Foreword: The blockchain will store the wealth value of the world. This is an ongoing direction, but it is still too early, and the evolutionary form is subject to factors such as technology and regulation. Even so, its a trend, albeit of varying lengths of time. This article makes a very bold assumption about the value storage of the blockchain, and believes that 100 trillion US dollars of assets will be stored on the blockchain in the future. is it possible? Everything is possible in the future. The author of this article is kyle samani, translated by the Blue Fox Notes community Leo.
On April 19, 2019, the Yale Endowment made historic investments in two crypto funds. And the Yale endowment has been a bellwether for other endowments, which sent a signal to a lot of people, and it seemed like it was the official entry of the institution.
There are several reasons for this.
1. The crypto world is massive market expansion (e.g. how many people think Ubers addressable market is comparable to Ubers pre-Uber taxi market.)
2. The crypto world will absorb the monetary premium of many non-monetary assets (these assets are mainly used as a hedge against inflation.)
In this article, I will outline some of the major market opportunities for permissionless cryptocurrencies such as BTC, ETH, BCH, XMR, ZEC, and all major smart contract platforms.
digital gold
digital gold
All the gold in the world is worth about $7 trillion.
The industrial value of gold (used in electronics) does not support the $7 trillion valuation. Rational market participants continue to buy gold at such valuations because gold is considered a hedge against inflation. Humans continue to dig up a certain amount of gold every year, and the inflation rate of gold is about 1.5%, and at the same time, we have no reason to believe that this will slow down in the foreseeable future. (Note from Blue Fox: In the long run, gold is not scarce. It is said that the gold content of the asteroid Eros Eros exceeds the total amount of gold mined by human beings in history.)
All base layer (not layer 2) cryptocurrencies are digital gold because they are not affected by fiat currency inflation and can be used as a hedge against fiat currency inflation in an investment portfolio. Even encrypted assets like EOS, which are not usually considered digital gold, have an annual inflation rate of only about 1%, which is lower than that of gold.
All cryptocurrencies—BTC, ETH, and others—share some key characteristics:
1. Transparent, auditable, and predictable supply schedules.
2. Anti-censorship - the encrypted funds held can be consumed without going through an intermediary.
3. No permission required - users do not need any third-party permission to use these systems. Users only need to download the software, generate a private key and start, no one will trouble you.
4. Self-management - users own assets in bearer. Users do not need to rely on any trusted third parties. As long as the private key is remembered, users can transfer huge amounts of assets across borders.
5. Divisible - can be divided into small parts and used to exchange various commodities of different values.
6. Portable - meaning it can be taken anywhere.
7. Interchangeable - meaning that all units are essentially interchangeable.
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Expanding the Digital Gold Market
Most of the people who have had the chance to read this article are fortunate enough to live in well-governed countries with relatively stable fiat currencies. Many of them do not see a strong need to hedge against inflation in fiat currencies.
However, most of the world is not so lucky. While there is no data to confirm this, perhaps 75-80% or so of the worlds population is less inclined to store their net worth in their local currency. Consider a simple thought experiment:
If you had to store 100% of all asset value in a single fiat currency, which fiat currencies would you consider? Which fiat currencies will not be considered? It wont be too many to enter the scope of your consideration. Inflation of legal currency in some countries is very severe, such as Argentina and Venezuela.
Securitized gold on regulated exchanges is inaccessible to most people. Even if these countries have local vaults, ordinary people are suspicious: in the event of unrest, the integrity of the vaults gold could be compromised by insiders or the populace.
Cryptocurrencies are completely permissionless. To store crypto assets, all a person needs is a smartphone (you can get it for $30 these days) and an internet connection (just choppy, terribly slow, and unreliable). With these two, anyone on the planet can use a mechanism for storing wealth without intermediaries. This is unprecedented.
This means that most people in the world can obtain intermediary-free wealth storage, and more and more of them will choose to do so, greatly expanding the size of the entire digital gold market starting from $7 trillion.
The scale of this market-expanding effect is hard to overstate. For the first time in modern human history, people have the option to store their wealth in an intermediary-free currency. If there is a problem with national governance, it will cause people to lack confidence in legal currency and stay away.
