Long Take: Parsing ARK Invest core assumptions in the case for Innovation, Singularity, and the Metaverse
Gm Architects —
Today we are diving into the following topics:
Summary: In this analysis we look at the new report from ARK Invest, supporting its Metaverse Singularity thesis, and the investment implications thereof. We focus on the story of digital wallets, blockchains, and the impact on commerce. In particular, ARK makes the argument that a new form of on-chain commerce will more than double eCommerce consumption in 8 years. Developments may be driven by DAOs and new operating models. We review this thesis with the counterpoints of Zoom, Netflix, and Meta losing steam in recent months, and what that means for innovation investing as a whole.
Topics: metaverse, innovation, NFTs, Covid pandemic, digital adoption, generational and social change, DeFi
Tags: ARK Invest, Apple, Stripe, Polygon, Discord, Twitter, Facebook/Meta, Venmo, Cash App, JP Morgan, Gen Z, Millennials, Zoom, Netflix
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Long Take
The Innovation Battle
We are in the midst of the Great Battle in our industry, and it’s getting hard to measure up the forces on each side.
On the one hand, you have Apple and Stripe replacing the payment terminal, Meta and Microsoft signaling towards a financial metaverse, Polygon raising $450MM; Bitcoin surpassing Visa volumes, $10B+ funds and $100MM+ check sizes going to all sorts of fintech and crypto companies. Nothing matters but the great platform shift, digitizing the old banks into grounded sand, swept away into obscurity.
On the other hand, you’ve got the weighing scales of the Market. All the above, says the Market, is but a playful little bubble on the tsunami wave of interest rates, real estate financing, supply chains, and geopolitical almost-war. How quaint that you believe in your frog-religion of innovation, anon!
Let’s explore the strongest argument for each at the moment, and try to pinpoint the things to watch so that we can make good decisions, grounded in the physics of economic reality. The goal is to balance out the dialectic, and find a near-term equilibrium that reduces our stress, anxiety, and error.
ARK Invest’s Secular Thesis
There are investment bibles for each generation. What Mary Meeker did for the Internet, Cathie Wood is doing for the Singularity. The latest version of her firm’s Big Ideas, each turned into an ETF for consumption, can be seen here.
All these things have so many names. Web3, the Metaverse, exponential technology, the Singularity. What’s in this cauldron? Start with Moore’s Law, suggesting that computational power increases exponentially.
Add in the idea that human intelligence is rooted in materialism, i.e., consciousness is derived from atoms and bits, and can be encoded into a machine mind. Calculate the required computational power, and release the science fiction of what happens when the AI general intelligence explosion occurs, what rendered worlds we will live in, and the cyborged, networked shape of the human animal.
Now, the Metaverse is just the space for our uploaded selves, and it doesn’t require much uploading or AGI. But still, the confluence or AR/VR, robotics, digital law and economics (i.e., blockchains), and machine learning does create a virtual world for some sort of something to inhabit. And as our attention shifts into this digital world, so do our digital appendages and their financial features.
For ARK, this is a $210 trillion market capitalization opportunity by 2030. In other words, in 8 years, about 30% of all human assets — the economic value of the our world — will be upgraded into a modern technology chassis that looks like a mix of Star Trek and Blade Runner.
Within that shift towards the 2030 terminus, lies $40 trillion of blockchain enterprise value and $10 trillion of digital wallet value. For readers of our newsletter, this is an obvious focus and framing lens. If public chains today float around $1-3 trillion in value, there is a 20x uplift to come. And similarly, digital wallets today are maybe $300 billion of value, if you count Coinbase, PayPal, Square/Block, and related Web2 stuff.
A 33x increase would mean that digital wallets are worth as much as 20 units of JP Morgan (i.e., $10T / $500B). From now on, JPMs will be our unit of account.
Attention and Hardware
There is good evidence that parts of this logic are correct. That evidence underpins the amazing AUM growth in ARK’s ETF products. Any investment manager that wants to add the bacon—bits of “innovation” to the traditional 60-40 portfolio can do so through an ARK investment instrument.
We found the slide below quite novel and compelling, showing the application of Wright’s law for artificial intelligence hardware and software. The “law” models out how a per-unit cost of some industrial process decreases exponentially (or is it logarithmically?) as the cumulative number of that unit is made. AI is an unblocker for a bunch of other adjacent industries, like self-driving cars, or augmented reality.
If it is true that applying probabilistic machine learning models to everyday things accurately is becoming increasingly affordable, then probably human kind will apply probabilistic machine learning models to everyday things. You know, because that’s how our minds work. And also because hard deterministic rules — IF(this, THEN that) — are very often wrong for higher order thinking in shifting context. Also, if you put “probably” in there, and you will always be right.
Second, there are some really great data points about adoption curve. You can see below that some of our newly adopted behaviors, like Facebook, YouTube, WhatsApp, WeChat, and TikTok can get to 1 billion monthly average users in 5-10 years. That’s, honestly, super incredible. A platform shift can happen in half a decade, where a large part of the global world is doing some silly dance for an attention-rewarding algorithm.
That said, we think the connection between Wright’s Law — more AI in everything, because we make more AI — and attention platform distribution can be debated. Yes, more compute and intelligence probably means we can reverse-engineer how people click on links. But also, it doesn’t follow immediately that more computers means more adoption. It only *probably* does. See how that works?
And so that leaves us with another core premise of the projections ARK puts together — that all this bubbles up into a higher share of time and commerce being directed online, rather than offline. The chart above shows you how in 2021, Internet users spent 38% of their time online and 62% offline. In 2030, ARK projects only 48% time spent offline.
Frankly, it’s hard to understand where this increased capacity for online participation comes from. And this assumption — that we can increase digital consumption by 50% over the next decade — underpins the economic argument about how commerce is shaped. To rationalize this, you need to deeply believe in the power of gaming.