Crypto Network's Killer Value Proposition

What is the biggest value proposition of “crypto networks”? We argue that the answer is the defragmentation of financial markets through the inadvertent creation of two key components:

  1. the creation of the first common language of finance, i.e. the ATP, or “Asset Transfer Protocol”, which is the financial equivalent to “HTTP”, or “Hypertext Transfer Protocol”, the common language of the web; and,
  2. the creation of the first the common infrastructure of finance, i.e. the first “Amazon Web Services”, which enables the core set of financial apps and primitives to be built upon the common language in a free, but compliant, way.

Abstract

We attempt to answer a simple question: “What is the killer value prop of crypto networks?”

The answer, we believe, is in the title of this article, namely the functionalization of asset/capital flows. In particular, there is a big opportunity in breaking down the division between private and public markets, enabling capital flows to transition through various asset classes effortlessly, thus enabling network effects to be bestowed onto financial markets. This will be done through an interoperable and common network for assets, where assets will be treated as first-class programmable objects, and where they will move around the network freely through simple API calls. Said differently, markets will defragment by moving from bespoke siloed solutions to a common network.

What is Functionalization?

Functionalization theory (see [2] for more details), is an attempt to model market innovation through an abstract functional process. The theory of functionalization is generic enough to itself include market theories such as “Aggregation Theory” [1] by Ben Thompson, which we highly recommend to the reader of this article. At a very high level, the statement of the theory is simple (excerpt taken from original article):

… functionalization is the process [of] making the consumption of a set of products or services by the end user repeatable, scalable, and predictable, which in turn makes them cheaper and better.

[Functionalization is] the composition, transformation, and standardization of a set of platforms (services/products) into a modular and callable function, rendering the platform scalable, repeatable, and predictable.

It is effectively the process by which we create higher-level “functions” out of existing services through composition. Simple example: Amazon.com. On the buyer-side, Amazon.com composes together three key services through one function: searching (i.e. discovery), purchasing, and delivery of consumer products. Before Amazon.com existed, consumers were still able to do the same exact thing you are able to do now. However, until Amazon.com packaged all these three services as one single service, it was just significantly more difficult. Shopify is another great example of functionalization of “payments, marketing, shipping and customer engagement tools to simplify the process of running an online store for small merchants”. Those are the basics of functionalization: take multiple products and/or services that exist independently, and compose them together into a single new product and/or service that is repeatable and scalable. This, in turn, makes the selling of the service as a whole cheaper and better than the selling of the sub-components independently.

Where Are Capital Markets Today?

No more than a hundred years ago, there was no distinction between private and public markets. This distinction was initiated by the United States government in an attempt to place a regulatory framework that enables the smoothing out of tail events in markets with open capital flows. In fact, the Federal Reserve’s job is precisely to ensure that financial crises are managed properly if rapid downturns occur. Control of monetary policy is a sensible feature of any government desiring stability.

However, additional statutory regimes, such as the creation of “securities” and the managing body behind them (U.S. SEC), placed as protective measures after the Great Depression to protect against future economic downturns, created a permanent schism that has arguably debilitated capital markets for generations. In particular, this framework created a bifurcation of capital flows into “public” and “private” markets. The unfortunate outcome of this regulation is that it has locked a vast amount of asset classes into illiquid, undiscoverable, unaccessible and dormant pools. This can be visualized in the following quadrants:

Markets today

Naturally, this has greatly hindered the potential of financial markets. Imagine, for example, if every-time you wanted to sell an item, the buyer had to go through an extensive process of demonstrating that they were an “accredited” buyer, and if you, as the seller, happened to ever accidentally sell to “non-accredited” buyers due to a subpar vetting process, you would face serious legal penalties. While it’s hard to definitely say, we would argue that if such a restriction was in place for day to day items, Amazon.com would be a tiny fraction of the behemoth that it is today.

The Big Opportunity: ProCap (Programmable Capital), i.e. Functionalizing Asset Flows

Instead, let’s imagine financial markets withouts these prohibitive restrictions. Instead, what if we could move any asset class freely (modulo meeting various conditionals) from one owner to another? If we are able to create digital representation of any contract (i.e. asset) and move its ownership set as easily as transferring data over the internet. This is what functionalization of asset flows would entail. If a generic way to encode contracts digitally is enabled, we can now not only move from issuance to discovery of assets much more easily, but it would also be done in a way that still enforces the necessary regulatory conditionals required to comply with local, national, and international regulatory bodies.

Acknowledgements

References

  1. Ben Thompson. Aggregation Theory. Accessed 2019. https://stratechery.com/2015/aggregation-theory/
  2. Kevin Sekniqi. Functionalization Theory. Accessed 2019.https://kevin.sekniqi.com/functionalization-theory/
Written on February 4, 2020