Where a16z sees the opportunities of cryptocurrency and blockchain
The objectification of money and ability to find new revenue models may be cornerstones of Web 3.0.
Venture capital firm Andreessen Horowitz (a16z) has announced its second cryptocurrency investment fund. It will be a $515 million fund focused on developing crypto networks and businesses.
It sees the fund as an investment in the long term development of the Internet itself, it said.
But as is often the case when you try to peer down the pipeline of future blockchain development, there's a lot of uncertainty around what the actual end products will look like.
"In the same way that it wasn’t obvious in 2007 how applications on top of mobile phones would change so many aspects of the ways in which we move, consume, travel, communicate, and even date, it’s hard to imagine what the very best apps and use cases will be for blockchain-based computing platforms," it said.
That half-billion ain't gonna spend itself though, so we'd better come up with some kind of concrete vision for blockchain applications despite all the uncertainty, and a general sense of where the applications are.
On this front, a16z highlighted that several threads are likely to run through blockchain's eventual applications.
Two closely-related threads are the ability to turn money into a digital object, and how crypto can open up new revenue models.
Turning money into pure bits
"The payments system we use today was designed more than a half-century ago, and the way we transfer and distribute value has lots of room for improvement. Transferring actual value quickly and cheaply without a third party, in much the same way we currently transfer data like emails or photos, will soon be technologically possible at scale," a16z says.
a16z highlights several major benefits of turning money itself digital.
The biggest and most obvious is probably the sheer efficiency. An extraordinary amount of infrastructure sits behind most payments, and much of it is geared towards creating the functional illusion of instant payments.
Digital currency can cut out a lot of that infrastructure, theoretically replacing it with simple, instant peer to peer payments of hard digital currency. Fewer intermediaries, more efficient.
Of course, there's still a long way to go, hence the investment from firms like a16z.
Plus, as former CFTC head Christopher Giancarlo noted, disintermediation is the general direction of all innovation. Wherever it's possible to condense a system and remove unnecessary steps, that's what will eventually happen. It was only a matter of time before this trend came for money itself.
"New systems could provide a much needed upgrade, significantly reducing friction (unnecessary fees, call centers, faxes, delays, privacy breaches, and generally antiquated processes) and providing a more delightful and modern user experience," a16z says.
This segues into...
Profitably banking the commercially unbanked
Another benefit a16z mentions is that by cutting reliance from banks out of the financial system, cryptocurrency has the means to serve the two billion-plus unbanked and underbanked people worldwide, including tens of millions in the United States.
"Unlike existing systems where the sender and receiver must have fee-extracting bank infrastructure in place, payment blockchains require no bank account, thereby opening up financial services to the two billion-plus unbanked worldwide," it says.
It's also worth noting that, for the most part, banking deserts aren't lacking in banks because banks can't get there. It's because banks can't serve the area profitably. The ability to move money digitally and at lower cost means more services can start moving in.
Beyond that, the ability to provide financial services with different revenue models than what banks use is also a game-changer.
Where the money comes and goes
Banks mostly make their money from investing customer deposits, and then top it off by charging additional fees wherever possible. The traditional bank business model is dependent on customers holding their money in the bank. With banks monopolising access to all financial services — insurance, loans, investments, etc — the result is that access to all kinds of financial services is limited by banking availability.
The end result looks like high minimums, high fees and additional costs for people who want to access financial services from disadvantaged locations, assuming they can get it at all.
This means there's a significant market for startups that can find non-bank style revenue models for themselves while providing key financial services where they're needed most.
We can already see fintechs finding varying degrees of success and reaching new markets by providing core financial services while stepping outside the traditional bank-style revenue models.
We can find examples of this in projects like Libra and its (potentially-flawed) plans for covering network costs, crypto-based stock trading apps for emerging markets, Ethereum-powered microinsurance schemes and many more.
The same rules can be applied outside of finance. After all, the whole thing is about blurring the lines between tech and finance via the Internet.
"We think the next wave of Internet business models will come from crypto," a16z said. "Rather than engaging audiences through centralized gatekeepers that charge high rents and create self-serving rules, creators can use token models that bypass gatekeepers and give their fans a direct stake in their success."
"In just a decade of existence, crypto has gone through several waves. With each new wave, the applications of crypto extend to a greater number of categories and more visionary entrepreneurs enter the space."
Disclosure: The author holds BNB, BTC at the time of writing.
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