We are excited to share that CoinShares has invested in Impervious Technologies. Impervious is building the tools and infrastructure for the peer-to-peer internet. Impervious has interlaced Bitcoin Lightning, IPFS, WebRTC, and resilient relays to introduce a new peer-to-peer internet standard with practical applications that mitigate censorship and surveillance risk.

The Evolution of the Browser

In the past, the browser served up static pages to internet users, while the operating system dictated the products and services you could use for communication, collaboration, work, and entertainment. Today, the browser is the de-facto operating system for many internet natives as its functionality has expanded and evolved, thanks to countless software and hardware innovations(a heavy browsing session with 50+ tabs can still redline my CPU, but this might be a personal, or hardware, problem!)

As early as 2016, mobile internet use overtook desktop internet for the first time. Since then, this trend has accelerated as 83% of the world accesses the internet via their smartphone as opposed to a tablet or computer. We now spend the majority of our time and run the majority of our applications in our browser, whether as extensions, plug-ins, or remote browser-based sessions. While browsers have been around for a long time, today Google Chrome currently accounts for nearly 75% of the browser market due to its rich application ecosystem.

The global browser market today is massive. In 2019, it was worth $125B and is estimated to reach $350B by 2026 with an increased share of users worldwide. Crypto companies have attempted to build a browser-native operating system, but most have limited their approach to an app or extension focused on one specific function blockchain ecosystem rather than addressing the end user’s existing behaviors.

Crypto browser applications today focus on a specific feature like a privacy oriented browser, a web wallet, document sharing, blogging, or other applications, but no companies have pulled all of that capability and interoperability into one browser as a cohesive experience that aligns with how users interact with browsers. An informal poll conducted on Twitter revealed this market gap — much of crypto twitter still uses Chrome (46%) and many crypto users are using multiple browsers.

“We actually use both chrome and DuckDuckGo for different purposes. Sometimes Chrome is more convenient but it sells our data, so we try to minimise it’s usage”

“I use Brave for surfing (crypto ready and ad blocking) Firefox for dev work, Chrome on the iPhone (synced with Google maps and apps). Hoping the future ends up a more refined Tor.”

“Brave sucks for crypto. Chrome far better for extensions.”

As highlighted, crypto users often cobble together a suite of products and services to manage and traverse their crypto, web and and work activities, resulting in duplication across browsers, extensions, and apps. Another informal poll regarding the use of the browser as a de-facto operating system also revealed close to 70% of respondents use their browser as their operating system or use only work tools outside of the browser.

It was interesting that even those who used specific work tools like Slack or a task manager were still doing so via their browser, as opposed to using the desktop client.

Why Build a Browser on Bitcoin?

A core theme we’ve been investing in at CoinShares is platformless applications — the idea that products and services can be built outside the walled gardens of existing distribution platforms. Platformless applications utilize open, decentralized blockchain platforms as the back end and bridge together various blockchain networks that offer different utility or functionality. This technology stack creates a robust suite of products and services that mimics the existing services users want and need. New functionality and features are exciting, but the easiest route to onboarding a large user cohort is by emulating existing products and services and expanding features over time.

While web3 has received much fanfare and even more capital in the form of speculative investments, Impervious is building a user experience that delivers on many of the promises of web3 without requiring a new blockchain, a new token, or a new narrative. The Impervious browser will come with a variety of familiar applications that people are accessing through their browsers today, but delivered via open source public blockchain protocols, namely Bitcoin via Lightning as an L2 and Impervious as an L3.

More importantly, Impervious is one of the first companies to leverage bitcoin as more than a financial asset. The bitcoin network is not only a medium for secure financial transactions, but also a censorship-resistant telecommunications and data transmission protocol that has broad implications for managing and securing our most valuable asset — information.

Many bitcoin products to date have been built with a bitcoin-only mindset, leveraging only bitcoin and thus, adopting some of bitcoin’s inherent limitations. In contrast, the Impervious team is one of the first with a a bitcoin-first focus, while building P2P enablement tools, utilizing WebRTC Decentralized Identifiers, a custom Decentralized Communications system, multiple public distributed networks (the Bitcoin Lightning Network, IPFS and Microsoft ION and more) to build the best possible product.

Impervious is working to build a new desktop of mobile browser operating system that utilizes Bitcoin and Bitcoin’s layer 2 Lightning Network as the communication and payment protocol, and integrates a variety of other open-source crypto infrastructure like IPFS for file storage, ION for decentralized identifiers (DIDs), and more. The Impervious Browser is building an entire suite of easy to use peer to peer capabilities in a familiar format — the browser as an operating system — while also developing APIs and SDKs to enable third party developers to build on this infrastructure, effectively standardizing privacy and censorship resistance in web applications using bitcoin and other blockchain protocols on the back end.

In August 2021, Impervious released a bundle of APIs built on the Bitcoin Lightning Network, which created a programmatic layer for Bitcoin (Layer 3 to Lightning’s Layer 2). The Impervious API was developed to provide the simplest way to transport data across the Lightning Network. Developers can use the Impervious API to build on the Lightning Network — enabling instant, secure and censorship resistant channels for data transmission. Impervious generates cryptographically secure tunnels that ensure data remains private both at rest and during transit, while also shielding the source of data transmissions.

Following an enthusiastic reception of the Impervious APIs, the company is putting all of its Peer-to-Peer (“P2P”) capabilities together into one easily consumable super application — the Impervious Browser.

While the initial audience for the browser will be bitcoin natives and privacy minded individuals, the growing concern over online censorship and surveillance, as well as a slate of new regulation focused on reducing or eliminating consumer rights to privacy in online communications are pushing consumers and corporates alike to find suitable alternatives to browsers and web-based operating systems that deliver a rich ecosystem of native applications.

Unlike many bitcoin-focused products and services which are isolated to building only on top of the bitcoin protocol, Impervious is leveraging a wide range of innovate protocols across the Web3 stack in order to build a robust application and suite of developer APIs. The first expression of this infrastructure will be the Impervious Browser, which is slated for desktop release in April, and mobile release Q3 2022 which will enable users to sync sessions across devices. The v1 of the Browser will focus on offering an alternative to existing work tools and functionality — Zoom, Google Docs, messaging, substack / blogging functionality. Future browser releases will extend this feature set to include new capabilities that are uniquely enabled through the use of public blockchain networks and to integrate new user behaviors in web3.

Since running the Impervious browser is really running an Impervious node, longer term, the goal is to monetize a significant percentage of the web traffic using bitcoin and Lightning, and to use Impervious to grow the Lightning Network to global scale via a simple consumer application. At CoinShares, we are fully behind this vision.

If you’re interested in trying it out — you can request early access to the Impervious browser here.

