Beyond Stablecoins - Where Enterprises Are Headed With Payments - Paul Brody

Transcript

It's lovely to be here. Uh, and it's nice to see many of you are still awake. Um, and not too disappointed of this grubby money focused topic after such a more aspirational talk that I I stayed for the last one. But, um, I'll do my best to entertain you. Vlad asked me beforehand. He's like, "Is there anything fun or interesting that I should add about yourself?" And that's like the most dreaded question. I do think that in some way I might some part of my personality might be fun and or interesting. But when somebody asks you to say that it's you're suddenly like wait do I is there anything interesting about me. It's like the most dreaded interview question that people used to ask when I was in college. It'd be like tell me a joke. And so I had to memorize I memorized one and only one joke about

an economist, a social worker and a priest. Uh and of course very reliably the economist is the bad guy in this joke. Um, and I'm not going to bore you with it because it's like 30 years old, but I'm going to talk about stable coins because every single company on Earth seems to be launching a stable coin. Like they're all doing it. Um, I I sometimes wonder if every bank and company in the world will be showing off a stable coin uh in the very near future. Like this the number of stable coins that have been announced is kind of mind-boggling. And so it's worth understanding like why is everybody getting into this business? What are we headed towards? How is this business potentially going to evolve? And that's kind of my my discussion here, right?

Stable coins volumes are kind of blowing up. It's actually really hard to put together a picture of stable coin volume because so much of it in some cases like if you look at Salana or some of the other chains, 95% of the transactions are bots. So it's hard to know like what is actual organic uh transaction. But a good measure of this is like sort of stable coin, let's say uh TVL, right, is a good indicator of how it's growing. It's growing at roughly at the moment 55% a year. And Ethereum between the L1 and the L2s has a uh has a slight majority of that total, right? It's it's a minority. It's not more than 50% of the transaction volume, but a lot of the

transaction volume is, to be honest, it's it's artificial and faked anyway. So this business is growing. It's growing f fast. It's fueled by kind of three big things. Number one, there's stuff to buy, right? And so people want to buy stuff with stable coins, right? And as most people on board into the blockchain financial ecosystem, they're doing it with stable coins, right? And they're in particular, at least at the moment, there's a tremendous amount of demand for US dollars. 99 like 8% of all stable coins are US dollar denominated.

We did our own forecast of this last year. We expect that to fall to about 70 to 80% over the course of the next decade, but there's still outsized demand for US dollars. Consumer payments. Consumers are paying each other. And then business ecosystems are going to blow up as well in terms of their demand. Over on the consumer side, there's basically we are basically h creating onchain banking, right? That is what's happening. We are really quickly getting to the point where you're not going to be able to tell the difference between an onchain financial application and a traditional bank. Um, now I uh how many of you have one of these like

MetaMask Mastercards or some other like network linked, you know, chain linked kind of card, right? You know, these things are going to become ubiquitous, right? And they're kind of a backdoor into the payment ecosystem. I'm not sure for how long they will persist because networks like Mastercard themselves take a much larger share of the transaction volume of the transaction value than the blockchain ecosystem. So they're certainly going to try to replace them. But in the meantime, one of the things I observe and I've got I've got two kids, teenagers, 16 and 17.

when they go to university, I'm almost certain they will end up signing up for some kind of onchain account and they probably won't even realize that it's not a traditional bank account, right? We're not quite there yet in terms of smoothness of user experience, but we're getting there. It's it's moving along. It only took me about 5 minutes to get this Mastercard up and running and then buy a burrito with it. Um, enterprise payments are really interesting because they are also starting to ramp up and in a very different way. Regulation is something that that enterprises worry about that consumers generally do not worry about. Like with rare exceptions, countries do not go around hunting down street vendors for accepting US dollar