At least $93 trillion in value is stored in fiat currencies today. With regard to predicting the size of the market expansion of digital gold in the future, it is impossible to have any reasonably precise predictions, because people choose to trade encrypted assets with fiat currency. From a conservative point of view, the size of the entire digital gold is 30 trillion US dollars, which may be more than 10 times that of gold, which is 70 trillion US dollars.
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hidden wealth
The worlds elite keep $20-30 trillion of their wealth in offshore bank accounts. These assets are clearly intended to escape the sight of the government so that they cannot be easily seized or taxed. Cryptocurrencies are bearer assets. Others cannot seize crypto assets without the threat of physical violence.
As investors understand the power of cryptoassets, especially some privacy coins such as Monero, Zcash, Grin, Mobilecoin, etc., this may allow these wealthy elites to transfer a significant portion of their assets to disintermediated cryptocurrencies .
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deflation of the money premium on productive assets
Since President Nixon decoupled the U.S. dollar from gold, investors have increasingly stored their wealth in various non-monetary assets to avoid inflation in fiat currencies.
Attracting these asset flows are real estate, debt and stocks. As central banks have printed huge amounts of money over the past decade or so since the financial crisis, they have mostly been buying debt. This has artificially raised debt prices and lowered yields, prompting investors to allocate more capital to other asset classes, primarily real estate and stocks. As a result, much of the worlds wealth is stored in debt, stocks, and real estate, especially as a model to avoid fiat currency inflation.
The global real estate market is worth $225 trillion, of which $30 trillion is in the United States. The global stock market is worth $72 trillion, of which $30 trillion is in the United States. The global debt market is $215 trillion, of which $40 trillion is in the United States. These asset classes add up to about $513 trillion.
Among them, it seems that about 1-5%, or 5-25 trillion US dollars, these values are not actual production values, but wealth storage mechanisms. While its impossible to measure this, it can be seen in the SP 500s price-to-earnings ratio and apartment vacancy rates in major cities like New York and London.
Cryptocurrencies are a better store of wealth than real estate, debt, stocks, oil futures, art collectibles, and other assets for which monetary premiums have already built up. Additionally, cryptocurrencies are bearer assets that cannot be seized, have no property taxes, are not taxed as often as oil futures (benefit tax treatment), are fungible and liquid (unlike real estate).
While it has been recognized that many assets can act as stores of value against fiat inflation, on a long enough time frame we will look back and think that non-monetary assets that command monetary premiums are insane, they are worth trillions of dollars at every turn .
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Tokenized World Assets
Real estate, debt, stocks, and digital fiat currencies make up the vast majority of wealth in the world, and none of these assets are bearer assets.
Record keeping and asset transfers are separate within each asset class. The systems for managing these assets are complex, opaque, slow, and expensive.
If we could refactor all asset ownership systems today, without the baggage of history, what would we do? Technically, the answer is pretty clear (its okay if you dont fully understand the next paragraph):
The asset owner (or custodian) generates a private key, transfers the asset by signing it, and then broadcasts this information to the public, so the world can confirm that the asset has not been double-spent. Each private key is bound to a public key. (Blue Fox Note: It is a public-private key pair.) Among them, when KYC/AML is required, the public key can be mapped to some off-chain identification systems. (e.g. tax ID number)
In other words, blockchain.
The total assets of the world — more than $700 trillion — will be tokenized on the blockchain, including fiat currency itself. Some chains will be permissioned, while others allow central banks to issue money. However, all wealth will be tokenized.
It is also possible for world assets to be tokenized on a permissionless public chain. If this kind of thing really happens, then this chain will be responsible for the value of hundreds of trillions of dollars in assets.
In all blockchains — PoW and PoS based systems — security is primarily a function of the total network value of the base layer tokens, and only a secondary function of inflation.
In other words, the more valuable the blockchain, the more secure it is. This is the source of self-circulation and powerful network effects.
As this article explains, a blockchain that secures assets around the world must be valuable. We dont know if $1 trillion in base layer value will protect $10 trillion or $100 trillion in value above it, but my hunch is that the appropriate ratio is somewhere between 1:10 and 1:100 (for attacks The security boundary of the public chain is a very technical concept, which is beyond the scope of this article.) (Blue Fox Note: Why this ratio is appropriate, the author did not give a clear explanation, logically speaking, it should be obtained from the perspective of profit-loss ratio draw conclusions.)
