We’re at #25 of the Tech Tok Weekly. Time really does fly!
It’s a blue Monday.
Monday Musings
In a rapidly growing niche of the internet, the excitement is palpable. Crypto is becoming mainstream, DeFi and the decentralisation revolution is in full gear, and the NFT boom of 2021 has led to the potential combination of all of these elements into new business models. The excitement is not unwarranted, either – it’s difficult to not feel buoyant about innovation that promises to be inclusive, democratising, and a revenue generator that solves problems plaguing a number of industries. However, broad retail adoption is still a little while away, especially in growing areas like lending, staking, or yield farming. The barriers to entry are pretty high – users would have to download a wallet like MetaMask, buy tokens on exchanges (either centralised or decentralised), pick the liquidity pool of the token that is to be lent out, and input an amount. Users are then usually paid out in tokens tied 1:1 to their chosen asset, and to track assets across exchanges, protocols, and liquidity pools, they would need to download a dashboard like Zapper or Zerion. Further, the DeFi space right now is large and fragmented, which only adds to the confusion of what to do for new users – there is no aggregator that displays the differences between the yield farming protocols to choose, or which exchange has which tokens. These problems, of course, are far from insurmountable – and solving this knowledge barrier may well lead to the widespread utilisation of DeFi by retail customers.
Meanwhile, this week…
Waymo is facing problems in attaining perfection with its self-driving tech, Paytm has been displaced as the leader of the Indian FinTech market, and DeFi continues to reach new heights on a daily basis. Also, a16z’s investment in Yield Guild Games signals the future of the Play-to-Earn model and blockchain-based gaming, and the transformation of the global remittance market indicates the beginning of a payments revolution.
#1 Waymo Is 99% of the Way to Self-Driving Cars. The Last 1% Is the Hardest
For a technology which needs to be absolutely perfect and battle-tested, self-driving cars leave no room for error. While self-driving tech is 99% of the way towards perfection, the last 1% involves threats and disturbances like cyclists, left turns and pedestrians, and weather conditions like rain, sleet or snow. The process of constructing a car and installing Waymo’s ‘Driver’ (cameras, sensors, and computer gear) is also extremely complex – each car needs to be disassembled and reassembled by hand, which adds friction and a lack of scalability to the process, leaving Waymo without a clear path to mass production. Being a subsidiary of Alphabet, Waymo is a clear leader on the tech side of things but predictably is lagging on the manufacturing side. Understanding how to manufacture cars efficiently and at scale has proven a step too far for competitors like Zoox or Uber, and the high barriers to entry in the global auto market have led to the oligopolistic nature of the industry. Waymo’s manufacturing issues are further highlighted by the company only hiring 22 people to work at its Detroit warehouse, where it had received an $8 million grant in exchange for creating at least 100 jobs in the state of Michigan. Moreover, Alphabet has (understandably) been cautious following an incident where an Uber self-driving vehicle killed a pedestrian in Arizona in 2018. It seems, from a high level, as if Waymo’s future lies in providing the tech that turns cars into self-driving vehicles, rather than manufacturing the cars themselves.
A unit of Alphabet Inc., Waymo hasn’t expanded its robo-taxi service beyond Phoenix after years of careful testing. The company has floated moves into other areas—trucking, logistics, personal vehicles—but the businesses are in early stages. And its production process for adding cars to its driverless fleet has been painfully slow.
#2 How Google, Facebook and Walmart Stole Paytm’s FinTech Crown in India
A few years ago, Paytm was the crown jewel of India’s FinTech industry. When the action of sending money digitally began to be referred as a verb (i.e., to ‘Paytm someone’), it signified that the company had made it. The last few years, however, haven’t been especially kind to Paytm, which has lost its crown to the likes of PhonePe and Google Pay, which control 46% and 34% of market share respectively while Paytm now only controls 11.6%. The headwinds began with the introduction of the United Payments Interface (UPI) in 2016, which removed the need to have a digital wallet to make payments, marking the end of Paytm’s dominance. The UPI gave overseas players like Google Pay, WhatsApp and Amazon to enter the market, and Walmart acquired PhonePe when it bought Flipkart in 2018. The interoperability between payment platforms via UPI added a blocker to Paytm’s growth by cutting into its digital wallets business. Moreover, the government has prevented companies from charging ‘meaningful’ fees from merchants who use UPI, which has further eroded Paytm’s margins due to competitive pricing pressure. The future is not all bleak, though. Paytm has some payment instruments via which it can generate revenues (BNPL, debit cards, payment gateways, etc.), is attempting to follow the Ant Financial model to convert digital payment users into users of other financial services, and also has regulatory arbitrage since it is the only bank in the ecosystem and has the banking license that Google Pay and PhonePe cannot obtain.
