Bitcoin, Ethereum And The Parallel World Of Crypto-Finance
While much of the world remains unaware or skeptical, Bitcoin and its crypto-cousins are quietly building a parallel financial system. It’s a friction-less system of economic networks with global 24/7 availability and advanced functionality that, in many respects, already exceeds the capabilities of big banks and legacy financial infrastructure.
This rapidly emerging crypto-economic network will become the world’s largest and you, dear reader, will one day be an eager and delighted user. Importantly, this parallel financial system—which is built on the back of public blockchains like Bitcoin and Ethereum—is its own distinct ecosystem, not an “add-on” to legacy banking products. (Disclosure: My firm, Blockchain Capital, invests in blockchain startups and crypto assets.)
There’s a lot of questions: Why should anyone care about this parallel world of crypto-finance? Why are tens of thousands of developers dedicating themselves to building out these economic networks which, in aggregate, are already valued north of $120 billion? Who will be the winners in this sea change of money and finance?
Digital infrastructure for a digital age
First, let’s address the most important question: Why is this happening? Why is this parallel world of crypto-finance emerging so rapidly and why are so many of the brightest minds dedicating themselves to this space?
At the core, it comes down to a simple reality: That which is natively digital is more functional. The parallel world of crypto-finance is enabling the world’s first natively digital assets. Natively digital goods are programmable and free from the constraints that limit us in the offline world.
Many years ago, PayPal helped bring money into a digital age by creating a layer on top of legacy systems. But while PayPal made it easier to use legacy financial infrastructure in a digital context, it didn’t create new financial infrastructure. PayPal is a digital front-end with an offline legacy back-end. In contrast, public blockchains like Bitcoin and Ethereum are new financial infrastructure: Digital infrastructure for a digital age.
Two examples that highlight the advanced functionality of natively digital assets are “time-locked transactions” and “multi-signature transactions.” The former allows users to “lock” bitcoin such that it can only be spent or withdrawn at a particular point in the future while the latter allows users to specify that particular bitcoins are restricted from being spent or withdrawn unless, say, 2 of 3 people agree (or 7 of 10, or whatever parameter the user establishes).
These are things that I can replicate in the traditional financial system with crude hacks that require hours of legal time and effort to create something like a Trust. However, that cost and burden has been reduced to a couple lines of code in Bitcoin and Ethereum. “Time-locked” and “multi-signature” transactions are just two early examples of what will become dozens and eventually hundreds of advanced functions that will be combined in novel new ways. Programmable money is finally here.
Software is finally eating the world of financial assets and value transfer and the outlook is incredible. We’re talking about an empowering world of advanced functionality, seamless exchange, and 24/7 global availability.
Surviving without Big Banks
But how do we get there? After all, the big banks and legacy financial system as a whole have been hesitant to even acknowledge Bitcoin, let alone support, integrate or build off public blockchains.
I used to struggle with this conundrum: On the one hand, public blockchains like Bitcoin and Ethereum are the valuable innovation that can change finance and money forever but, on the other hand, banks are subject to regulations that make it difficult or impossible to fully integrate these chains. It’s a “square-peg, round-hole” problem.
For years, the question was whether these public blockchains could survive out in the cold on their own without support from the legacy system. However, as these blockchains have grown in value from $1 billion to north of $120 billion, that question has been definitively answered: They aren’t waiting for permission or support—they are creating a parallel world of crypto-finance.
But who will be the winners and losers in this parallel world of crypto-finance?