Hi Fintech futurists --

In the long take this week, I look at the difference between (1) building out the crypto asset class, and (2) operating infrastruture for a blockchain-based digital economy. There are so many little logic pot holes into which you could fall! There are so many things one could believe that make the whole thing make no sense at all! I am anchoring around two primary data points -- a Multicoin report about Binance's financial progress and its massive (though unaudited) $180 million profit in Q3 of 2019, and a post by supply chain company Centrifuge about marrying cashflow financing with the decentralized web.

The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.

Long Take

I have been thinking about blockchain use-cases, adoption curves, and jumping the chasm for Web3 software. Let's start with the easy stuff. Binance is killing it. Since 2017, they have out-executed crypto exchanges, decentralized exchanges, fintech broker/dealers, and everyone else trying to get day traders to day trade. As I understand, this was accomplished through a combination of multi-level marketing, extremely quick technology builds, some of the lowest pricing in the industry, and regulatory arbitrage. The crypto trader market is now 60% owned by Binance, and Binance is being a fast mover to capitalize on this advantage. They are throwing off massive amounts of cash -- $1 billion to date -- and reinvesting that in the business. The difference between subsisting on venture financing and being cashflow positive is the difference between being underwater on your mortage and owning your home outright.

Further, Binance is quickly going horisontal and creating cross-sell between trading, margin, staking, and decentralized offerings. Whereas American exchanges like Coinbase are wading their way throuh a morass of a regulatory landscape, Binance is launching features and spreading its jurisdiction octopus across the world. Where it needs to be compliant, it is spinning up subsidiaries and following local law. But for most of the crypto trader world, this is an afterthought. Binance may not get every large token offering from CoinList (e.g., Nervos), and it won't ouperform ConsenSys on Ethereum, but it will certainly get many others.

Yet after all this profit and success, it does not feel like sufficient progress to me. And the reason is simple. There are two vectors for blockchain innovation worth considering -- (1) investing in the asset class itself, and (2) the operating transformation of the digital economy. Crypto was born for payments on the web with Bitcoin, but quickly became a killer use-case for day traders, speculators, and gold bugs (bless you!). Instead of most transactions being used for buying sandwiches, most transactions are about outcompeting investors on some trading thesis. And then fake transactions for fake competition around fake trading (bless the Internet!). So here's a quick segmentation of what I get even more excited about.

On the vertical axis is the bit we already discussed, with the bottom part of the chart focused on capital gains. The horisontal axis plots private vs. public blockchains and some examples of local progress. So, for example, because trading in the trustless context became so appealing to so many, capital markets operating improvements were a natural blue ocean to explore. Firms like R3 quickly moved to set up permissioned chains in existing financial industries that follow established standards and protocols. If you want to see this on an even more massive scale, just check out the tidal wave of 500+ Chinese government and technology projects that use permissioned chains for global competition. Are they real blockchains? If that is your only concern, you are missing the game.

Programmable blockchains -- not those representing just one asset, but those that can be used to write distributed software -- are the real game. I am biased to say that Ethereum is that programmable chain, because it can shift between public/private and investing/operating. Of course, it is not the only solution, and the careful thinker would appreciate the progress others are making in the space, particularly around infrastructure. But the way Binance dominates on users, Ethereum dominates on its core market, developers.

And yet, I am afraid that the risk of failure for winning this long game is high. If you are not focused on doing one thing well and having a major cash-flow engine, like the currency traders and the Bitcoin miners have to date, then there is no room for re-investment and expansion. This is why I think we will see the permissioned operators, who have cash-flow from existing industry consulting, and decentralized capital markets players, who have capital gains to spare, spend the next decade trying to move into the digital economy. The Chinese proprietary blockchain giants will power billions in business activity. Binance may become as widespread and adopted as WeChat or AliPay for digital wallets. It is much easier to win something from a base of users and revenue, than from smart, aesthetic ideas.

