As digital asset markets evolve, astute investors will continue to develop mental models and analytical tools to identify attractive risk/return opportunities. Arthur Hayes provides readers a free lesson in these matters by offering a peek through the lens he uses when gazing across the landscape of destroyed tokens these days. To pique the wily veteran’s interest, projects must have the following characteristics:
As an economics graduate from Wharton and former equity derivatives trader, it’s not surprising that Mr. Hayes says his focus is on DeFi projects. However, I think the second bullet is most relevant today as web3 advocates look past the current turmoil and envision a world where cryptoassets feature prominently in our lives. As mhonkasalo points out, so many protocols in DeFi are simply leverage masquerading as innovation and what “sustains crypto is building cool and useful stuff.” Frankly, most people don’t care about finance, so I’m inclined to believe that a catalyst for mass adoption will be something that emphasizes community over token price or yield. DeFi applications will be a feature of web3, but I don’t think they’re well-suited to be at its core. Afterall, banking is all around us, but it’s most effective when interactions are seamless – it’s meant to be an afterthought.
Interestingly, while Arthur states that he’s looking for DeFi services, two of his big ideas are more social. He likes NFT marketplaces, which is important because we’ve seen some acquisitions in the space recently as eBay purchased KnownOrigin and Uniswap rolled-in Genie. The buyers are leaders in the verticals they serve, so that they’re both buttressing their capabilities to provide client access to the evolving space of non-fungible tokens is notable.
Mr. Hayes also thinks there’s a good value-based case to be made for accumulating the tokens related to Ethereum Name Service (ENS) domains. These are addresses which can be used to host a website, but also have potential as part of a digital identity. Holders can use their “.eth” names to replace the long and complex strings that represent their public keys, which is a subtle, yet significant improvement to the user experience. Many users flaunt ENS as their Twitter handles and soon followers might be able to use them for sending renumeration/tips in-app as a demonstration of their fidelity.
It’s believed that about 71 million wallets hold Ethereum and Mr. Hayes’ long thesis is based on penetration increasing from it’s current 1.5%. While not broadly used today, you might start to see Sign In With Ethereum (SIWE) more frequently as consumer-facing companies integrate web3 functionality to capture a digitally native and highly engaged consumer base:
Auth0 is an organisation that manages a universal identity platform for web, mobile and the Internet of Things (IoT) and they recently enabled this functionality into their “authentication as a service” offering. This development shouldn’t be ignored since it’s clear evidence of web2 transitioning to web3 and with that, new innovations will follow.
Single sign-on (SSO) has its shortcomings, but because it’s so convenient, the innovation is generally viewed as a win for consumers. Importantly for the ENS case, it is a meaningful step in the direction of digital asset wallets expanding their use-cases beyond stores of wealth and JPEGs. As more retail businesses integrate NFTs, they’ll likely require wallet holders to authenticate themselves, so using something like ENS (or a public key) as a sign-in mechanism seems like a natural (and more user-friendly) extension.
As the internet embarks on its next evolutionary phase, we’re seeing competition heat up because, as we witnessed with the FANMAG stocks, online platforms have trended towards monopolies (or oligopolies, if we’re lucky). Companies like Alphabet and Meta generate Net Income Margins between 25% - 35%, which compares to the average large cap company in the S&P 500 at around 13%. If the vision for the next web is one where users control their information, then revenue models will necessarily have to adapt. Conceptually, more dollars will accrue to producers of data, but aggregators will still add value and be compensated accordingly. It’s hard to say what margins will look like since code is expected to feature even more prominently in web3, but with a larger piece of the advertising pie going to creators and consumers it makes sense that there’s a big push to be a leader in authentication. Merchants aren’t going to want to offer SSO for each chain or wallet, but as we’ve seen with Apple, Google and Facebook, it does make sense to provide this convenience to members of the largest online communities.
Blockchain technology lends itself nicely to verification. A wide variety of data can be stored on-chain like verified documents, biometrics, and other tokenized assets. Such records can be used in authentication without the need of a password. Of course, they can be encrypted like any other repository as well. Perhaps most importantly, the decentralized nature of the technology means that no central authority would manage the IDs, leaving the user in control. That’s not entirely true given that so much data is stored on cloud servers owned by centralized parties, but you get the general idea. You’d be negligent to reject this all as something for a sci-fi storyline because 1Kosmos already has a number of web2 integrations for their blockchain authentication tech and a16z just led a $7.5M seed round for Dynamic.
