libertarian wing of the crypto community, to others they offer the best of both worlds. The efficiency and transparency of the crypto world coupled with the stability and security of the existing fiat-based financial system.
This stability enables a broad spectrum of use cases for those that want to utilise crypto infrastructure without exposure to the fluctuations of cryptocurrencies.On the retail side people are using them for instant international remittance or to gain permission less access to foreign currencies to protect against local currency devaluation and inflation. On the corporate side, they are being used by treasury departments to generate better yield and by hedge fund managers to ensure basis trades are delta neutral.
While stablecoins are interesting in and of themselves it’s not why I mention them here. I mention them here because I think there is something much more interesting about stablecoins than just their form and function. I think they tell us something much more profound about the future of finance and technology. I believe they are in effect the beginning of what Andreas Antonopolous calls ‘Infrastructure Inversion’.
The future is impossible to predict. That said, when it comes to technological innovation and advancement, each migration from the old technology to the new technology follows a very similar pattern with repeating phenomena. By observing these repeating patterns, we can be confident in certain outcomes once we have reached a particular inflection point in the societal and commercial adoption of the new technology.
Infrastructure inversion is one such repeating phenomena that is consistently observable through numerous new technology adoption cycles. Antonopoulos says this happens when “Infrastructure that is new is laid on top of infrastructure that is old and how that creates a conflict” which eventually results in the businesses that were being run on the old infrastructure migrating to the new infrastructure.
The reaction to the new technology by those that either do not understand it, or whose power is threatened by it, is also consistent and observable. It always starts with the new tech being a point of humour, before they turn fearful of it, and try to combat its proliferation by inducing fear in individuals and institutions.
Antonopoulos points to three very relevant examples of infrastructure inversion throughout history. Horses to cars, gas to electricity and telecoms to the web.
Sightings of ‘crazy people’ experimenting with automobiles began to occur in the late 1800s but it wasn’t until the emergence of the Ford Motor Company, and the first moving assembly line in 1913, that cars started to become commonplace in society.
In other words, the automobile took several decades to move from toy-like technology to near ubiquitous means of transport. Along that path it encountered numerous phenomena and temporary barriers that would appear again and again during other completely unassociated technology adoption cycles.
One of the big barriers to the general adoption of the motorcar was of course the road network and the absence of gas stations. The existing road network was the mobility infrastructure of the age and it was designed for the incumbent mobility technology, which was horses. Horses travelled perfectly fine on uneven mucky roads but not so motorcars. This in turn allowed those fearful of the new technology to laugh at it’s early imperfections and generate fear of it’s adoption. Resistance is always the first reaction to any new disruptive technology.
At the outset this new technology had to run on the infrastructure of the technology it was replacing. What ultimately unfolded of course was that new infrastructure to support the new technology was eventually built. Paved roads, gas stations and signalling systems. This new infrastructure even spawned new technologies that were impossible on the old infrastructure such as skateboards, rollerblades and motorcycles.
This is when the infrastructure inversion occurs. The old technology starts to get carried by the new infrastructure. Those riding horses began to use the roads that were built for the motorcar because they were faster (i.e. more efficient) and more comfortable (i.e. a better user experience).
“You start with the new technology living on the old infrastructure. Then it flips. You build new infrastructure and then the old technology rides on top of the new infrastructure designed for the new technology” - Andreas Antonopoulos
The move from gas to electricity had a very similar path as that of horse to automobile. However, the most recent and famous example of infrastructure inversion happened with the emergence of the internet.
Anyone who was around in the late 80s and 90s will remember the ordeal involved in getting ‘on the internet’. Modems and dial-ups were necessary because we were operating the internet over infrastructure designed to carry voice. Trying to squeeze data over these narrow frequency ranges made for a poor user experience and a very restrictive application design space.
However, just like with automobiles and electrification before it, new infrastructure in the form of fibre cables was eventually built to enable the full potential of the web. As the demand for web access increased the old phone companies slowly morphed into ISPs and eventually into pure digital infrastructure players.
Now almost every single phone call in the world is made over digital infrastructure designed to enable the web. A complete and total infrastructure inversion.
Just like automobiles and electricity before it, the early web was seen as a toy only hobbyists and crazy rich people played with, and just like automobiles and electricity the early web was clunky, costly and only served niche use cases until the appropriate infrastructure was built around it.
When it comes to technology adoption, history repeats.
So what might this mean for banking and finance in relation to blockchain and crypto technology? Are there parallels and recognisable phenomena that look similar to previous major technology adoption cycles?