We have no shortage of beautiful, aesthetic ideas for decentralized economic activity. I am taken with this write-up by Centrifuge about how their technology could be extended to help businesses with supply chain financing, using MakerDAO. During the ICO boom, I had spent time with a Lithuanian business called Debitum Network, which approached the problem for invoice factoring from a digital lending perspective -- but they were saddled with a token economic framework that aged out of favor. Since then, decentralized finance approaches have dropped transaction tokens in favor of more open systems.

With Maker, today you collateralize a position with ETH, and receive an algorithmically dollar-pegged currency. Very soon, you will collateralize that same position with *whatever* and be able to get your dollar equivalent. This approach fits cashflow problems like a glove. Businesses in a supply chain often get quite differing payment terms (i.e., we will pay you in 30, 45, 90 days) while having to pay their own bills on yet another set of terms. To smooth things out, they will sell or finance these cashflows. In fact, one of the largest UK fintech startups, called Greensill, has raised $1.4 billion from SoftBank to solve problems around working capital that traditional banks are too slow to address.

Another company to keep in mind is Taulia, which raised $170 million and powers working capital for 1.5 million businesses. I bring this up, because the folks behind Centrifuge have a background from Taulia and Greensill. Is it possible to stand up a decentralized working capital solution today? Technically, the elements are there. Special purpose vehicles from Centrifuge could be spun up quickly through a service like Vauban (disclosure, I am invested) and tied through software to Maker smart contracts. You then have a mix of real-world legal enforcement and blockchain-based programmability. But can we get the industry to opt in, and how? Can we do this before most small businesses even know how to operate a blockchain-based payments processor?

Coming back to the analytical segmentation of the space, this is where permissioned chains may actually be helpful. Think about media piracy if you will -- I sure do. When you go onto Pirate Bay, a popular Bittorrent tracker (i.e., a distributed software for file sharing), there is a list of files you can click. Each file has Seeders, and Leechers. The Seeders already have the file, and are sharing it with the community. The Leechers are just downloading the file from the Seeders. The more people share, the faster the downloads go. Conversely, if you have very few Seeders for your very specific niche search, then your download may not go at all. This is, in some sense, a market with an intersection of supply and demand. In the decentralized world of Pirate Bay, some requests simply aren't possible because there is not enough supply. There are a lot more people interested in the Avengers than in Tron.

Permissioned file sharing providers, like Netflix, Amazon, and HBO do not have this problem. There is no market clearing mechanism involved to support how fashionable some particular movie is today. Nobody needs to persuade the millions of nodes to host Tron, it is just available on those permissioned platforms -- as are the likely horrible spin-offs to come. As a comparison to the potential DeFi-based supply chain solutions, look at ConsenSys-built komgo, which is owned by the industry that uses it and is already in production today. This is why I think the digital economy path for blockchain use-cases must also be powered up by the private blockchain providers, and then made interoperable into the public ecosystem.

We need to move past day-trading. We need to bring over both retail and business users. We need to have operating cashflows. That's the real game for everyone in blockchain.

Featured Interviews, Podcasts, and Conferences

• Fintech used to be a back-office support function, now it's defining an industry. Check out my Op-Ed in Investopedia about the history and future of financial technology.

• Interview with Blocks99. In this discussion, we focus on the financial crisis, entrepreneneurship, and why decentralized finance infrastructure is needed in the industry.

• Are banks losing the brand war to tech firms? Great podcast with American Banker's Penny Crossman. We don't buy Tylenol from the Tylenol store. Why do we buy Wells Fargo bank accounts from Wells Fargo?

• From Crypto to Decentralized Finance. Another great podcast with Will Beeson at Rebank: Banking the Future. Check out our conversation and subscribe here.