Disclosure

Please note that this post is provided on the basis that the recipient accepts the following conditions relating to provision of the same (including on behalf of their respective organisation). This post does not contain, or purport to be, financial promotion of any kind and is not intended to constitute an offer, solicitation or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so.

Although produced with reasonable care and skill, no representation should be taken as having been given that this post is an exhaustive analysis of all of the considerations which its subject-matter may give rise to. This post fairly represents the opinions and sentiments of the CoinShares Group, which is the issuer of this post, as at the date of its issuance but it should be noted that such opinions and sentiments may be revised from time to time, for example in light of experience and further developments, and this post may not necessarily be updated to reflect the same.

CoinShares, its directors, and / or employees may own interests in the companies mentioned in this post. Any mention of a company, product, or service is not intended to be a recommendation or endorsement by CoinShares.

The information presented in this post has been developed internally and / or obtained from sources believed to be reliable; however, the CoinShares Group does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions and other information contained in this post are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and the CoinShares Group assumes no duty to, and does not undertake, to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

Nothing within this post constitutes (or should be construed as being) investment, legal, tax or other advice. This post should not be used as the basis for any investment decision(s) which an individual may be considering. Any potential investor in digital assets, even if experienced and affluent, is strongly recommended to seek independent financial advice upon the merits of the same in the context of their own unique circumstances. Crypto assets are a highly volatile asset class. Your capital is at risk. The value of crypto assets can go down as well as up and you can lose your entire investment. Crypto assets may not be covered by financial compensation schemes.

The CoinShares Astronaut is a trademark and service mark of CoinShares (Holdings) Limited. © 2022 CoinShares Group. All rights reserved.

Building a Bitcoin-Native Operating System was originally published in CoinShares Research Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

We are excited to share that CoinShares Ventures has invested in MintGreen, a CleanTech company using bitcoin mining to monetize heat generation.

MintGreen is focused on addressing two of the primary concerns related to cryptocurrency mining — sustainability and power costs. MintGreen builds, manages, and maintains industrial bitcoin mining systems co-located with utilities and industrial plants to produce guaranteed income from two revenue streams — cryptocurrency and the sale of heat, with a potential third revenue stream in the form of tax credits.

The North American mining ecosystem is growing rapidly, and with more American corporations, asset managers, and financial institutions allocating to Bitcoin, building onshore capabilities is becoming increasingly important. We feel MintGreen is well-positioned around the North American mining narrative and the sustainability narrative, and has an opportunity to carve out a unique niche in this sector.

Selling Heat — From Undesired Output into Salable Asset

At CoinShares, we believe Bitcoin is the catalyst for an energy revolution the likes of which we have never seen before.

In cyberspace, miners use specialized hardware like ASICs and power to mine cryptocurrencies like Bitcoin, but in the real world, they mostly produce a lot of heat. Today, miners view heat as an undesired output, and facilities have invested in industrial operations including venting and cooling infrastructure to remove this heat. MintGreen has built a proprietary solution to capture this heat and sell it to buyers of heat. The MintGreen immersion bitcoin mining system allows for efficient capture and transfer of the heat generated by crypto mining servers to industrial scale hot water utilities known as District Energy (DE) via long-term off-take agreements.

District energy systems use networks of hot water piping to efficiently deliver industrial scale heating and hot water, utilizing a lot of electricity in the process. Cryptocurrency mining works synergistically with district heating due to its consistent, predictable loads and scalable year-round energy intensity.

MintGreen is able to sell district energy companies and companies that need industrial-grade heat this lowest priced*, fully managed, and integrated low carbon heat source, MintGreen also profitably mines bitcoin at extremely low power prices, often nearing $0.00kW and sometimes even trending negative.

Bitcoin is a Catalyst for Sustainable Energy Infrastructure

There have been many discussions about Bitcoin’s energy usage, which our team at CoinShares has spent significant time researching in order to better understand what type of energy is being used to mine bitcoin. Our 2019 Mining Report found that 73% of bitcoin mining is doing utilizing renewable energy sources. This is evidenced by where bitcoin mining happens — miners are still largely confined to regions dominated by cheap hydro-power, such as Scandinavia, the Caucasus, the Pacific North West, Eastern Canada and Southwestern China.

With concerns around sustainability and use of renewables, district energy is a rapidly growing part of the global energy infrastructure grid. Like bitcoin mining operations, district energy networks are very diverse and variable in terms of size and load, and seek out low cost, low carbon sources of energy to generate the heat needed. Similarly, heating and cooling networks are based on economies of scale, as the generation of heat in one large plant can often be more efficient than production in multiple smaller ones. A growing number of cities worldwide are adopting modern district energy solutions, as the best way to bring sustainable heating and cooling in dense urban environments.

Like other parts of the energy grid, district heating is trending towards low carbon heat sources. Jurisdictions like British Columbia have put a zero emissions plan into place to get to 100% low carbon heating by 2030. Environmentally progressive countries like Norway are exploring regulatory mandates to utilize waste heat from data centers within their district energy footprint.

According to District Energy Magazine, the size of the global district energy market is currently $177B, and is projected to reach $250B by 2029. The electricity consumed by district energy plants around the world could power the bitcoin network several times over. Taken together, the demand for cheap, green heat for district energy and the growing demand for energy to power the security of the bitcoin network translate to a robust and growing market for MintGreen.

By providing heat from a source that is low-cost and renewable, MintGreen’s solution is an ideal alternative to the high-cost green sources (geothermal, biomass, hydro) or low-cost carbon sources (natural gas) that are most popular today. Coupled with the narrative around ESG investing, CoinShares believes this product will also help shift the narrative around crypto mining as wasteful because it can leverage existing electricity usage that is directed towards heating. As an added benefit, we also see opportunities for MintGreen to open non-traditional crypto-mining markets, as carbon regulation and heating costs will attract a different set of market participants than industry miners looking to optimize for power price alone.

The growing popularity of sustainability coupled with growing investor appetite for highly profitable bitcoin miners is driving demand for these types of deals amongst investors. For example, Square announced the launch of a Bitcoin Clean Energy Initiative to focus on sustainable bitcoin mining as part of its broader drive towards zero emissions. MintGreen is well positioned to meet these investment mandates for both district energy companies and bitcoin-focused investors and firms.

Building for the Long Term

One of the more interesting aspects of coupling bitcoin mining with industrial energy infrastructure is the benefits of long term contracting. Heat offtake contracts in the district energy sector tend to be long term, with a lifespan of 5 to 20 years, and provide stable demand that allows for long-term capital planning and infrastructure development. The fixed nature of these contracts means revenues will scale with deployed capacity, and any bitcoin mined accrues to the bottom line and investors.

