- Lead Crypto Asset Strategist
Singapore, Intermediary
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Behind the scenes of crypto volatility, unwinding of leverage, and rising regulatory uncertainty, less-talked-about innovations are brewing. While many crypto developments are still early experiments, they offer a view of the ways these technologies can address a wider range of business applications beyond just payments and store of value.
Expanding the crypto ecosystem
A few years ago, a lot of crypto innovation focused on two areas: scaling blockchain technology and building out the infrastructure for creating and trading digital assets. We saw a rise of decentralized finance (DeFi), which helped fuel the rally across multiple emerging protocols that expanded the size of the ecosystem. Nonfungible tokens (NFTs) expanded crypto’s reach into mainstream awareness and culture.
Now we find ourselves at the tail end of that upcycle, but with many more users, innovators, and unspent venture capital funding working in this space. So, the question is: What drives the next expansion wave? We believe that the next upcycle may see the scope of crypto technology widen beyond just scaling transactions, DeFi, and digital art.
Crypto building blocks
Before exploring emerging business models, we believe it’s important to review some key building blocks that crypto and blockchain technology enables:
- A consensus database of transactions, ownership, and records — the ability to have a trusted, independently verifiable ledger of records. It can store digital token data, transactions, ownership rights, etc. It will be increasingly used to manage digital identity and serve as the new “login to the internet.”
- Highly automated transfer of value between parties — a few hundred lines of smart-contract code can replace complex business processes that involve thousands of people and integrate transactions natively into apps.
- Ability to design cryptographic incentives — using code to tie economic outcomes to an action. Decentralized blockchains run because of economic incentives hard coded into the design — what else can run enabled by token-based rewards and penalties? For example, crypto tokens can be issued or redeemed to reward or disincentivize activities that power a business model.
Business model innovation in the data economy
Combining the elements above will lead to a reimagining of many business models. The idea of incentive design may be one of the most disruptive elements of crypto innovation. It draws on the existing elements of open-source software, crowdfunding, cooperative ownership, and digital platform economics — how to incentivize collective action to achieve an outcome. One area where we see an impact in the year ahead is in the business of data. Data ownership, use, and rights have been ongoing topics of debate that are only intensifying with the acceleration of AI innovation.
We see projects that reimagine the business of storing, exchanging, and using data emerging. These types of projects use the consensus database of blockchains to track data assets, their ownership, and rights. They facilitate software-based transfer of value connected to data assets and run on automated token incentives that ensure the data is securely stored by a network of decentralized participants. These approaches are already scaling to petabytes of storage deployed, and the innovation continues to progress at a rapid pace.
Decentralized social networks
Another area of disruption is social networks, where the competitive landscape is already very dynamic. Today’s companies maintain users’ posts, profiles, and data in databases. Disruptive crypto projects are storing user credentials, data, and interactions on a blockchain instead. They’re also facilitating easy transfer of value between users and creators in an emerging token-based economy. The metaverse is less about the visual experience and virtual reality goggles, and more about the token-based network of economic relationships and coordination to accomplish shared goals.
Networks whose data is stored on blockchain could challenge today’s vertically integrated social network model and change how we “login to the internet.” Instead of using the login of a large tech platform, a user would use the credentials stored in a digital wallet. Social networks tend to accelerate user adoption of any technology, and we see this as an important catalyst this year.
Decoding the power of disruption
There are three ways in which new crypto-centric business model approaches can be disruptive to the existing technology landscape:
- Different flow of economics and token-based incentives: Previous disruption cycles pulled users away from expensive incumbents with venture capital (VC)-funded free services and offers. The new approaches to business models often involve token incentives and automated distribution of benefits to stakeholders in a way that shares value created differently than just equity. Users have an ability to become economic stakeholders in the protocols they help build.
- Lower take rates: Most crypto-native business models operate with take rates significantly lower than today’s incumbents. They pass on efficiency benefits to both the users and suppliers in the platform and can be disruptive in how little they extract from the economic flow they enable.
- More open innovation: These innovations and the future of the web they represent are much more open and easier to connect to. They have the potential to break down monolithic business models into interoperable modules. The use of crypto-incentivized and openly available “digital public goods” infrastructure has the potential to unleash another cycle of rapid innovation.
While we’re eager to see the opportunities these disruptions create, it’s important to remember that it will take some time for these ideas to mature. The regulatory landscape will have a significant impact on the direction of innovation because crypto assets don’t easily fit into the existing categories of regulated assets. We are optimistic that over time, regulatory frameworks will emerge and address new disclosure and accountability needs while also accounting for the differences among the tokens — not all crypto assets are the same!
Our focus in crypto asset research is finding sustainable and responsible innovation. We are encouraged by what we observe, and see opportunities for alignment between new innovators, investors, regulators, and users. Where that alignment happens, we’ll see highly disruptive business models emerge.
Expert
Related insights
Showing
of
Insights Posts
URL References
Related Insights
Related Insights
Showing
of
Insights Posts
How do bank failures impact fintech?
Global Industry Analyst Matt Ross analyzes the ways in which recent US bank failures could impact the fintech sector in public and private markets.
Quick Take
2024-04-30
Fintech regulation: Geopolitics, ESG, and crypto
Discover how fintech’s growing role as a national strategic imperative impacts regulations, the effect of ESG on regulation, and the specific need for regulation in crypto markets.
Article
2024-02-29
The role of ESG in fintech
Global Industry Analyst Matt Ross and Portfolio Manager Matt Lipton explore the role of ESG in fintech in this clip from their WellSaid podcast episode.
Article
2024-01-31
Fintech
The fintech revolution is just beginning. Explore the full potential of fintech innovation across public and private markets.
Collection
2023-12-31
Fintech opportunities after the recent pullback
In four short videos, our fintech investors explore the sector's outlook amid today’s dispersion and highlight the long-term growth potential in payments, fintech incumbents, and crypto innovation.
Video
2023-11-30
Fintech market overview: The intersection of disruption and dispersion
In the latest episode of WellSaid, Portfolio Manager Matt Lipton and Global Industry Analyst Matt Ross join host Thomas Mucha to discuss their outlook for fintech in today's environment, exploring the recent pullback in the sector, disruptive fintech innovations, potential regulation, and much more.
Podcast
2023-11-30
Fintech outlook for 2023: The trends separating the winners and losers
Our fintech investors delve into high-conviction ideas for the year ahead — including embedded finance, buy-now-pay later, and digital assets — and highlight the power of incumbency amid today's increased volatility and dispersion.
Article
2023-12-31
Digital transformation in financial services continues
We highlight the fintech innovations driving the digital transformation and disruption of financial services.
Article
2023-10-31
The growing wave of disruption in financial services
Amid today's uncertainty, Portfolio Manager Matt Lipton outlines three key reasons he believes the opportunities fueled by fintech disruption will continue.
Continue reading
Article
2023-08-31
Fintech innovation: A pure play on enduring disruption
We explore why fintech merits a pure-play approach, discuss the importance of an investment team with deep industry expertise in both financial services and technology, and highlight the long-term nature of this disruption
Continue reading
Article
2023-09-30
Fintech industry outlook in a recession
We explore the current environment for the fintech industry and highlight a few factors that show why the outlook for payments and other related subindustries may be less challenging than many may anticipate.
Continue reading
Quick Take
2023-07-31
URL References
Related Insights