Did it start off looking like a toy for geeks, hobbyists and rich people? The answer is yes. Were the early versions clunky and expensive with large usability gaps to everyday use? Yes again. Have those who don’t understand it, or been threatened by it, tried to discredit it? Absolutely yes.
So if crypto and blockchain is the next new technology wave we should at some point start to see the signs of infrastructure inversion and that is exactly what I think stablecoins represent. Institutions and companies from the old world, beginning to adopt and operate on the faster and more efficient infrastructure of the new world.
Therefore, as the speed of adoption and investment into blockchain and crypto infrastructure continues to compound, the next decade could see a complete infrastructure inversion for all of financial services. An inversion that results in the majority of financial activity taking place on blockchain infrastructure. Along with a whole host of new business models, organisational paradigms and innovative services driven by the new open and transparent incentive structures of the crypto world.
Technological advancement in the computer industry comes in waves every ten to fifteen years - think mainframe (50 & 60s) to PC (70s & 80s) to web (90s) to mobile (00s). These new waves are often described as ‘S-Curves’ in that the wave (as measured in investment, innovation & adoption) starts off quite flat as the new technology goes through a difficult gestation phase (marked by high friction and poor user experiences) before breaking out into a steep adoption phase (where investment pours into the technology and adoption is exponential) and eventually maturing and flattening again as it becomes almost universal in our personal and business lives.
Infrastructure inversion usually begins to occur as the technology starts the climb up the steepest part of the S-Curve as the early majority come on board. Therefore, the pace of change in financial services driven by the crypto revolution is only just starting. The real change occurs when the infrastructure and layer one technologies are mature enough to support an explosion in consumer and business applications.
The brilliant Packy McCormack, in a recent post called Compounding Crazy, wrote about how innovation compounds and technological advancement is actually exponential when viewed with a wide enough lens. This exponentiality is powered by the fact that each new invention or discovery becomes a building block for a whole host of new inventions and discoveries, which in turn become building blocks themselves for the next wave.
“Discoveries become inventions become building blocks become inventions become building blocks, ad infinitum.” - Packy McCormack
When it comes to crypto though this compounding effect of innovation is even more dramatic because of the open source and composable nature of DeFi and the broader blockchain world. What composable means, in a practical sense, is that each new system or protocol that is developed can be built upon and extended without permission by another developer or team. An ever-growing system of financial and computing Lego bricks that ever expands the toolkit and possibilities of every subsequent entrepreneur. The possibilities are inherently infinite and the speed at which they can be realised gets faster by the day.
“A platform is composable if its existing resources can be used as building blocks and programmed into higher order applications. Composability is important because it allows developers to do more with less, which in turn, can lead to more rapid and compounding innovation.” - Jesse Waldon
The proliferation of stablecoins as the first signs of infrastructure inversion tells us we are about to leave the gestation phase of the new blockchain enabled Web 3.0 world. The compounding nature of technology, especially the Lego brick technology of crypto, tells us the ascent up the S-Curve will be steeper than anything we have seen before.
That said, just because the world is about to go through a massive change in how we interact with the online world, allocate capital and form business entities does not mean that everything from the old world will be thrown out. Nations and governments will still exist and therefore taxes and corporate governance rules will largely still apply. Most of today’s large companies and financial institutions will survive the transition with augmented and modified business models. New hybrid architectures will emerge that straddle the decentralised blockchain based world of Web 3.0 and the old centralised world of Web 2.0.
There will also be a long transition period where business entities and financial institutions adopt the new infrastructure and technology. During this phase there will be a spectrum of organisations within the financial services world that span TradFi institutions who offer some crypto services like Visa and Square, to crypto native financial institutions (CeFi) like BlockFi and Strike to native DeFi entities in the form of fully decentralised DAOs like Uniswap and Compound. Knowing what the future might look like is only half the battle as you still must manage your way through the transition.
If you work in technology, and especially if you work in financial services, the move to Web 3.0 and it’s blockchain based architecture is going to bring enormous change. Getting your head around stablecoins is just a tiny beginning.
For insurance professionals, how can decentralised prediction markets like Augur help you offset the risk associated with floods and failed crops? If you are a fund manager or venture capitalist, how might equity tokens, governance tokens and the move to T+0 settlement affect your business? For central bankers, what are the limits and possibilities of truly programmable money? If you work in corporate law will the DAO replace the LLC as the vehicle of choice for collective economic action? For auditors and accounts, how will you begin to verify custody of digital assets at centralised exchanges and transactions at decentralised exchanges?
All that ever before you enter the wormhole of the Metaverse. If you think a lot has changed in the last few years, the next decade is going to blow your head off.
The evolutionary stages of the computing industry and Web3 are discussed in more detail in the below webinar starting at 9:13.