We have met with dozens of mining companies, and we have been impressed by Colin, Jenn, and Kurt — the MintGreen executive team. Their innovative approach to greening bitcoin mining is built on strategic relationships and insights related to a growing and increasingly carbon regulated market — district energy — where they can build a strong foothold and build a very profitable business in a short period of time and use this stable capital base to scale laterally into other energy markets. Having a strategic focus and domain expertise will be critical to ensuring early success and proving scalability of their pilot deployments, and subsequently, revenues.

Following our recent investment in Compass Mining, our team at Coinshares Ventures is excited to back more innovative solutions in the Bitcoin mining space. We are excited to work with MintGreen, where we will join the board, and the like-minded investors we brought into this deal alongside us to help transform the bitcoin mining landscape and its image in the mainstream media. We firmly believe bitcoin mining is compatible with sustainability, energy efficiency, and the growth of a more resilient, low-carbon global energy grid.

* MintGreen can say with confidence, at least in British Columbia, that they are the lowest priced low carbon heat source for district energy.

Note: Meltem Demirors and Russell Newton are both investors in MintGreen alongside CoinShares Ventures

Our Investment in MintGreen was originally published in CoinShares Research Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

We are excited to share that CoinShares Ventures has invested in Compass Mining, a mining marketplace focused on democratizing bitcoin mining while providing actionable insights through research and media.

I’ve also taken a board seat alongside my friend and long-time collaborator Amanda Fabiano, Head of Mining at Galaxy Digital. We have been consistently impressed by the founding team — Whit, Thomas, and Paul — and share in the team’s vision of opening up access to bitcoin mining for institutions and individuals alike. I wanted to share some thoughts around the future of bitcoin mining, and why our team at CoinShares Ventures is so excited about this space — which many investors have neglected on the basis of dated wisdom and poorly understood dynamics, much to their own detriment.

Bitcoin Mining is Misunderstood

As interest in bitcoin continues to grow, more investors are becoming interested in bitcoin mining. However, the bitcoin mining value chain is complex and poorly understood. From the cumbersome process of sourcing hardware from a credible distributor (ASICs are difficult to find in the primary market, let alone the secondary market), to selecting a hosting facility with robust operations and then negotiating a favorable electricity rate, the whole process can be overwhelming, and few firms have survived in the mining space over long periods of time.

We have been looking at opportunities in the mining space since 2018, when CoinShares first began publishing its bitcoin mining research reports. The Compass Mining team has spent the last year providing a unique perspective into this critical component of the bitcoin value chain. We have been looking to invest into the mining ecosystem, but have been hard-pressed to find founders that really understood its nuances and complexities.

Institutions want to mine bitcoin but are limited by counterparty risk and a poor understanding of the economics of bitcoin mining due to a lack of credible, robust data. Individuals cannot mine bitcoin profitably due to economies of scale. Enter Compass Mining.

Compass enables miners to purchase hardware and secure space in the world’s best bitcoin mining facilities at competitive rates, meaning miners can start profitably mining bitcoin much faster. The founding team is able to use their relationships and reach to launch a variety of products and marketplaces to enable decentralization and democratization of bitcoin mining by bringing more investors, operators, facilities, and financing providers into the mix.

Going From Single Player Mode to Multiplayer Mode: A New Marketplace Model

Most mining businesses thus far have been “single player” mode and as a result, much of the mining industry has been an enigma to outside observers.

At its core, Compass is developing a marketplace. Most mining businesses have too much exposure to CapEx and OpEx risk, and a marketplace is a great way to capture value from the billions of transactions happening here without having to take risk on the direction of these investments. We like marketplaces generally, and are frankly surprised that no firms have been able to establish a marketplace in the mining space given the existing Equinix and AWS model for sourcing and selling compute and enterprise-grade compute infrastructure.

Moreover, drawing on wisdom from Sarah Tavel, GP at Benchmark and the undisputed marketplace QUEEN, the marketplace that wins is the marketplace that figures out how to make their buyers and sellers meaningfully happier than any substitute.

Marketplaces often fail when they forget to listen to the customer and lose the ability to continue to extract short-term monopolies. This is precisely what we’ve seen in the mining space, where firms operate in an opaque manner, engage in predatory pricing, require locking into specific service providers, and attempt to extract exorbitant rents by monopolizing specific parts of the mining value chain. We do not believe in this vision of the future — but will be working to erode the power of these monopolistic players which threaten the bitcoin ecosystem.

More reputable facilities, better financing options and transactions economics, and robust reference data and benchmarking resources will all inspire more trust and a better customer experience. As marketplaces serving the mining value chain continue to evolve and mature, Compass is in a unique position to leverage its research and popular podcast to understand how client expectations are evolving and really listen to the voice of the customer.

A big factor to the success of this type of business is timing, and Compass is developing this product at the right time in the market. There is a significant effort underway to onshore tech R&D and infrastructure amongst the world’s superpowers, and part of that is the onshoring of the physical instantiation of the bitcoin network.

We have seen over $200M of capital deployed into building onshore mining capacity in the United States alone, which all points to a rapidly growing market for equipment, facilities, and financing options. There was nowhere to go for price discovery, but Compass is now providing real-time, actionable data. The substitutes in the market are bad experiences, and more importantly, they over-index on either financing or hardware specificity. Compass has a unique opportunity to delight users and build a super-sticky client acquisition and retention flywheel to scale GMV.

Our Outlook on Bitcoin Mining: Let There Be Hashrate!

At CoinShares Ventures, we believe the development of the bitcoin mining ecosystem will mirror the development of the early internet, where local networks and ISPs were aggregated into a global network, and early entrepreneurs had to run their own bare metal, and eventually relegated this to the cloud which allowed firms to consume cloud at scale by sourcing data center capacity from all sorts of industrial-scale operators.

As the bitcoin industry becomes more horizontally integrated along the bitcoin value chain, more firms will want to operate their own mining facilities and to ensure they have access to the bitcoin network.

This is also how the internet peering market and subsequent data center market evolved — firms needed help from experts in building and managing an infrastructure footprint with reliable vendors and third parties. We see a similar push as more corporates add bitcoin to balance sheets. Securing bitcoin compute and connectivity will become more and more important not only for miners, but for exchanges, wallets, asset managers and other industry players, as well as financial institutions and corporations who now hold bitcoin as a treasury asset.

We look forward to working with Compass and Galaxy to create a new category for a robust mining and blockchain compute infrastructure marketplace, and supporting a flourishing, more decentralized bitcoin mining ecosystem!

Note: The author, Meltem Demirors, and co-GP Russell Newton are both investors in Compass Mining alongside CoinShares Ventures

Our Investment in Compass Mining was originally published in CoinShares Research Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

At CoinShares Ventures, we spend a lot of time thinking about politics given our team is in the United States and the United Kingdom, and has been witnessing a very interesting time in both of these political landscapes. We are not political commentators, but it would be incorrect to say we are not political. The aspirations of the crypto ecosystem are inherently political in nature — everything we invest in has some element intended to decentralize, disintermediate, and minimize unnecessary rent seeking — whether by governments, tech oligopolies, or financial intermediaries like brokers and banks.