payments, right, from, you know, Circle or something like that, right? But they will go after companies that violate their foreign exchange law. So, so corporations care a great deal about the regulatory environment. It's it's a key go no-go decision and the regulatory uncertainty around stable coins has kept a lot of companies on the sidelines. Secondly, companies want local currencies. They don't just want US dollars. They would like US dollars. But the reality is if you do business in Argentina and your revenues are local and your costs are local, the risk minimizing strategy is to keep those all those intermediate transactions in the same national currency as well. And that would be true whether or not there are

currency restrictions in place. So uh you need local currencies, you need stable coin interoperability. We we almost never talk about this, but you know, we in a world where we have literally hundreds or potentially thousands of stable coins, we need systems that will transfer my USDC to my USDT to my Bank of America to my, you know, Coca-Cola bottling coin or whatever it is that we're transacting in almost instantaneously. And we need some level of confidence, right, that uh those transactions are basically insured and viable, right? If I have to start worrying about every single stable coin and their peg to the dollar and things like that, it's going to be very time consuming, right? But I

do know lots of people are building like I'll call it stable coin interop banking integration, right? Onramps and on-ramps off offramps. And then this is one that people don't spend much time thinking about, but it's actually hugely important. It's ERP integration, right? Uh how many of you know what SAP is? That's good. I see some hands up. If you don't know what SAP is, it is important. SAP is the business operating system for almost like 80% of the global 1000. If it happens in a big company, it's done on SAP, right? And last year, EY did some work with SAP, PayPal, and Coinbase to automate stable coin transactions. Now, EY, we have been

accepting stablecoin payments for years. To be perfectly frank with you, per it's been a performance. It's performative. It's not been substantive. You come to EY and you're like, "Yeah, we love you guys. We're a crypto company. Want to pay in stable coins." We're like, "Great." Right? And we we will say yes because we want to take the money and and we claim to be a good crypto company. But in reality, like our compliance people get involved, it's a huge manual process, etc. We've now set up with SAP. SAP has an addition, a new piece of software called digital currency hub. And from inside your enterprise SAP system, you can have direct access to your own wallet and you can connect institutional wallets. And so last year, for the first time ever,

PayPal, we were implementing SAP for PayPal, they received an invoice from EY for some work that we did. They clicked on pay and instead of it sending us money through the banking system, it sent us stable coins from their wallet to our Coinbase institutional account which showed up in EY systems as cash in our bank paid against a PayPal invoice. full automation right now. That matters a great deal because what it means is that it now cost us nothing to switch from a banking payment to a stablecoin payment. How much is that worth to us? It turns out we estimate and we can't do this, but if we could, if we could move all of EY's

crossber payments from the banking system to stable coin rails, we could save a hundred million a year. That's real money even if you're a $50 billion company, right? And this is why enterprises are going to join the stampede into uh payment integration using stable coin. So um it, you know, we it requires more knowledge of how enterprises operate, but trust me, it's going to be a big deal. It's going to drive a tremendous amount of demand. Uh it's not just a technology though. People often talk about crypto technology as if it was some kind of magic thing. It's really not. I believe the magic in the crypto ecosystem is actually the level of competition.

Right? The reality is is that um credit card networks uh traditional banking wires are actually not all that expensive from a technological standpoint. What's happening is there's relatively little competition or in some cases no competition inside of these ecosystems, right? Um and uh for example, here's a here's a really interesting one. Fedwire, that's a what's called a real-time growth settlement system. It's a US national digital payment system. It's cheap. It's cheaper actually than a trans than a transfer on the Ethereum mainet. It's not programmable.