Paytm’s IPO filing showed that it has $700 million in assets under management across its investment products, including digital gold, mutual funds, and stockbroking. Zerodha, the country’s largest stockbroker, manages $700 million worth of assets just in its mutual fund distribution portfolio.
The decentralisation of money did not immediately lead to the decentralisation of the services used to handle that money, a contradiction that picked at the heart of the crypto movement. The rise of DeFi over the last couple of years has begun to emphatically solve this contradiction. Consensys provides insights on the state of the DeFi market in Q2 2021:
Stablecoins
The DeFi economy is powered by stablecoins like USDT, USDC, and DAI (created by MakerDAO), which provide a way to hedge against volatility in crypto markets, and are fundamental for services like borrowing and lending. DeFi lending protocols like Compound, Aave, and MakerDAO now hold ~23% of the USDC supply.
Decentralised Exchanges (DEXs)
DEXs also serve as the building blocks for DeFi, acting as automated market makers and token swapping aggregators that enable users to transact peer-to-peer and maintain complete control of their funds. DEX volume reached all-time highs of $343 billion in Q2 2021, and the public real-time transparency provided by DEXs will act as a significant advantage for DEXs over centralised exchanges like Coinbase.
Institutional Backing
DeFi protocols like Aave and Compound are building the infrastructure for institutions to enter DeFi. For example, Aave’s permissioned pools ensure that only KYC-verified participants access on-chain asset management, and Compound’s new Treasury project has been created to allow institutions to earn fixed interest of 4% a year, which FinTechs like Current are already integrating into their products. Consensys has also launched MetaMask Institutional, a wallet built for institutions.
More than $6 billion worth of digital assets are now held in just the top 20 DAOs alone. While well-known DeFi projects such as Compound and Uniswap command the largest DAOs, there are thousands of other projects — from media organizations like Bankless to social token communities like Alex Masmej’s, to public funding entities like Gitcoin — that utilize DAOs to coordinate, govern, and manage their financials.
#4 Arianna Simpson of a16z on Yield Guild Games, the Firm’s Newest Bet on Crypto + Gaming
A new gaming model is on the horizon: NFT-based ‘Play-to-Earn’ models, where the mechanics of the game incentivise gamers to earn tokens that can then be cashed out in the real world for local currencies on decentralised exchanges like UniSwap. Blockchain-based games like Axie Infinity have models where players earn 95% of revenues earned in the game, compared to ~27% in games like Roblox. In Axie, for example, players have to purchase 3 ‘Axies’ (Pokemon-like creatures that are NFTs) for around $200 a pop at their cheapest to enter the game. In the game, players then earn ‘Smooth Love Tokens’, or SLPs, by battling other players or completing quests. SLPs can then be sold on DEXs for real-world cash. The barriers to entry are obvious, especially for players based in developing countries like Indonesia, Philippines, or Vietnam, where much of the game’s user base is located. This has led to like Yield Guild Games (YGG) lending players money to buy the Axies and other digital assets needed to start the game. YGG has raised $4.6 million from Andreessen Horowitz, and hope that their players earn more money in the game than they pay YGG for the use of its assets. The crypto game universe is only just beginning, and at this point is in the very initial phases of its journey – think early Pokemon in terms of gameplay. The Play-to-Earn model is ripe for evolution and widespread adoption, and is on its way to revolutionise the gaming industry (and potentially beyond).
The idea [with blockchain-based games] is to make them more open and allow players to have actual ownership in the space themselves.
#5 Remittance FinTechs Herald a Payments Revolution
The remittance industry has been long seen as the ugly duckling of financial services, once dismissed as ‘plumbing’ by flashy investment bankers. The industry has also long been ripe for disruption, though, with banks and traditional money agents charging high fees and cross-border payments being beset by inefficient legacy infrastructure. This has led to the rise of services like Wise (formerly TransferWise) and neobanks like Revolut, which offer fees that are up to 8 times cheaper than UK banks and arrive in about a day, compared to regular settlement windows of two to five days. Moreover, the global average charge for remittances has dropped from ~9% in 2011 to 6.4% today. These efficiencies, though, have been achieved in the ‘traditional’ system – by bulk dealing in currencies and connecting domestic payment systems across countries. The blockchain-based future is potentially even brighter. Ripple provides a great example of a cross-border money transfer service, where its XRP tokens act as a ‘bridge’ for the conversion of one currency into another. Ripple has a medium called ‘Gateway’, which uses RippleNet to send and receive currencies to public addresses. Its transaction fees are extremely low and stable ($0.0001 to $0.0004), while settlement time is about 5 seconds – a seismic difference compared to today’s system. Were Ripple not mired in controversy and engendered trust in users, it would be spoken about in more glowing terms as changing the face of the cross-border payment market.
The implication is that banks and traditional money agents will always struggle to compete, constrained by broad customer service promises supported by large physical distribution networks.
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