FTX x SALT and Crypto’s Infrastructure Age

A significant crypto conference, Crypto Bahamas, was hosted last week by SALT, the crypto exchange FTX and FTX founder Sam Bankman-Fried. The SALT investment conference is an influential annual event for the traditional finance industry. This joint conference marked a big step forward in the ongoing merger between crypto and conventional institutional finance. While crypto is roughly 13 years old, institutional participation is just two years old. Judging the current state of crypto too harshly today risks missing the path to the future state, where we are ultimately headed with blockchain technology. Here are the key themes and takeaways I saw at the conference regarding where we are today and where we’re likely headed:

This article is intended to be longer than usual as it is a comprehensive review of this conference and its relevance to the crypto industry at this time.

State of the Crypto Market

Crypto assets today represent roughly .40% of global wealth. Institutional capital is flowing into the sector at a slow and steady pace. There are now roughly twenty multi-billion-dollar crypto-focused venture capital funds, but that’s relatively small compared to the size of the investment management industry. Knowledgable consensus expects crypto assets to grow to $10 trillion over the next decade. Whether that takes 5-10 years or more seems to be a question of when, rather than if.

Bubbles, Crashes and Value Creation

Continued blockchain adoption is considered a foregone conclusion at this point. Notably, that doesn’t say anything about the price of Bitcoin or Ethereum or whether or not they will be dethroned by newer alternatives.

It’s important to note that the value lost during the ’01 Dot-Com crash was a fraction of the value created by the tech industry over the last two decades. Investors at that time knew that the internet, e-commerce and semiconductors would eventually become dominant economic forces. Cynics, momentary asset price bubbles and media theater were distractions from the bigger underlying trends.

Blockchains are the next evolution of the internet. Whether there is another crash or not (there have already been many) is less relevant because the cumulative value created in this ecosystem will also dwarf temporary losses.

Battle Of The Chains

Blockchains are dealing with an ongoing existential battle called the trilemma: the contradictory goals of decentralization, security, and scalability. Blockchains have to sacrifice one trait to optimize the others. For example, Solana sacrifices decentralization to achieve scalability. If Solana’s goal is to be the first blockchain to reach 1 billion users, then perhaps they are correct to sacrifice decentralization to achieve scale.

The panel on alternative layer 1’s included the founders of each of the major alternative chains: Solana, Algorand, Avalanche and Near. One argument I tend to agree with is there is so much data out there that needs to find a blockchain home that multiple niche chains can coexist. For example, today, Solana is focused on winning the market for decentralized global market pricing data. If each chain can find its niche, then the battle of the chains matters less.

In my opinion, these four projects are overvalued at the moment, but that can change quickly. They either need to decrease valuation or dramatically increase real user activity.

All of the current blockchain offerings need to be easier to use and have a higher standard for security. Eventually, blockchain dApps (decentralized applications) will need to reach a fiduciary standard, which almost none of them have today.

Fully Automated Businesses

There isn’t a buzzword (yet) that captures the full power of automated blockchain businesses.

• Uniswap is a popular, fully-automated, decentralized exchange on Ethereum. It processes roughly $50B in trading volume per month and recently became the first decentralized app to pass $1B in annual revenue. It requires no employees to process transactions or generate revenue, and if the entire team quits, the business will still be operational. The Uniswap team spends its time supporting further innovation.
• Arbol is an automated climate insurance tool. They use Chainlink to connect to local weather data, actuarial calculators to run pricing models and Ethereum smart contracts to create and process agreements. You can see an org chart of their design here and read their IPFS case study here. Technically each Arbol climate insurance contract is an NFT – it uses the same ERC-721 framework. Arbol’s insurance contracts pay automatically when the weather data is processed. They processed $70m in premiums in 2021.

Fully automated businesses like these are the pinnacle of software development. Uniswap was started in November 2018, less than four years ago. This fits into my Roger Bannister thesis. Roger Bannister was the first person to run a sub-4-minute mile. Shortly after he broke the record, so did many others, including high school students. Bannister’s achievement broke a mental barrier proving it was possible, which allowed others to believe. In the case of crypto, the shortest path from a $0 to $1B valuation with real revenues and profits, real products and real user adoption has proven to be just a few years away at any given time.

Fiduciary Standards and Ease of Use Needed

Another major topic of the conference was how to make it easier for interested institutional capital to participate. Fiduciaries, especially those managing $100B+ pensions and sovereign wealth funds, cannot risk putting 2% ($2B+) on experimental chains. Large balances attract motivated hackers. With multiple 9-figure hacks this year, fiduciaries are cautious about moving forward. Furthermore, those fiduciaries will not be comfortable using browser extensions and private keys to manage their crypto allocations. At some point, this will be solved and mandated 1-2% institutional allocations representing nearly $1 trillion+ will flow into the ecosystem. Getting ahead of institutional flows is an attractive investment opportunity.

From a political standpoint, it’s interesting to see positive momentum unfolding in real-time. There are an estimated 25m crypto holders in the US today. Every vote counts, and it behooves competitive politicians to lean in.

Decentralized Social Media

Elon Musk’s purchase of Twitter is a hot topic in the blockchain world. Ultimately we would like to see decentralized social media, but what does that mean?

Decentralized social media means that the data (tweets, Instagram posts, Facebook posts, Reddit posts) would sit on one decentralized chain. Right now the data is owned, edited, promoted and deleted by each of the social media monopolies. Decentralized social media would mean that your tweet is on an immutable public chain. In this world, companies can curate the underlying data based on user demand.

Decentralized social media would be uncensorable and would not require parent companies to operate.

Stablecoins and Bringing Real-World Assets On Chain

My big takeaway from the conference is that the next phase of growth in crypto will be focused on bringing real-world assets onto the blockchain, including fiat currencies and, notably, USD.

USD that lives on the blockchain is known as a stablecoin. USDC, created by Circle out of Boston, is one of the leading providers of stablecoins with $50B in assets backed 1:1 by USD – that figure is audited monthly.

Stablecoins like USDC allow for two essential functions: 1. automated applications can be built using USD as a base currency (insurance contracts, for example), and 2. anyone in the world with an internet connection can send and receive USDC. If you have family in Venezuela, for example, you can have them download MetaMask and send them USDC with no verification needed on either end whatsoever. We never talk about cross-border emails, and it would stand to reason that we will not need a particular category to identify cross-border payments either.

Real Estate is another example of real assets finding their way onto blockchains. Given that real estate is highly regulated and qualifies as a security, its path onto the blockchain is more challenging and involves SEC oversight and approval.

Our first private investment from our crypto fund went out last week into a well-known Boston founder’s real estate blockchain project. His vision to combine real estate with blockchain technology opens the door for many creative functions involving debt, cash flows, stablecoins and governance, which we’ll cover later. If you are interested in learning more about our crypto investment activities, please contact us.