It can only handle dollars, but it is actually pretty cheap, right? But by the way, if you get to the L2s or Polygon or Aptos, right, you're really talking about much much lower fees. And uh this is ultimately going to be, you know, transformational even though this is not a fair apples to apples comparison. Credit card networks come with all kinds of things like chargeback protections, insurance and and frequent flyer points. Um, however, blockchain networks are programmable. They have network capacity. They are incredibly fast, right? And so, as a result, people are going to start adopting them and new entrance are going to offer all kinds of new packages and services. One of the things I predict is that this is

ultimately going to reshape how companies do handle their cash. And let me explain what's going on here. Basically, in your traditional large company, they keep lots of cash everywhere, right? And they keep cash everywhere because they can't be sure when customers are going to pay, when the bills are going to come due, like will they have enough money to pay the electric bill or to make payroll. So, typically companies, the average large company in every country in which it operates keeps about 12 to 26 weeks of business operating expenses as cash.

that is the technical term for that is a I guess I shouldn't say because it's being recorded it's a lot of money so um uh and right now the way it works is it's all over the place right and in addition to that there are like some of these things called global treasury teams that manage that money and move it around in case there's a shortage looks very different looks more like music streaming like literally we are going to stream money on demand like the day a bill is due, if you don't have enough cash, you're going to put it. And this big pile in the middle here, this kind of global treasury pile, that's going to all be in the best yieldbearing instruments that they can find, right?

And all the the small country level piles are going to be as tiny as we can make them because payments are going to be instantaneous and nearly free. And by the way, blockchain transactions are so cheap that it is uh if if your interest rate is above 1%, it's cheaper to make payments every single day than it is to wait on a weekly basis or a monthly basis. Think about that. It's it's it's basically streaming money. You work today, you get paid today, right? You buy today, you get paid today. Every single thing you do gets build out on a per day basis.

It's basically streaming money right in this model and the economics work at any interest rate above 1%. That's how cheap blockchain transactions are now. So I think we are shifting from kind of keeping inventory of money to a just in time model. Um to give you a sense of again of how much money is involved, US businesses alone have somewhere between three and four trillion dollars in cash and working capital loans on their balance sheets. It's a lot of money and that's just the US and still we have only covered half really even a third of a business agreement. This is by the way okay side note um any of you ever like done a

consulting job interview? So, you know, before consulting job interviews, like I I did it, right? Uh they're like, "You need to have frameworks. You need to memorize the five forces." I have no idea what four of the five forces are. I think one of them is demand. I I That's it. All right. I made it through all of my interviews with a single framework. Profits are equal to revenues minus cost. That's it. That's everything you need to know about business, right? This framework represents everything you need to know about all business agreements ever. One party has money, the other party has stuff, and you are exchanging money for stuff under the terms of some kind of agreement. That's it. Right? By the way, 99.999% of all stable coin transactions today

just involve moving the money to pay for the stuff. We haven't tokenized the stuff and we aren't dealing with the business agreements yet. But this is where the rest of it comes. And by the way, the rest of it is way more valuable than anything we have talked about today. Right? This is a typical enterprise supply chain. So if you think of, you know, making phones, right? I got uh I got a battery, I've got a screen, I've got a CPU, right? Each one of those can be tokenized. I can move them along in a supply chain. I can put them together into a phone. I can transport them. I can put them in warehouses, sell them, etc. Right? So in this picture, stuff tokens move from left to right. Yeah. My your left to your right. And money tokens move from

your right to your left. And smart contracts govern all of that process, right? And by the way, managing these smart contracts, managing the flow of this money and stuff is very expensive, right? Um, on average, large companies spend about $100 to pay a bill. The $100 that large companies spend to pay a bill has nothing to do with the wire transfer cost. It has everything to do with, okay, did I get the stuff I ordered? Did the stuff I ordered come, you know, based on the on the order I actually placed, right? The invoice, does it match the stuff that I received and does it match the terms and conditions?

