It’s Time To Build in Crypto — But Build What?

Marc Andreessen, one of the co-founders of Andreessen Horowitz, wrote a timely piece during the height of the US COVID-19 crisis.

In Marc Andreesen’s infamous “It’s Time to Build” essay, he called out the need to ignore the mania and divisiveness of COVID-19 in favor of building. He championed spending our time building solution to our problems instead of spending our time hating each other.

It’s clear today that Crypto has reached a new peak of consumer adoption in 2021 with the advent of NFTs and crypto gaming — and it’s equally clear that “It’s Time to Build” in Crypto — but build what? Let’s look at the world’s most valuable companies from each era past.

Part I: The Most Valuable Companies Reduce Friction

The most valuable companies in the world are the ones that reduced the most friction between consumers and technology. To reduce the most friction, companies need to sit as close to the consumer as possible. Examples include:

• Google reduced friction between people and what they wanted on the web (Search)
• Apple reduced friction between people and access to the internet (iPhone)
• Facebook reduced friction between people and other people (Social Networking)
• Amazon reduced friction between people and physical goods (The Everything Store)

This concept holds true in crypto too. Coinbase is the most valuable company in crypto today — and Coinbase initially reduced the friction between people and Bitcoin. Specifically, Coinbase reduced friction by allowing consumers to buy Bitcoin with cash via credit cards, and to hold those Bitcoins securely via standard 2-factor authentication rather than strange seed phrase craziness like Metamask. Coinbase fundamentally reduced friction and bridged the gap between a new technology and consumers.

And this concept still holds true as the biggest driver of 2021 crypto adoption too. Two companies dramatically reduced friction for the average consumer to onboard onto 2 new consumer use cases for crypto:

• OpenSea for NFTs
• Axie Infinity for crypto gaming

OpenSea operates a simple marketplace portal to view and purchase NFTs. NFTs have been around since 2017, but it was the aggregation of new NFTs by OpenSea that really allowed the market to explode this year. Speculation, aka the dominant crypto incentive, combined with cultural value, drew hundreds of thousands of users to OpenSea.

Axie Infinity isn’t the first crypto game, but it’s the first crypto game to reach mass scale. Axie reached mass scale two ways. First, Axie’s Ponzi-esque game economics allow players to earn money consistently by playing the game well (as long as more players keep coming in). Axie first gained prominence in the Philippines when daily average earnings in dollar terms exceeded the average income of Filipino workers.

Second, Axie reduced the friction for onboarding to crypto by separating out the wallet and the game login. Players still need crypto assets, but the unique separation and high returns allowed a symbiotic relationship to form between Western investors and developing market players. Western investors sponsor teams at no risk to themselves since they control the crypto assets and wallet, while players get a cut of returns by logging in and playing with the game layer.

It’s worth noting that these use cases are at roughly 10x and 100x less adoption than cryptocurrencies in general, but serve as an incentive to on-ramp to the broader crypto ecosystem. For reference, Coinbase and all exchanges have around 100M+ users, while all of crypto gaming touches maybe 10M users (Axie accounts for ~5M of those), and the entirety of OpenSea’s transacted wallets only account for <1M people.

Part II: Reducing Friction and Getting to 1 Billion Users in Crypto

If we accept that the most valuable companies reduce friction between consumers and technology, what’s going to dramatically drive down the friction of cryptocurrency adoption for the next segment of consumers? What problem will the first $1 trillion crypto company solve?

To 10x the size of Coinbase, said company would likely need to reach 1 billion users — and to reach 1 billion users, I believe 3 problems have to simultaneously be solved:

• Mobile Adoption aka not Metamask
• Infrastructure Fees aka not Ethereum’s $100+ transaction fees
• Business Model aka not a Pseudo-Ponzi scheme promising 1000% APR (Axie)

II.a: Mobile Adoption aka not Metamask

The world’s consumers are mobile consumers and have been for a very long time. There’s a lot of hubbub about Web3 going around the internet but why is it that to interact with any new part of the crypto world we’re dependent on web-browser-based extensions?

Axie tried to solve this by completely separating their web-based system (wallet) and their game-based system (email and login), but this split results in significant adoption friction. It’s basically building in a way where all of the cost for onboarding is passed onto your consumers — hardly a winning model in the long-term.

I suspect that this problem will be solved with some form of custodian-as-a-service or sidechain-as-a-service. Aka, deposit your Ethereum into our privately operated blockchain to play (no fees inside) and withdraw if you’re done playing.

This would entirely bypass the currently prized wallet (Metamask) layer and I’m surprised Coinbase hasn’t released an API for this already. Create a simple single sign-on login API that lets users convert at Coinbase fees (low) to new crypto currencies, use them on a privately operated blockchain or inside a Coinbase-hosted blockchain (crypto AWS), and swap back to a crypto bluechip (Ethereum/BTC) when you’re done playing.

