Posted on Feb 06, 2024Read on

Money Is The Killer App

There was once a time when ‘crypto’ was synonymous with ‘cryptocurrency’. Today, the term is far more expansive, spanning NFTs, zk-stuff, identity systems, stable coins, and more. Given the recent expansion of crypto, as a term and now veritable industry, it’s interesting to consider what crypto’s ‘killer app’ might be. Many take the view that the cryptocurrency piece is just the beginning, that eventually we will see ‘non-speculative’ use cases sporting ‘real utility’. Farcaster is a current example of such a phenomenon; a product that leverages the immutability of a blockchain to house their name space, in the form of a smart contract, and PKI (i.e. wallets) as an identity augmentation, in service of a new brand of ‘sufficiently decentralized’ social media. Conspicuously absent from Farcaster is any native use of cryptocurrency, lending credence to the idea that crypto might just transcend the realm of the explicitly financial. In the background, however, it is largely the allure of financial incentives -- in the form of memecoins -- that is driving a lot of Farcaster’s recent adoption. And so it is that even in the context of what is considered the shining exemplar of a ‘non-speculative’ crypto app, speculation and cryptocurrency remain the dominant themes. This would seem to support the more ‘conservative’ perspective that the fundamental use case of crypto is, and always will be, money, financials services, and speculation. So, which is it? Is cryptocurrency simply a chapter of the emerging crypto story, or shall it remain the primary motif?

When it comes to anticipating the future, it pays to consider the past. And if we take a look at crypto’s past, its short ~15 year history, one thing is clear: money has been the killer app. As the original instantiation of crypto, Bitcoin -- what is a novel money / payments network -- remains far and away the most widely adopted product in crypto, accounting for around 50% of its total market share. Ethereum, as a money and ‘general purpose smart contract platform’, accounts for another 15-20%, while stablecoins represent ~10%, with a long tail of digital assets making up the rest.

While the popular narrative of the moment is that crypto is about much more than ‘magic internet money’, and will serve as the underlying substrate of a new, more open Internet, the reality is that money and its basic infrastructure remains crypto’s killer application -- and it’s not even close. Even in the case of smart contract platforms, it is the speculative asset (i.e. money) -- and the ecosystem of (mostly financial) services built around it -- driving the adoption and subsequent valuations of these networks (as opposed to more traditional notions of cash-flows and p/e ratios). Of course, the future may diverge from the past here, and money may ultimately prove but a stepping stone in the evolution of crypto as an industry. Possible though this may be, I consider it highly unlikely. Indeed, I expect ‘money’ -- broadly construed -- to remain the dominant use case of crypto far into the future. Here’s why.

Fundamentally, crypto represents the emergence of an Internet-native financial system. And money represents the foundation of finance. Without money, there is very little that looks like modern finance. Indeed, it’s no coincidence that this emerging financial system was catalysed by the genesis of a new money in the form of BTC. Moreover, though it’s rarely considered a market as such, money is effectively the largest market on earth; the medium through which all other markets move. And what crypto represents is a radical broadening of the space of possible monies, the introduction of a whole new order of competition into the global money market.

Next to the opportunity that the global market for money represents, the rest of crypto’s potential applications -- however significant or revolutionary -- are relatively underwhelming in scale. So when I say that money will remain crypto’s killer app, it’s neither cynical nor pessimistic; in fact, it’s supremely optimistic. For while crypto is already taking on money, in the broad scheme of things, at $1.7T, it is but a rounding error in the overall market for monies. Therefore, if money is to remain crypto’s killer app, given everything else that crypto could conceivably be used for, it would imply that crypto was able to become a major player in the market that matters most.

Ultimately, I view networks like Ethereum and Bitcoin -- along with every other cryptonetwork worthy of mention -- as new kinds of financial institutions -- ‘Internet banks’ -- and their primary product as money (and its safe storage i.e. property rights). Everything else we witness in crypto is an emergent consequence of these new moneys being distributed and speculated on; a happy accident that results from the properties of the underlying technology (as it happens a shared hard drive is useful for more than just money). The astonishing valuations of these networks become far more credulous within this frame. Indeed, the reason cryptonetworks trade at such seemingly absurd valuations is because the market values them, correctly, as monies. Now, to be sure, most of these monies will ultimately go to zero, or close enough to, but the market nonetheless pays a speculative premium for them because the potential upside, if they are to reach ‘money status’, is so great.

Finally, there’s a popular assumption in crypto that there will only be a couple of monies that win out -- i.e. ‘BTC, ETH, maybe SOL’. Personally, I expect a much broader set of valuable monies to emerge. While there might be a power law dynamic that plays out, I expect a diverse landscape of non-sovereign monies competing against one another, as per Hayek’s vision. Indeed, I take the view that the surface of possible monies -- and possible distribution mechanics -- has barely been scratched. After all, money is a kind of game, and its hard to imagine that we’ve already exhausted the most compelling forms of such. Just as Bitcoin and Ethereum leveraged proof of work as the incentive mechanism at the heart of their respective money games, I expect new and similarly novel mechanisms to drive the growth and adoption of new monies in the future to come. In short, we’re not about to mature beyond the ‘currency’ phase of crypto; it’s only just begun.