Checking all of those things before you pay the bill costs $100. We know from work we have done previously that if you turn those contracts and those data streams into tokens and smart contracts, you can make the whole thing run way faster, 99% faster. You can basically take a process that works at best on a monthly basis and turn it into something that lasts a couple of minutes. You can cut the cost roughly in half and you can make it infinitely more transparent and and viable. And this is something we did for Microsoft for the Xbox video game network. So if you buy a video game today on a Microsoft Xbox, the transaction is actually being processed

by a smart contract written on an Ethereum blockchain. Now, when we did this, we didn't have the tools to put it on the public blockchain because Microsoft didn't want to disclose the details of their business agreements, right? And so, it never really sort of took off as an industry utility or something that lots of people would use. But we know from this experience that the rest of the equation, the money for stuff under terms of an agreement, right, that going beyond just the payment is worth a crazy amount of money, right? If we could save a hund00 million a year just from switching the payments, we could probably save three or four billion dollars a year from automating the entire process using

Ethereum and smart contracts. To do that, however, we need we need one more magic agreement in ingredient, which is privacy, right? And we need two kinds of privacy. One is we need privacy about who is paying what, who is paying whom for what, right? We need privacy of the exchange of money and stuff. I don't want people to know how much I'm paying for stuff. And if I just pay you today somebody I don't really know that well one time, I probably have a lot of anony anonymity in a and a lot of kind of deacto privacy in a big public streaming ecosystem, right? I'm giving you some funible tokens, right? It's as I explained to people like it's like trying to keep

track of a glass of water in a lake. It's really hard, right? probably impossible right at a certain level. But now what happens if we start exchanging transactions all the time and I'm buying stuff and you can buy almost everything that companies make is nonfgeable. Your Apple may make 20 million or 100 million iPhones a year but every one of them has a serial number. That's a nonfgeable item, right? And so all of a sudden it becomes really easy to figure out who's paying what uh who's paying for what to whom and how much are they getting back in return without privacy.

And then of course you need to make the terms of the agreement private as well because if I can just read the contract and says we're going to pay you 80 bucks a unit for the next 200,000 units I kind of know already what the story is going to be right so we need both of these kinds of things and um we are making progress but it's not very mature right and by the way um privacy uh is something we have to be very careful about from a regulatory standpoint right today you know Ethereum is public and I would say really pseudony anonymous right you you you can you know chain analysis would like to say that they they can probably identify who you are to some degree right and we have things like ENS right you can see what incredible po apps and other stuff I own

over at prrodyeth right um and then you've got other services that are both private and anonymous right regulators no like these they do not like them right and to be honest I think with relatively good reason we can have all the principles we want about you know free speech. Money is not speech. If you have unlimited privacy and anonymity for money transfer, you have a recipe for money laundering and criminal activity. And it doesn't matter that most people may use this for perfectly legitimate reasons. I'm going to tell you the regulators are going to close this down if that's what happens. Right? We've kind of taken an interesting point of

view at EY. We built a tool called Nightfall. Our goal is to enable privacy but not anonymity. So you cannot use it anonymously. Um you can do it in such a way that you're not disclosing what you're transacting but uh and with whom you are transacting but you cannot use it anonymously. And I think this you know based on our conversations with regulators this is probably an acceptable compromise right and I I hope to see a lot more of these. And I I would like to see the enterprises and entities that want to do business in a regulated environment move from the anonymous and private category to the private and identified category, which is what we really talk about as confidentiality. At the end of the day, what we want, what businesses want is we

do not want to tell our competitors what we're doing. And what individuals want is to not share with the rest of the neighborhood how much they're paying, right, for their groceries, right? They don't want to make that stuff minable and informable, but they're not here to actually transact illegal activities. The vast majority of what people want to do is perfectly legal and legitimate. And it is perfectly reasonable to want to have privacy for that. I do not like people who say if you have nothing to hide, you have nothing to fear. That's completely unreasonable, right? So, I want the maximum level of viable privacy for both individuals and for enterprises.