(sidebar: yes, we are certainly aware of the underlying tension present in CoinShares itself being an intermediary, and discuss this at length in our board meetings and as it pertains to our growth strategy.)

In addition, we have spent the last year running a series of meetups focused on mesh networking where we hosted projects like GoTenna, Althea Network, Helium, and many others focused on ushering in a new vision for how compute and connectivity will get operationalized, financialized, and disintermediated. After all, how permissionless can bitcoin and other digital currencies really be if the infrastructure upon which the bitcoin network is run is entirely dependent on the internet?

The Rise of the Political Internet

Over the last six months, we’ve witnessed a drastic acceleration in the shift to all things digital. Our information, content, and communication is already mostly digital, delivered via wires and device, flowing as 0’s and 1’s over fiber, radio waves, and sat link. Finance has resisted this trend for a long time, but now the digitization of trading, banking, payments, and lending rushes full speed ahead, and governments around the world are contemplating how to digitize the money printer itself, in the form of central bank issued digital currencies (CBDCs). And all of digitization sits right on top of one highly centralized and highly fragile system — the internet.

To understand the present and the future, let’s briefly visit the past.

The year is 1962. The United States and the USSR are in the depths of the Cuban Missile Crisis, and both sides are building nuclear systems and figuring out how to use technology to ensure mutually assured destruction in case of an attack. US authorities, deep in their planning, were facing an interesting challenge — how would they communicate in the aftermath of a nuclear attack? At that time, all communication technologies used central switching facilities that routed communications to their destinations in a hub and spoke model. This meant that if enemies could bring down one of the hubs, all of the spokes would be offline and the whole system would collapse.

Paul Baran, a researcher at RAND, the private think tank, dreamed up a new system. He envisioned a network of unmanned nodes that would act as switches, routing information from one node to another to their final destinations. The nodes would use a scheme he called “hot-potato routing” or distributed communications. Furthermore, the information would be divided into “message blocks” before sending them out across the network. Each block would be sent separately and rejoined into a whole when they were received at their destination.

This was the foundation upon which the World Wide Web was built.

Over the last sixty years of the internet, the technology that was supposed to decentralize critical information and communication infrastructure has become the very thing it was supposed to circumvent — a highly centralized, deeply vulnerable global oligopoly.

Our digital overlords have only become more powerful. Over the last six months, power has been consolidated into fewer and fewer hands as more and more of our activities shift online.

As of August 18th, FAAMG stocks make up more than 25% of the S&P 500 by market cap.

But their supremacy goes far beyond markets.

• AWS controls over 40% of the public cloud market, with the remainder owned by Google and Microsoft.
• Google owns over 75% of the search market.
• In 2009, the top 10 companies in the world had a market cap of $2.3T combined. In August 2020, Apple alone commanded a balance sheet the size of a small nation state’s economy, at over $2T.

The centralization of tech hasn’t only fueled the wealth and power of these platforms (and the men who run them). It has allowed a small handful of individuals to own and operate the infrastructure and interfaces that allow us to navigate, search, communicate, transact, and store information.

The Politics of Being a Digital Oligarch

As everything becomes digitized, politics are also shifting from the world of the physical to the world of the digital. Just look at this short list of political events:

• February: Huawei gets hit with RICO charges in the US, which are typically reserved for members of the mob and the JP Morgan metals desk. While Huawei had won numerous 5G contracts in Europe, the US began its campaign to completely remove Huawei from the process (and insert US and European companies into it).
• March: In March, a number of tech companies competed to win contracts for a US Department of Defense cloud procurement contract of unprecedented scale. The DEOS contract worth $8B and the JEDI contract worth $10B were both awarded to Microsoft. Amazon sued. The US Federal government has announced its intent to spend over $100B on cloud compute and services over the next several years. Compute and systems spend is estimated to exceed weapons spend in the next decade.
• June: US lawmakers propose a $23B bill to support the semiconductor industry, and TSMC, one of the world’s largest chip fabs, announces it is building a $12B facility in Arizona. Similar statements follow from other semiconductors companies as the US extends various incentives.
• July: Trump administration declares intent to ban TikTok and force its US entity to sell to a US tech company. Microsoft was first to announce its bid, but since then, every company has thrown its hat in the ring, and ultimately Oracle won the bid but it was really just TikTok using Oracle’s cloud services and selling a minority stake? Also all the tech oligarchs are called to testify in front of the House Financial Services Committee via video conference, but most of the time was spent having these CEOs explain why email works in an embarrassing show of boomer incompetence. (Imagine being a sitting senator and asking Jack Dorsey why your emails are going to spam?)
• August: Trump administration announces the launch of the “Clean Network” — a vague plan to “purge” Chinese tech companies from America’s internet. The stated intent of the program is to keep American citizens safe from Chinese spies and censorship.

Reading between the lines, this is spelling out the new battle front for a digital war between the rest of the world and the US. These actions lay outline a more explicit approach to expanding the great American firewall on all compute and connectivity infrastructure and flows. There already is an American firewall to some degree in the form of fiberoptic taps, get out your tin foil hats and read about Room 641A if you are into these sorts of things. For now, “clean” = not Chinese… but as the battle for this new digital frontier heats up, it’s inevitable that it won’t be limited to just one tangible enemy, but expanded to include a larger ideological battleground.

It will cover not only software, like TikTok, but also hardware and connectivity, the very systems we rely on in this new world of digital finance. It is well known that China interrupts the hardware supply chain for equipment being send to major American tech firms including Amazon, Google, and network equipment vendors.

Just like all financial transactions flow through the NY Fed, one could imagine a world where all data flows through a central, national hub commandeered by intelligence under the guise of “security.” And it’s not even such a far-fetched future. As it stands, within the US, 75% of the population have only one service provider for connectivity speeds higher than 25 MB/s.

p.s. Already we see this with the battle against end-to-end encryption, where the logic is (in the words of David Vorick) “Because criminals lock their doors and sometimes this inhibits police, we decree that nobody is allowed to have locks on their doors anymore.” I will not be surprised if consumer E2E is “banned” by the end of this decade. Ghoulish, really.

Welcome to Digital Dictatorship

Most of us take our connectivity to the internet and other telecommunications networks for granted. But behind the simple and benign act of connecting to the internet lies an intricate maze of physical hardware, wires, and complex routing logic consisting of layers upon layers — and many curious parties sniffing your web traffic.

Overall, today’s model of computing (and arguably, corporations and capitalism as a whole), is akin to dictatorship, not democracy.

In this race for control, sadly, there are few US or European companies who can dominate the compute and connectivity infrastructure race. As it stands, there are only a handful of companies in the world who have the sophistication, systems, and manufacturing capabilities to produce mass-scale infrastructure.

