Compiled by: Vernacular Blockchain
I’ve been struggling with how to get involved in crypto policy as election season rolls around. So I wanted to share my personal, apolitical reflections on why I think blockchain is the future of financial services — and pretty much everything else.
The days are long, but ten years pass in a flash.
1. Background
I bought my first Bitcoin in 2013. In 2016, I co-authored a paper with a group of Federal Reserve System colleagues exploring whether blockchain would change the global financial architecture. Over the past eight years, I have thought about this question from many angles.
This journey has been challenging at times. I’ve seen many things in the industry come in and go out (…and come back in again). Despite my fair share of setbacks, and many people in my personal and professional life trying to convince me that crypto has no substance and won’t change the world, I’m still here.
I have come to the conclusion – and now I would call it a conviction – that permissionless blockchains have already transformed the global financial architecture. And we are only just beginning.
Financial infrastructure has historically been expensive to build, which has been detrimental to consumers in the long run.
My career has spanned two very different fields, from the heart of the financial system (the Federal Reserve) to the cutting-edge crypto space (Paradigm). I have always been interested in money and freedom as social phenomena, and in making both ideas work better for ordinary people. I view the financial system as the middleware of capitalism, and am fairly neutral about what the future will look like, as long as it is better than the past. This is how I view crypto policy to this day, and I believe some of my former government colleagues share similar views.
My experience working at the Federal Reserve System gave me a deep understanding of how the financial system works and its flaws. Most of the traditional financial infrastructure is protected by huge barriers, and the core challenge for entrepreneurs and policymakers is how to build bridges across these barriers.
Conventional economics tells us that natural monopolies emerge where there are high (upfront) fixed costs and low marginal costs. Electric utilities are a basic example: it’s very expensive to build a nuclear power plant and transmission infrastructure, but once everything is in place, it costs almost nothing to add another node to the network.
Building a trading platform, clearing house, or payment system has historically had similar cost structures, but financial market utilities have greater market power due to the concentration of participants and liquidity. If you wanted to build a traditional financial infrastructure that operated at scale 5 years ago, you would at least need to: 1) build and maintain a local data center; 2) develop core software from scratch to record transfers; 3) create a communication network for participants; 4) integrate with seemingly endless external systems and merchants; 5) provide a governance framework and some kind of rule book.
In a 2023 Federal Register notice, the Federal Reserve System estimated costs of up to $545 million to launch the FedNow Service, a parallel system to the Fedwire system it already operates. Intercontinental Exchange, which owns the New York Stock Exchange and ICE Clearing, spent $734 million on technology and communications infrastructure in 2023. SWIFT traces its origins to the transatlantic undersea cable connecting New York and London.
But where there is no competition, innovation dies and costs rise. Without pressure to compress profit margins, rent-seeking intermediaries have little incentive to invest in R&D that will provide benefits to end users. They also have the market power to charge what they want… and most are not doing it for charity.
Furthermore, high recycling costs severely limit the scope of what can be built commercially, meaning that only markets that don’t require customization and don’t benefit from economies of scale are served. People have trouble understanding that this isn’t about using technology to make existing products or markets more efficient, it’s about building products and markets that couldn’t exist before because the economics just didn’t make it happen.
We can lower the cost curve with public blockchains. Who wouldn’t want to make it cheaper to serve the long tail of users and businesses that are often overlooked?
2. What if you could build a financial instrument on an efficient, interoperable infrastructure with almost zero upfront cost?
Ethereum, Solana, and some other tier-one blockchains all function like globally distributed data centers that are privately funded and open to the public. If you want to build a payment system today, you can build your own data centers, etc., or you can just create a stablecoin. If you want to build a trading platform today, you can run a CLOB and collaboration infrastructure, or you can deploy a Uniswap liquidity pool. The ledgers, communication networks, and social graphs are already built, and you just pay for them on a per-transaction basis. Even better: everything is interoperable by default.
It’s hard to overemphasize what this situation could mean for the future of finance and social coordination at a time when financial infrastructure is in dire need of an upgrade. It’s why Vlad Tenev and Larry Fink continue to tout the merits of building on-chain and leveraging the efficiency benefits of public infrastructure. Every major bank or financial institution and every major government (except the US) is investing in this space. I don’t know how you can ignore this. Some people like to point out that you can get these benefits without a native cryptocurrency, but that’s simply not true. Native tokens like ETH are at the heart of what makes these networks work and what incentivizes people to build on them.
This doesn’t necessarily require blockchain
Decentralization does sometimes come with efficiency costs, and many blockchains, in order to optimize for those efficiency costs, introduce inefficiencies into products that don’t require this level of censorship resistance. I think this view is quickly becoming one of the weakest anti-blockchain arguments in the financial sector.
At some stage, if every other part of our lives is on the blockchain, it won’t matter so much whether use case XYZ needs to be on the blockchain. You may not need to pay on your phone when almost every store accepts cards and cash. But when your phone is with you 24/7 and is your primary way of interacting with the world, it will be a huge convenience to have every part of your life integrated into it.
rwa.xyz shows that there are currently about $5.25 billion in “real world assets” (aside: terrible name) on-chain, up from almost zero five years ago — and that doesn’t include stablecoins, which add over $150 billion to the total. This will continue to create a flywheel effect such that in five years, “this doesn’t require a blockchain” will sound as pedantic as “why would you build a website for your business?” This brings me to my next point.
Blockchains are not monolithic (even those that appear to be)
In our 2016 paper, we identified a number of technical “challenges” for blockchains, including scalability/throughput, key management, and interoperability. Most of these issues have seen significant breakthroughs in recent years and are likely to be solved in the near future.
I believe that maintaining trusted neutrality at the base layer of blockchain is critical, but certain organizations developing in the blockchain space also require varying degrees of control and visibility. Smart contracts with whitelists and L2 solutions with centralized sorters are close to enterprise blockchains, but still offer more benefits than proprietary technology stacks.
The field is already filled with so much nuance that you can easily ignore those who try to use one-size-fits-all reasons why blockchain can’t do something. Time and technology will change people’s perceptions of what’s possible and their willingness to change.
3. Beyond Finance
The implicit theme of this article is about the future of finance. Of course, all the benefits that make blockchain useful in financial applications also apply to other areas that require trust, where the technology can be used to create digital scarcity and enhance social coordination. Therefore, I am equally interested in non-financial applications because they create positive feedback loops for financial applications and are an arena for cultural experimentation. The migration of traditional finance to the blockchain is a second-order effect of the overall migration of business and culture.
Farcaster is a great example of what co-founder Dan Romero likes to call a “decentralized enough” social network. Storing every piece of information on a blockchain is both expensive and excessive, but having a social graph on a blockchain is extremely useful, especially when it’s combined with an embedded crypto wallet that can be used for payments and storage of unique digital content.
Skeptics who criticize crypto for having no “killer apps” or for having too much unsavory activity miss the point. First, unstoppable public infrastructure is a killer app in and of itself. The early adopters of new technology are almost always marginalized groups in society. As technology spreads and enters the mainstream, its user base eventually expands, and people build apps that meet the needs of more and more people. Crypto is on such a trajectory.
4. Conclusion
This brings us back to the original topic. Having been in this space for nearly a decade has made me fairly confident that crypto is not going away. In fact, we will only see more projects and applications over time.
One of the most fundamental principles in the corporate world is mergers/acquisitions, a trend that often leads to centralization. In crypto governance, a very important “corporate” action is forking — where one can become many.
Our labs will make mistakes along the way, and that can be uncomfortable, but I challenge everyone working in this field, especially those working in policy broadly, not to focus too much on the negatives but to imagine how we can make things better.