We’re complex beings, so typically a person’s LinkedIn profile doesn’t resemble their Instagram. This might change as the passion economy grows and what people do for work approaches what they actually care about, but for the time-being a natural separation makes sense. Sometimes when you’re asked to fill out a form for a webinar etc. you can pre-populate from LinkedIn, which is great because it saves you time. Meanwhile, many social applications use Facebook as a SSO partner given the nature of that platform. However, now Microsoft and Meta know that you’re interested in some particular content or application and this data is valuable. In a way, you pay for the convenience, but do you know how much? Further, there are risks associated with trusting centralized bodies to manage our credentials. Accounts get de-platformed and sometimes disputes among tech giants risk users accounts being locked or lost.
What if digital asset wallets could serve as containers for our important personal data, too?
I recently had to complete my Nexus renewal. Part of the process asked me to provide a list of addresses since my last application in 2017. For many, this might be a simple task, but I happen to have moved between three cities and five apartments over that timeframe, so gathering the different coordinates was a pain. However, over the course of the past five years, I had entered those addresses countless times across different sites/forms. It would be great if that history was somehow saved to a trusted place where it’d be reliably managed and accessible. Encrypted decentralized identifiers could help in this manner.
Here's another example, which is clearly a first-world problem, but not irrelevant. I have a friend who moved to the U.S. to join his company’s global headquarters in Manhattan. Upon tying off his associations to Canada, he paid a final credit card balance and moved on. However, upon returning to Toronto several years later he applied for a bank-issued Visa and was denied. Turns out, there was a residual amount owing on his previous balance of around $15 that got written off, so his credit score wasn’t sufficiently strong to justify the risk of extending him a revolving loan. Even though this guy made regular payments to his U.S. credit card provider, earns a healthy salary, and boasts considerable savings, his profile (as it’s currently amalgamated) was deemed unsatisfactory for service through traditional lending channels. Now, imagine the challenges a new immigrant with comparatively less savings would face. I get it – the banks’ credit adjudication models have been honed over several decades, but there are clearly some holes. More robust and portable digital identifiers could form part of a meaningful solution that would not only provide credit to worthy borrowers, but also add revenue to the incumbents’ income statements. There are teams currently building out this ecosystem.
A controversial example of a similar social experiment is India’s Aadhaar digital identification system. The introduction of this biometric ID across most of the nation boosted telecom subscribers and bank account holders because it was suddenly easier to authenticate customers.
However, while the program was a success for most Indians, those who didn’t see the benefit were already some of the country’s most vulnerable. Some critics have proclaimed that Aadhaar serves as a tool for social exclusion and corporate influence. It may have also laid the foundation (Google says Aadhaar’s English translation from Hindi is backbone) for an Orwellian surveillance state. A good reminder that the new tech we’re trialing could have profound positive impacts and dire consequences.
Groups like Disco.xyz are taking this all a step further as they look to create digital repositories of individual information that can hold more nuanced data. If a wallet carries your identity, loyalty cards and payment tools, then consider Disco as a backpack which holds (and encrypts) old documents, year books, ticket stubs, education certificates and more. Right now, the technology is still in beta and only available on Ethereum, but the group has larger ambitions to be “the only profile you’ll ever need” across the metaverse. Users will be able to house all the data in Disco, but only share what they want with whom they choose. The availability of this information within a wallet which can be linked to applications across the internet has the potential to create better experiences and unlock connections we may not have otherwise made. Learn more here.
It seems like authentication and identity management have immense potential to attract the next big wave of digital asset adoption. The problems addressed by self-governance of one’s personal information are more pressing than what yield farming sought to accomplish and there aren’t any ponzinomics involved (though, I’m sure some will try). To be clear, wallets and decentralized identifiers are only parts of the overall web3 tapestry, but they’re more fundamental than DeFi, which I hope will play more of a backseat roll going forward. That’s weird for me to say because I’ll certainly be spending most of my time focused on yield generation and compounding returns, but I think the sustainability of those outcomes is reliant on a heartier ecosystem. More comprehensive wallet (or backpack) experiences/capabilities are likely to do more for digital asset acceptance than higher yields.
* From T.I. - What you know