European companies, in particular, have fallen behind due to onerous regulatory pressure and are not capable of pursuing large infrastructure projects, so they cannot afford to make the equipment, to lay fiber optic cables, and to install this much-needed compute and connectivity infrastructure.

America has a handful of companies ($ market cap at COB 10/14/2020)

• Qualcomm ($147B) in the wireless communications space
• Cisco ($170B) builds hardware and software for routing and switching
• Juniper Networks ($8B) provides more than 65% of the world’s router infrastructure for the Internet
• Data centers REITs like Equinix ($72B) are US based and serve a global client base

However, none of these companies have the balance sheet strength or capital base to compete, despite their best efforts. (The great irony here is that a single tech company, like say Google, has a bigger market cap than all of the infrastructure players combined.)

If America & Europe do not compete for the digital future, China will very likely be our new digital overlord. And Huawei is competing with two assets neither America nor Europe has — an unlimited amount of capital and political will.

Putting the pieces together, it’s clear that we now have a battle on two fronts:

• An economic war — US dollar hegemony v everyone else (see prior writing on this topic here)
• A technological war — US led alliance v everyone else

That’s precisely why we need to build as much distributed, open infrastructure as we can.

Hidden Forces: How Economics Drive Design

So, what is an internet citizen to do? To understand the present, we must understand the past. So let’s explore why it is that our digital infrastructure looks the way it does today.

Now it would be easy to say the reason the internet looks the way it does is because of some sinister plot by tech companies to take over the world. But that would be a naïve interpretation. One of the reasons the internet has become highly centralized has to do with the economics of operating an internet business. After all, operating a business is an activity that requires you to make money. And current internet business models necessitate scale and efficiency to drive unit economics.

Centralization enables efficiency in planning — where to put towers, where to lay wire, where to build servers and data centers, and allows private companies to finance this build and charge for access to it. Business models also influence where commoditization is happening and where innovation is happening. As a result of the challenges of implementing profitable business models, everything from network design to hardware to critical software like search has been commoditized, and innovation has been pushed to the edges. The below graphic illustrates the commoditization of each progressive layer of internet infrastructure over time.

Because so much of the internet has been commoditized by decades of centralization and margin compression, it feels like innovation at these core layers is impossible. However, we believe that the introduction of programmable internet money, in the form of digital currencies, facilitates an entirely new model for infrastructure innovation. For example, the introduction of asset backed debt in bitcoin is a game-changer, as evidenced by the rapid financialization and build out of US onshore mining facilities.

The idea of distributed networking has been around for a long time, as mentioned at the start of this piece. Distributed compute and connectivity hasn’t been as fast or as cheap, and the right tools haven’t existed to incentivize people to contribute resources to these network. Until now…

With the introduction of a token as an incentive and monetization layer, new models for constructing networks become possible. In addition, new distributed governance structures like DAOs (decentralized autonomous organizations) make it possible for groups of pseudonymous people on the internet to coordinate decision-making in various ways.

With these new crypto-incentivized models being introduced, the objective is to keep all components of internet infrastructure distributed or decentralized, so the only way to shut down or otherwise disrupt these networks will be to shut down every node in the network. And if these networks become diffuse enough, this will be practically impossible to do. This is precisely what made BitTorrent, the file sharing protocol, such a nuisance for IP law. Because the network is comprised of global set of nodes operated on a wide variety of non-proprietary hardware ranging from personal laptops to sophisticated data centers, it becomes much more resilient to interference from government, law enforcement, or other disturbances.

Investing in an Open Internet

So this all sounds great. But practically speaking, how does a firm like CoinShares invest in this theme?

We believe a few core things will happen over the coming decade to fundamentally change how networks are constructed, from infrastructure all the way through to compute and connectivity and the end-user experience via apps.

First, given the rise of high bandwidth consumption across the globe (thanks to streaming and gaming), we will move to more metered bandwidth consumption models that allow for more dynamic pricing and pay-as-you use models. After all, bandwidth and network capacity is a finite resource.

This gives rise to our investment thesis around the financialization of compute and connectivity, and our investment in Blockdaemon, who are building a full-stack blockchain compute platform.

Second, the demands for compute across blockchain networks will accelerate the build-out of new protocols and layer 2 solutions, which allow for utilization of networks best suited for the compute and connectivity needs of a particular use case. Already we see this playing out on the Ethereum network…

Looking at the above, the rise of on-chain activity via DeFi has resulted in a rapid spike in fees, and as a result, an increase in hash rate as miners look to capture these transaction fees by shifting GPU capacity from supporting other networks to the Ethereum network. As there is more demand for Ethereum network compute resources in the form of contract calls the industry has had to come up with solutions to bring down the cost of this compute.

First, we see a number of new protocols emerging which attempt to address some of the underlying structural issues with Ethereum, including Polkadot, NEAR, and Solana, to name some. We have seen dozens of protocols raise capital to compete for the “smart contracts” use case, but we are still unconvinced these will displace Ethereum in a meaningful way.

Rather, many of these new protocols are building bridges that make the migration from Ethereum to their protocol seamless, and many existing Ethereum-based projects are building versions of their product on top of these new protocols who are flush with cash and can provide engineering resources and capital to projects willing to migrate to a new blockchain network. Whether or not this model is sustainable remains to be seen, and already several of our portfolio companies are managing infrastructure across multiple networks.

Second, at the network construction level, we have seen an explosion of capital raising for mining infrastructure, and the introduction of various financial contracts that provide miners with hedging and risk management tools. Examples here are Luxor and Titan Mining, both of which are building operational management systems to help miners monitor and manage their operations and marketplaces for mining, network, and transaction fee derivatives. On the decentralized finance side, a new token called “gas token” allows users to pre-purchase Ethereum network capacity. We expect more types of products like this, that allows users to secure compute and connectivity in the form of a financial contract, will be developer.

Lastly, there is also work being done on “Layer 2” which attempts to utilize native Ethereum infrastructure and smart contracts to make it easier to scale capacity without adopting an entirely new protocol and codebase. There are also a number of companies building applications that abstract out the reliance on network compute by optimizing their architecture to minimize consumption of network resources.

This is a clear example of market dynamics driving business models for infrastructure — as there is more demand for network capacity, the industry is migrating towards metered business models where consumers pay for their consumption (as evidenced by Coinbase passing Ethereum transaction fees to their users in September) and as demand for bandwidth increases, creating economic incentives for the adoption of more efficient types of infrastructure that lower the cost of compute and connectivity, whether at the protocol layer, or networking layer, or application layer.

We believe that as this cycle continues, new financial primitives for compute and connectivity will emerge, and that these have the potential to disrupt the larger market for compute, bandwidth, and other connectivity services.