Short Takes

• Goldman Sachs & Co. appoints Rachel Schnoll to yank off United Capital band-aid that Joe Duran didn't -- making FinLife work with non-UC applications and Goldman’s robo advisor is ready to run. Apparently Goldman has added 200 developers to support the wealth tech powering United Capital, and moved over a senior GSAM product executive to oversee the upgrade. Also, it can use these resource to offer retail level asset allocation -- which should be no surprise, as that fits with the digital lender, neobank bundle strategy.

• The 4 Stages Of Fintech Startups – lessons from Personal Capital rebranding and Digital bank Monzo fails in attempt to trademark signature colour. The particulars are that Personal Capital is doubling down on its human factor within its robo positioning and adjusting its brand to follow suit. And second, Monzo tried to trademark its color. Takeaway is that for B2C fintech, you compete on your clothes.

• Playing the Game of Infinite Leverage on Robinhood. Oh man, how I love Matt Levine of Bloomberg. This is the most correct take down of what you should think about Robinhood users gaming the system to get levered up by buying stocks and selling call-options against them, and then buying stock with the margin on those option sale proceeds, and repeating ad nauseaum. Stuff like this is amateur hour.

• China’s digital currency holders will not receive interest payments, says central bank official. Always interesting to get more color about the China coin, which many believe is not really based on a blockchain and is just a version of digital money. Ok, but that's still fantastic! That there is no interest, however, creates an opportunity for others fiat stablecoins that integrate into underlying banking systems.

• Public blockchain Nervos Network raises $72 million in token sale. This is notable, especially for its star-studded set of investors (Polychain, Multicoin, China Merchants Bank!?). I have a high level of scepticism around any would-be Ethereum competitor, but important to know the comp set. Also, it raised on Coinlist, which recently got a check from Twitter's Jack Dorsey.

• A Deeper Look Into Microsoft’s Stack to Bring Tokenization to Enterprise Blockchain Applications. Main takeaway is that tokens are organized by taxonomy and have built in features and role support. We've done this stuff at ConsenSys for a while, but it's great to see a potential path to broader deployment and adoption. See also Ethereum, Accenture, IBM, R3 publish first token taxonomy framework.

• AI to power TD’s digital customer experiences. TD Bank consistently sticks its neck out trying to implement innovative stuff, from AI to contextualize client experience, to roboadvisor tech through the Hydrogen platform, to even renting Brett King's Moven neobank. Surprising though how disconnected its various sub-businesses are in technology roll-out -- a missed opportunity.

• Nationwide Partners with Betterview to Use its Proprietary Computer Vision and Machine Learning Technologies in Commercial Property Underwriting. Yeah, it's a press release. But it's a press release about using AI to scan image data of people's roofs to probability-weight the likelihood of said roof collapsing, and then underwrite insurance on it.

• The Silicon And Software Driving AI Insights. Software for machine learning continues to improve, and this has continued to create demand for new hardware and optimization engines to run neural networks. Will be hard to displace NVIDIA, but maybe easy to sell to them.

• Brazilian Mobility Startup Kovi Raises $30M Series A From Global Investors. Kovi is 17 months old, and its business is to rent cars to Uber/Lyft/Didi gig economy workers. While the growth is there, doesn't this seem like just indirect lending to or risk-shifting from Uber?

• Top-down, unsustainable Silicon Valley needs to learn from Africa, South Asia, and South America, where tech is built for and by users. As new platforms struggle to find existential use cases (hi there VR), this article presents an interesting counter factual. To quote: "In Nairobi, Kenya, I was amazed to see a 3D-printing business set up on a street corner, merrily printing everyday objects for passersby. Their custom 3D printers, which make everything from medical devices to household appliances, were cobbled together from circuits and wires salvaged from dumps and recycling centers."

• Microsoft Launches HoloLens 2 Worldwide, Here's a Close-Up Look at the $3,500 Device. According to the author, this is the best enterprise AR device on the planet, and can teach its users industrial, factory, and surgery skills. I think it turns people into robots following software instructions. But maybe for some of us, that's a good thing!

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