Uh I think there are four things that we need to do in order to create kind of this viable privacy environment. The first is scalability. That's just another name for stuff needs to be cheap, right? And uh if you look at the enterprises that are out there offering privacy services and um you know I look at what we we have done at EY and what Aztec has done um it is uh today you can do a you know Aztec or Nightfall transaction for less than it used to cost to do a mainet transaction. So not bad. We are making significant progress. You can do them for like uh uh 30 to 50 cents uh or or um probably you know a dollar at the moment on the mainet and maybe you know two or three cents on a layer 2 network. That's cheap but it

probably needs to be at least an order of magnitude or two cheaper to start getting people to move their NFTts their industrial assets on chain as well. Secondly, you got to have programmability under privacy, right? And so if you look at what Aztec has done with the Aztec network and Noir language, they've done a really cool job of programmability under privacy, right? Hats off to them. They're they're phenomenal at what they do. Uh EY, we have built something called uh Starite, which I'll mention in a moment. You also need composability, right? So it's not enough just to have like kind of the equivalent of a smart contract under privacy. It also needs to be composable.

You need to take the outputs of one item and put them into the as the inputs into another. And then lastly, and this is really different from the way consumers are thinking of priv privacy today, you need a permanent privacy environment. This is not a thing where you put money in and somebody else takes it out and you can't connect the two, right? The goal is to run your entire transaction ecosystem continuously under privacy, right? your entire supply chain, all of your business agreements, everything. Money goes in, supply chain stuff goes in, and it stays in, right? It all runs under privacy. And that's a big difference from like privacy pools and other types of services that exist for consumers today. Enterprises want to run

their entire business networks and to do it onchain with interoperability and open standards, but under full privacy. Um I would say in my opinion we are we have all the sort of ingredients that are required to get there. They're not fully assembled yet. So Aztec has I think more than anybody else done a great job of putting all the agreements all the stuff together in the Aztec network. We have the same pieces in separate form. So one is Nightfall for transfers and payments. The other is called Starite for custom business logic. My goal uh we're currently on version four of Nightfall. My goal is that in a couple of years when we deploy version five of Nightfall, it will offer both of them combined but at a cost that

is comparable to version 4. Right? The biggest challenge in sort of combining all these pieces together is the compute and transaction cost of doing both custom logic and uh transfers and payments roll up under privacy. It's not cheap. By the way, um, one thing that is unique about EY approach is that we have donated all the code into the public domain. We are keeping no ownership over these assets. The goal is to drive privacy adoption, not to build something that we are going to monetize directly. And I'm optimistic even though if you look at the numbers, right? Um, you know, at EY we estimate we can do one to two transactions per second, right? I

think Aztec is quoted a 0.9 TPS rate, right? These are not going to blow off, you know, these are not going to blow the socks off of Visa and Mastercard at the moment, but I personally am optimistic. Um, we started work on Nightfall in 2017, just about the same time that Aztec got started. And right here in Prague at DevCon in 2018, we showed the prototype and it only cost $100 to execute a single transaction. We needed two full consecutive blocks of Ethereum. And by the way, ETH was priced back then at $260, right? I I I I think the equivalent gas fee today would be like 35 or $4,500 for a single transaction, right? Um that's the very definition of not scalable. Um we made a

lot of progress over the last few years. We estimate that the current version of Nightfall is more than 10,000 times more efficient than the original version. So, even though I like to joke that we're 8 years into what I thought was a 2-year project, the performance improvement is great. So, you know, uh will we be doing 10,000 TPS in 8 years time? I think that's not unreasonable. And that is it. They say I have two seconds left. Thank you for coming to my TED talk that's not at TED and isn't funny, but is about stable coins in the future. And you know what I would only say is like you got to start building now. Um, and if you want to build on Ethereum, I'll just include this small advertisement for Ethereum for EY. We

are the most Ethereum aligned firm of all the big firms out there. I'm the chairman of the Enterprise Ethereum Alliance. I wrote a book and it's not called Blockchains for Business. It's called Ethereum for Business. Um, so that's it. And uh, if you would like a NFT, it is up there for you. We don't have time for questions, but I will be around in case you want to complain or something like that. Thank you very much.