While there are many projects focused on the dweb, Web3, or whatever you want to call this instantiation of blockchain compute, there are not yet many projects connecting our existing internet architecture to the dweb at scale. One of the core challenges with today’s blockchain “solutions” is they are incredibly niche. MNOs (Mobile Network Operators) like TMobile and Verizon and Cable providers have spent billions on both wired and wireless infrastructure for last mile. Most blockchain projects do not get anywhere close to addressing this.

The Future of the Internet as Design Space

As expressed in the opening of this piece, the concept behind the design of the Internet was to ensure that under nuclear attack, the Internet could continue to run — that risk of losing important links and routers could be mitigated with redundancies and proper scaling. Today, the internet is actually a mesh of many networks that come together at colocation centers around the world have enabled massive economies of scale for fiber providers who only need to pull their fiber into single buildings rather than a dozen or more in a region. It is difficult to imagine trillions of dollars going into building entirely new (capex) infrastructure to support an entirely new internet.

We have recently been looking at companies who are leveraging existing internet architecture — both physical networks and routing logic — and building on top of these existing business models. We are eager to find business models like these that allow monetization of existing infrastructure by implementing new ways using distributed networks and digital assets.

This goes far beyond building a decentralized physical network or routing network; this is about security and privacy. Using the open internet, it’s quite easy of bad actors to maliciously force internet traffic destined for certain networks to go through them in order to intercept and steal information. This famously happened a few years ago with EtherWallet. New architectures like that created by Noia Network can help solve this origin and ownership issue of networks and routing identities.

The Internet today is build under assumptions of normal operating conditions and normal network loads, which are to some degree predictably cyclical, but still face “spot” events that shift traffic into unexpected patterns. These failures can either be addressed with more bandwidth or with smarter routing. These types of innovations not only continue to push the economy towards decentralization, but also provide end-to-end encryption for every packet, while improving the quality of data communications with quantifiable metrics — avoiding packet loss and shaving milliseconds off of every data packet delivered.

If you’re building in this space, please drop us a line at investments@coinshares.com — we’d love to hear from you! We’ll be re-starting our Mesh Networking meetups soon as well, so please join our Meetup Group to stay updated on upcoming digital events.

Thanks to Marco Rodrigues from Volterra (see his technical writing, it’s excellent), and Bill Norton from Noia, co-founder of Equinix and author of the Internet Peering Playbook, for their comments on this piece and their willingness to entertain my questions.

Compute and Connectivity Meets Crypto was originally published in CoinShares Research Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

An Insatiable Thirst for Dollars, the Race for Global Reserve Currency Status, and Rates on “the Blockchain”

At CoinShares, we’ve been watching the explosion of stablecoins in the crypto sphere as demand for dollars goes through the roof. We thought it would be interesting to share some of our perspectives, in the below excerpt from an investor newsletter.

In this post, we’ll cover:

• The insatiable thirst for dollars
• The political stakes surrounding central bank digital currencies, also known as CBDCs
• The IMF’s SDR instrument as a potential global reserve currency, and;
• The planned shift away from LIBOR and the general malaise about zero and negative overnight rates in the banking and finance landscape

Insatiable Demand for Dollars and Crypto as the Eurodollar

One of the things we’ve long believed is that dollars are the lifeblood of the cryptocurrency ecosystem, as they are the lifeblood of all markets around the world right now. The dollar is effectively the global reserve currency. Eurodollars represent dollar deposits held in foreign banks, and the spread charged by banks for sourcing, buying, and holding these dollars for you is effectively benchmarked using LIBOR.

If crypto-collateralized dollar-peg stablecoins are to be the new Eurodollar, then these instruments will also need a LIBOR. In fact, if we look at stablecoin utilization, one trend is abundantly clear: it looks like the demand for dollars is a trend not only in legacy finance, but also in the new frontier of crypto finance. Despite the crypto market being the same size it was nearly 2 years ago in November of 2018, the stablecoin market has grown nearly fivefold in that same time period. It would not surprise us at all if the value of stablecoins grew to exceed that of digital currencies in the very near future.

Dollars on a blockchain, whether backed by dollars in a bank account or collateralized by other digital assets and cryptocurrencies to create a synthetic dollar peg, are incredibly useful in a world where actual dollars are (a.) scarce (b.) expensive and (c.) politicized.

The Growing Popularity of Stablecoins

One of the key themes we’re exploring is the use of crypto-collateralized stablecoins with a dollar peg as a way to extend correspondent banking, payments, and investment opportunities into global markets. In a way, it’s a natural extension of the Eurodollar market. In a world with zero or negative interest rates, the appeal of a digitally native, highly portable and fungible dollar-equivalent isn’t so hard to imagine.

While still a small market relative to the global Eurodollar market, the rapid growth and proliferation of stablecoins has been an eye-opening experience for central banks and the commercial banks who rely on them for liquidity. Just look at the continued dominance of Tether, a stablecoin pegged to USD. Tether currently has a float in excess of $8B, and throws off at least $200M in fees per year. Tether is probably the most important asset in the function of the digital currency ecosystem.

Why CBDCs are the Antithesis of Cryptocurrencies

On to CBDCs! We’ve written a lot about this topic, and Meltem wrote a personal blogpost about the upcoming Digital Currency Wars.

Over the past few weeks, there have been several hearings in Congress about the prospects of creating a digital dollar, perhaps even one “on a blockchain” (whatever that means, honestly we aren’t clear on this ourselves). The Chinese DCEP project has made significant strides, and last week, Xi Jinping established that ultimately digital Renminbi would be interoperable with other public blockchain assets. There’s a lot of confusion about what CBDCs are and how they would work, one of the common claims is that CBDCs are *just like* cryptocurrencies, except they operate within the bounds of legal and regulatory oversight.

In fact, CBDCs are the antithesis of cryptocurrencies like bitcoin.

Bitcoin is an attempt to separate state and money.

CBDCs are money owned and operated by the state for the benefit of the state.

For example, China’s digital renminbi will create one single digital payment system that is supported by the majority of commercial banks and the central bank, and could potentially have the side effect of minimizing the USD shadow economy, capturing data on payment flows and implementing more effective controls. This could be levying tax on these flows that have historically happened outside the system, limiting daily transactions between wallets, or perhaps even blocking certain individuals from using the digital payment system.

You don’t necessarily need a digital currency or a blockchain to do this — notably, India removed high value bills from circulation in 2016, as an effort to “curtail the shadow economy and reduce the use of illicit and counterfeit cash.” The ban on higher value bills was coupled with a digital payments and digital identity scheme, and the demonetization effort was intended to boost adoption of these schemes.

And again, China has already implemented a financial surveillance system without the use of a blockchain, but by digitizing the renminbi they can also begin exporting their surveillance not only to Chinese citizens, but to any participants using the digital RMB system over the coming years. Surveillance capitalism isn’t just for corporates — everyone can play!