What is the appropriate justification for this scale range? At the current size level of the crypto market, such ratios are dangerous. However, as more and more of the worlds wealth is stored on the blockchain, the law of large numbers becomes true, making it much more difficult to attack the system on an absolute basis. So the question is, what ratio becomes unsafe?
Even if $500 trillion is stored on the public chain, the ratio is 1:1000, which means that the base chain is only worth $500 billion, and may be attacked by a few percent. My hunch is that this is an overly aggressive assumption, but a value on the order of $5-50 trillion is enough to secure any attacker. (Note from Blue Fox Note: It is not known whether all will be concentrated on one chain in the future.)
It is unclear whether or how investors will choose to park their assets in a native unintermediated currency to keep their remaining assets safe. However, this becomes even more fascinating when it is combined with the arguments presented in the next section.
Honest, transparent, market-driven, global, risk-free interest rate
If you dont use CPI to define inflation, but instead use the amount of money issued by a government, most government treasury bills around the world offer a negative real interest rate.
Go crazy.
In a PoW system like Bitcoin, where the supply is fixed, the Lightning Networks liquid market sets the systems risk-free rate. In PoS systems such as Ethereum 2.0 and EOS, the risk-free rate of the system will be the income obtained by staking assets.
If investors choose to lock up capital in the PoS system to earn a risk-free rate, it is guaranteed to beat inflation even in the event of perpetual inflation. Given Bitcoins hard cap, investors who provide liquidity to the Lightning Network will beat inflation. (Blue Fox Note: That is to say, the capital gains of node operators of Lightning Network are higher than inflation.)
In the long run, this changes how asset allocators think about risk-free rates, yields, and risk premiums across all assets. This will ultimately accelerate and expand capital outflows from other assets and into crypto markets.
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new possibilities
From a macroeconomic perspective, the only way humans can create new wealth on a global scale is by assigning increasing value to production processes, which requires specialization and is ultimately measured through trade.
(Violence and inflation do not add value. Rather, they simply change the ownership of existing wealth, and in many cases, it actually destroys wealth.)
Before the invention of the joint-stock company, corporations could not materially grow beyond the size of the family workshop. In the fifteenth century, the invention of the joint stock company changed all that, allowing investors to collectively take risks and share the rewards. The invention was a new way of coordinating human economic activity—facilitating one of the greatest explosions of wealth creation in human history.
This has accelerated dramatically over the past 100-150 years as the financial system established the means to extend the concept of equity from private markets into public circulation.
For the first time since the invention of the joint stock company system, smart contract platforms like Ethereum, EOS, Dfinity, Algorand, Kadena, Tari, Solana, etc. have facilitated unprecedented new types of economic activity. This will ultimately lead to not just more trade, but more efficient trade, which will accelerate the pace of wealth creation by opening up new design spaces that we cannot even imagine today.
As the global economy simultaneously becomes more international and local (at the expense of cross-border trade), there will be ample opportunities to connect supply and demand in unprecedented ways, such as through blockchain smart contracts. Also, as Chris Dixon said, modern giants hinder innovation.
The overall impact of frictionless and programmable value flows cannot be predicted at this stage. But if the overarching assumption is correct, that smart contracts unlock new types of trade and ensure that incumbents dont stifle innovation, there is a multi-trillion dollar value opportunity.
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To understand the magnitude of this opportunity, we can add it all up:
Digital gold: $30-70 trillion
Narrowing money premiums in housing, equities, and debt markets: $5-25 trillion
Replacing Offshore Bank Accounts: $1-10 Trillion
Ensuring the security of global assets: 1-10 trillion US dollars
Blockchain unlocks potential for new economic activity: $1-10 trillion
Add it up, there can be at least $50 trillion, and a chance to touch $100 trillion.
What needs to be declared is that all of the above are compatible with the dominance of other fiat currencies such as the U.S. dollar and the euro. It is not necessary to challenge the legitimacy of U.S. dollars and other fiat currencies to achieve a market value of 100 trillion U.S. dollars. On the contrary, cryptocurrencies will challenge the legitimacy of some weaker currencies, such as the Venezuelan bolivar, the Argentine peso, etc., and at the same time it will reduce the currency premium in real estate, debt and stock markets.
The only question left is: how to get there?