All without ever touching a risky seed phrase driven desktop-locked Metamask or incurring $100+ fees for every exchange/transaction and giving users a trusted onramp/offramp to lock in losses or profits.

II.b: Infrastructure Fees aka not Ethereum’s $100+ transaction fees

Which brings us to the second insurmountable friction barrier in crypto — fees. Ethereum has given us a centralized digital currency with all the flexibility to allow for NFTs, ICOs, crypto gaming, and more — but is hamstrung by huge and rising fees.

Any time anything is modified on the Ethereum blockchain, users routinely pay >$100 fees. It’s ironic that cryptocurrencies, which were created to cut out the middleman (centralization) and lower consumer fees to democratize finance — have ended up with dramatically higher fees that hardly anyone can pay.

Ethereum itself is to blame — it has not actually iterated on its system to make it scalable and performant enough to handle real world use cases. Without a centralized, highly-focused development team, and with minimal direction from Ethereum’s creator (Vitalik), Ethereum cannot move meaningfully forward in any particular direction.

The current solution to Ethereum’s problems are the “L2 technologies”, which batch transactions to be referenced from the Ethereum chain. Retrofitting dependencies onto an underperforming technology can be a viable-if-regrettable business solution when business needs have to take near-term priority. But if you believe crypto has a strong future, these “L2 technologies” start to look very strange: if it’s still early days, what “business needs” could possibly take priority over getting the technology right?

The possibly viable solutions today, are the other L1s — Ethereum replacements designed from the onset to be more performant, combined with a centralized, incentive and iteration driven software development team to continually improve.

Solana is the most promising of these and is the opposite of Ethereum in many ways — a capitalistically oriented and run company driving immediate and rapid improvements to their blockchain with a highly compensated and incentive-tied software engineering team. Imperfections in a technology’s initial vision or implementation can usually be solved by moving quickly, and Solana is showing promise of having nearly fee-less transactions and a transaction-per-second throughput of the same order of magnitude as Visa.

I understand leveraging the large Ethereum userbase is appealing, but locking consumers into poor infrastructure will not unlock a step-function increase in the crypto userbase. The summary state of blockchain infrastructure today is egregiously fragmented and burdened with incredible friction in the form of $100+ costs to write anything to the public ledger at all — and this is a problem that will certainly need to be solved to reach 1 billion users.

II.c: Business Model aka not a Pseudo-Ponzi scheme promising 1000% APR (Axie)

The adoption of new technologies by large segments of the population is often driven by an explicit or implicit reward — socially or financially. To paraphrase Eugene Wei’s infamous article, human beings act to optimize their social or monetary rewards within the incentive structure of the various technologies offered to them.

I can see very little evidence today or in 2017 or before, that the majority of crypto adoption isn’t driven by financial greed. Our world is so broken today — with record high inequality and burdened with the first decade of real wage loss since the 1930s, that many young people feel like gambling on securities is the only way to have a fighting chance. It seems obvious now that at least part of the 2021 run-up was due to the Gamestop crowd of February turning their COVID checks towards newly democratized securities — including Cryptocurrencies.

However, the flaw today is that almost all popular 2021 crypto businesses depend on a Ponzi-esque business model. Crypto users are driven by greed, and so they’ll allocate their capital to whatever makes them the most money. But the bar is too high — to attract users a crypto project needs to generate 10, 20, even 30% monthly returns. To paraphrase The Social Network — 10% APR isn’t cool — only 1000% APR is cool.

But it comes with a catch, 1000% APR obviously isn’t sustainable. Start with any sized business and within a few orders of 10x increases it’ll dwarf the size of all businesses on earth combined.

Here we’ll need just as much innovation as in the other two areas above. To build a sustainable business it’s impossible to promise consumers 10x their money annually and crypto will need to evolve until that isn’t necessary to sustain consumer attention.

The closest example of this I see today is in crypto gaming. The crypto gaming model should be to make fun games that are retentive, not games that players play purely because it’s the highest return now. Gaming as a business model generates hundreds of billions of dollars annually growing at a rapid clip, and the possibilities of NFTs and new distributive economic models in crypto gaming present a tantalizing vision of the future. But builders need to focus on making the games fun, not on unsustainable economic hacks to give players the highest returns fastest.

Part III: There’s So Much Left to Build

Companies that capture the most value have always been ones that fundamentally reduce friction between technology and users. This has been true in crypto and will be true for crypto of the future too.

I’m not sure what the most valuable company in crypto will be, but I’m quite sure it will solve the 3 problems above. To reach 1 billion user, crypto has to solve the friction of:

• Mobile Adoption aka not Metamask
• Infrastructure Fees aka not Ethereum’s $100+ transaction fees
• Business Model aka not a Pseudo-Ponzi scheme promising 1000% APR (Axie)

So don’t worry crypto founders of the future — there’s so much left to build.