A Currency Basket Known as SDR: Special Drawing Rights and Why They’re Interesting for CDBCs

On to SDRs! Special drawing rights, or the SDR, is an international reserve asset that was created by the IMF. The value of the SDR is based on a basket of five currencies — the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

How an SDR is Made

Now, it’s important to note that the SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system. The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset. Effectively, the rise of the petrodollar following the oil embargo of 1973 led to the rise of the U.S.dollar as the global reserve currency and in many ways the SDR has taken a back seat since then. (FYI: see this video on the topic of the petrodollar)

But now, SDRs are back in the spotlight, baby! In April, in response to the recent CoVid crisis, the IMF proposed to issue $500B in new SDRs. The US, which holds veto power in IMF matters, blocked the issuance. So right now, in a world where everyone wants and needs those sweet, sweet greenbacks, only 14 countries are able to get access to Fed swaplines and tap into the global supply of dollars. Other countries are left to fend for themselves, particularly emerging economies who have been disproportionately impacted by the effects of CoVid and their heavily dollarized economies.

One thing many people don’t appreciate about the SDR is that it has its own interest rate, the SDRi. The SDRi is the interest paid to members on their SDR holdings and charged on their SDR allocation. Unlike LIBOR or other daily or real-time rates, SDRi is set weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets. One proposal underway is to make the IMF a bank for SDRs, whereby it would borrow SDRs from developed economies and lend them out to emerging economies which need them. So effectively, SDRi could has the potential to become a global rate benchmark.

One development we’ve been tracking for several years now is the IMFs keen interest in digital currencies. It doesn’t take too many intellectual jumps to see that the SDR lends itself well to digitization, especially as its constituent currencies themselves may become increasingly digitized and interconnected. In fact, if we look at Facebook’s Libra and its initial proposal to form a basket of global currencies, it was actually a form of this SDR approach. The SDR story is just beginning to unfold, but our bet is the IMF will be a strong contender in the race for global reserve currency.

LIBOR, Ameribor, and Rate Setting Mechanisms

Lastly, we come to rates. Although we know LIBOR is set to be phased out starting in December of next year, for the purpose of simplicity, let’s stick with LIBOR in this analysis. The London Interbank Offered Rate has historically set the price at which banks lend to one another. The rate was set by a small group of large banks, and was famously subject to manipulation and fraud, as LIBOR is a base rate that informs pricing of many, many other types of financing arrangements. In crypto, we have historically lacked any sort of formal rate. The emergence of a lending market in the crypto ecosystem has created informal rates, but there isn’t one standard overnight rate that defines the industry.

One of the interesting things we’ve been looking at across our business, but especially on the capital markets side with our trading desk, is the importance of overnight rates. Effectively, crypto needs LIBOR if it intends to be a currency substitute, and if we intend for individuals, companies, and nation-states to hold it on their balance sheets.

In the last few months, we’ve seen a number of innovative new approaches emerging around rate setting in both legacy financial markets and crypto markets. Relying on a group of private banks to submit quotes for a rate is positively archaic, especially when we have technology that allows for creation of a real-time rate that can be set by the market at large. The way rates are set is no longer fit for purpose. A relic of the 20th century, there are now a number of experiments underway to prove how blockchain technology can actually solve, like, a real problem. Allow me to explain…

In legacy financial markets, a new Ethereum-based index has been proposed by the American firm AFX. It aims to create a new version of Ameribor and to set the rate using real-time data from each market transaction to set rates. Effectively, in the case of Ameribor, AFX will mint two non-fungible tokens for each party in a transaction. Unlike bitcoin, which is fungible, meaning every token is the same, these non-fungible tokens contain information about the transaction and the counterparty. The tokens are automatically minted by the AFX Blockchain when a transaction begins, and using the parity smart contract language are automatically settled when the transaction ends.

I Guess We Could Put Ameribor on a Blockchain?

The idea is that AFX will use a private, permissioned blockchain to gather real-time data about interbank lending rates, effectively making it impossible to manipulate LIBOR because instead of someone entering a number in a spreadsheet once a day, LIBOR would instead be automatically informed by real rates from bank transactions. So in this instance, the ledger would be used as a mechanism to capture real-time, verifiably correct data. The details are all still quite fuzzy, and honestly, they don’t actually need a blockchain, but that’s another matter entirely.

However, crypto enthusiasts were thrown into a tizzy when Jerome Powell, the Chairman of the Federal Reserve, commented that he felt such a mechanism could be a welcome upgrade to LIBOR and rates in general by verifying inputs used to set rates are a reflection of actual paid rates in the market. JEROME POWELL, Mr. Printer himself, talking about blockchain, y’all. Pinch me, I’m dreaming.

Leaving that world aside, let’s step into the world of cryptocurrency. There’s been much ado in the world of “decentralized finance” aka DeFi on a new concept known as automated market makers (AMMs). Some examples include Uniswap, Balancer, and Compound — but effectively what we’re seeing is the use of market incentives to set market rates in the DeFi ecosystem. If this sounds unintelligible, don’t worry. We have a translation machine…

There are a ton of people who own a bunch of cryptocurrencies that just sit idle in their wallets. Wouldn’t it be great if people could earn some yield on those assets? What a bank effectively does is take deposits and lend them out to earn yield. Meltem wrote a long post about the race for assets under custody last month that talks about bank deposits, if you’re interested. In the crypto space, a new concept called liquidity mining enables users to earn fees on their Ethereum-based (ERC-20) idle assets. Users can deposit their portfolios into an AMM and earn fees as other users obtain leverage using their portfolio as collateral. However, since this is blockchain-land, instead of using paper agreements and getting mired in internal complexity, everything is transparent, visible, and openly auditable. People create liquidity pools comprised of different types of assets, say 50% ETH and 50% wBTC (wrapped bitcoin, or bitcoin put on the ethereum blockchain), and then make these LPs (liquidity pools) available to people and projects who want to borrow. Rates for borrow and lend vary in real time, and people will adjust their allocations of assets to optimize for yield since you can swap one token for another easily using a decentralized exchange.

Users can deposit their entire portfolios into, say, Balancer’s self-rebalancing LPs & earn fees as other users trade borrowing against their portfolio. And in the process, a free market for rates is created. One that leverages real-time supply and demand of various types of collateral. So in effect, what you can do is create a market of rates across asset types, instead of relying on a single rate. And that is a pretty interesting concept!

In Closing

There’s much change afoot in the structure of the global economy. From currencies to rates, everything seems to be rife for digitization and disruption. As always, we are watching with a keen eye…

As always, if you’re interesting in learning more, check out our latest at www.coinshares.com or give our investing team a shout by emailing investments@coinshares.com.

Money, Money, Money was originally published in CoinShares Research Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Note: I’m writing more regular blog posts on various topics over at Substack. Click here to subscribe! I’ll cross-post some of them here on Medium.

It’s been quite the week in crypto, with a new phase of the “china FUD” being kicked off by the announcement that China would be launching a government currency on the blockchain. I’ll write more about that later, but for this post, I really want to focus on the digitization of money and payments, and what it might mean for “crypto.”

Let’s start by going backwards. The last ten years of crypto were kicked off by bitcoin — which I believe is a technology, new networking infrastructure, but most importantly, a new set of political, economic, and social philosophies. Bitcoin’s growth resembles that of a social movement. Social movements are purposeful, organized groups striving to work toward a common goal. These groups might be attempting to create change (Occupy Wall Street, Arab Spring), to resist change (anti-globalization movement), or to provide a political voice to those otherwise disenfranchised (civil rights movements). Social movements create social change. Bitcoin introduced a new idea to the world at the time when we needed it most — the idea that state and money should, and could, be separate, and that money could be digital, scarce, immutable, and open-source. You can hear more about the topic of bitcoin as a social movement on Episode 27 of What Grinds My Gears, the research podcast I do with my friend Jill Carlson.

Once bitcoin started gaining steam, the community started to fragment as new people joined and OGs broke off to start new projects with different visions. Each successive wave of “innovation,” marked by a change in terminology and change in execution of the idea, is one step further removed from bitcoin, until the end result doesn’t really look anything like where we started. In fact, it’s the opposite of where we started.

So here we are. It’s 2019, and bitcoin has been around for ten years and it’s basically all of (well, 70% of) the crypto market. While bitcoin has captured a lot of mindshare, the money for most corporates and institutions who missed the bitcoin wave is thinking of ways to manufacture and capture the next wave of “bitcoin.” The evolution of initial coin offerings from public, anonymous fundraises to private, fully regulated securities offerings is a great example of this shift. Regulatory capture is a strong force in our world, and crypto is no different than any other industry. Regulatory capture also allows incumbents to squeeze out competitors, and it’s no surprise that as the popular narrative moves from bitcoin to ICOs to security tokens to stablecoins, and now, CBDCs, each successive wave is concentrating power in the hands of fewer and fewer (existing) players. The game is still the game.

Nowhere was this sentiment better captured than the TV show Mr. Robot, where E-Corp created E-Coin which is basically a terrifying preview of the dystopian future that is coming our way.

So where does this lead bitcoin and the “crypto” community? I think we’re entering a new phase of the narrative, where digitization of money and value will enable companies who own end users will also own their money because they can. As we look at the broader narrative unfolding in the tech world, we start to see the shift from the world of physical things to digital things is an interesting one indeed. Looking at the last 10 years, the largest companies in the world used to be the ones that made physical things — especially companies who produced the resources (energy) needed to make physical things. In 2019, what matters is the digital realm, not the physical. The largest companies in the world are now the companies that define our digital lives, own our data and our relationships, and manage our world’s financial flows.

I like to call this new group of companies our “digital overlords” and for good reason. The internet is an economic powerhouse that drives competitiveness and productivity. See above how the US, and increasingly, China, absolutely dominate. The digital economy,[1] powered by the internet, drives Gross Domestic Product (GDP) and also offers countless intangible benefits to small businesses, consumers, institutions, and governments. According to the Bureau of Economic Analysis, the digital economy has been a bright spot in context of the United States economy. The real value added to the US economy by the digital economy grew at an average annual rate of 9.9 percent per year from 1998 to 2017, compared to 2.3 percent growth in the overall economy. The digital economy accounted for 6.9 percent ($1,351 billion) of current‐dollar gross domestic product (GDP) in 2017.[2]

But like all things, this growth has not been evenly distributed. Our digital overlords — a small group of 5 companies — command the majority of this value. And as they’re sitting here looking at the world, and this crazy bitcoin thing, they start asking “why not us, too?”

If you already own everyone’s data and digital lives, why would you let a bank capture all of the value of their economic activity? It’s an interesting question, especially in an age where money is now fully digital and as demonstrated by bitcoin, no longer needs to be tethered to the guarantees of a central bank or a government with guns (an army) and steel (an economy) to defend its currency.

Historically, the business model of being a bank has been cumbersome, capital intensive, and challenging. But as money, too, becoming digital and less bound to physical jurisdiction, the ways in which we bank has also begun to change. People no longer consume financial services in the same way. Instead, financial services historically bound to the bank branch are consumed on demand, at the digital point of sale. We see this with lending businesses like Klarna and Affirm which effectively provide digital “layaway” services (buy now, pay later) to digital shoppers. What is interesting to think about is who the bank of this new digital future will be? I’d love to believe it could be bitcoin, but I don’t think our digital overlords see the same future for us. Digitization has made us more dependent on intermediaries than ever before, and has concentrated power in the hands of a small handful of companies who define our digital experience from the moment we wake up, to the moment we go to sleep. And actually, in your sleep, too, because you probably track your sleep with your Oura Sleep Ring you evolved human being, you.

As an investor, what I then wonder is how digital conglomerates will beg, borrow, and steal from the crypto community (and larger FinTech community) to leverage the new possibilities of digital finance. We’ve seen a taste of this with Facebook’s Libra project — which at this point requires no further commentary because it’s been analyzed and scrutinized to death — but I think this is just the starting point for a long and dystopian march into the digital gulag of the future. The tools of our liberation could very well have the opposite effect, leading to complete digital capture with no hope for escape. Trust me, I’ve tried going a day without using Amazon, Apple, Microsoft, Facebook (via WhatsApp), and Google and I couldn’t make it outside my front door.

This new narrative unfolding is going to be an epic one, given the marketing prowess and sheer balance sheet strength of these conglomerates. I mean, Apple has more spare cash on its balance sheet than the entire crypto market cap.

I’ll close with one of my favorite lines from Mr. Robot. “Give a man a gun and he can rob a bank, but give a man a bank, and he can rob the world.” Looks like E-Corp isn’t the only one who figured that out…

[1] The United States Department of Commerce’s Bureau of Economic Analysis is working to develop tools to better capture the effects of fast-changing technologies on the U.S. economy and on global supply chains. The project seeks to calculate the digital economy’s contribution to U.S. GDP, improve measures of high-tech goods and services, and offer a more complete picture of international trade. More at https://www.bea.gov/data/special-topics/digital-economy

[2] See the Bureau of Economic Analysis “Measuring the Digital Economy: An Update Incorporating Data from the 2018 Comprehensive Update of the Industry Economic Accounts” which can be found at https://www.bea.gov/system/files/2019-04/digital-economy-report-update-april-2019_1.pdf

Digital dollars for your digital life in the digital gulag