Why blockchains are valuable

Transcript

what's up friends welcome to web3 academy a place for entrepreneurs creators and marketers to explore and learn how to use web 3 to transform business models and create thriving communities enjoy this next episode gmgm welcome friends back to another episode of web3 academy podcast uh i'm here by myself to talk about why blockchains are valuable right there's a lot of talk about this technology and what's going on here and all the nfts and things that are being built on top of it but the fundamentals here like the foundation why does this stuff even matter what is it that blockchains provide what is the product of the service that blockchains provide that are making people actually

pay to use this stuff why don't we just use normal centralized databases why are we spending insane fees on ethereum or fees anywhere on any blockchain to use this stuff and that's what we're going to talk about here in this in this episode today so i'm actually going to read an article that was written by a member of the web3 academy community this is the first time we have done this and i'm super excited uh that we are seeing contributors from the community one of the members uh named sam andrew uh who is in our discord um is is a writer and he's actually um he's a reformed hedge fund investor uh turned crypto researcher writer and an investor

overall he spent 10 years at a 22 billion dollar uh new york city based hedge fund um and now he's moving full-on into crypto and we saw some of his writings and we were super impressed and it was very in line with the things that we teach um and so uh sam has thankfully given us his article to host at web3 academy and so we've launched it in our newsletter and and then i'm gonna read it here on this podcast we also have sam coming on the podcast uh in the same week so we can interview him and dive deeper into some of the things that he wrote about um here that you're about to learn so um you know i'm excited to share this

because often in our roll up in our interviews i try to get across the benefits here of blockchain uh and so it's about time we just fully focus on it and let you understand and learn the true foundation of what's of what's going on here um finally before i get into it if you are also a writer uh or if you have something cool that you want to share maybe you've never written before but uh you have some great thoughts um we ask that you write for web3 academy all you have to do is there is a link in the show notes uh below and there's a link there where you can apply and basically all you need to do is write something and so long as it provides value to entrepreneurs creators

and marketers um trying to stay on the forefront of web three um then please apply and share that with us if we like it um we will we will do exactly what we're doing here we'll post it on our newsletter so you get all the links back to your site uh and to your twitter etc or wherever um and we'll do a podcast just like this and maybe we'll even get you on the podcast um for an interview um so uh we're about to get into this here again this was written by sam andrew you can follow him on twitter at samuel m andrew uh and that's it uh he also writes his own newsletter called sam's cryptomusings uh so samuel andrew.substack.com again the links are in the show notes

so why are blockchains valuable well amid the hype innovation and enormous wealth creation this simple yet profound question eluded me this is sam saying this of course advocates um proselytize that blockchains will disrupt every industry blockchains could revolutionize traditional finance disrupt the art world and create new forms of monetization and record keeping potential use cases are seemingly endis this is one of endless this is one of the things we try to share on our podcast is all of the different potential use cases here of web3 and blockchain so instead of assessing that blockchains could be valuable if it does x or when it achieves y

i propose assessing features of blockchains that are inherently valuable i posit that blockchains are valuable because of four features one decentralized two functional three composable and four native economics these features make blockchains the most fertile ground for innovation spurring an innovation super cycle they're present in programmable blockchains which are the the focus of this piece their presence varies in degrees across different programmable blockchains we talk about this a lot as well for example some are more decentralized than others these features are not all present in bitcoin which is not

programmable and not the focus of this piece so uh what we're talking about here is actually smart contract um platforms so things like ethereum and solana and avalanche and the list goes on and on and on so decentralized blockchains are decentralized because they are not controlled by a central authority decentralization is a feature unique to blockchains due to their innovation in incentives and governance okay so trust guarantees foster cooperative networks decentralization is valuable because it creates a trust guarantee that no human operating system can right the risk of a business becoming obsolete by a change in operating procedure of a centralized

platform a business is relying on known as d platforming is eliminated on a blockchain because no entity can change how the blockchain operates right this is the problem when you build let's say games on facebook or you integrate an api or something into twitter as soon as they change the rules well this impacts your business completely if you run your business on youtube and you that's where you speak to your audience and they block you your entire business is at risk right this is the problem of centralized uh organizations or centralized platforms so a trust guarantee is valuable to developers because they can build their decentralized applications adapts with the guarantee that the blockchain

network dapps are built on will not change right the same cannot be said for centralized networks like microsoft and meta and google and apple and amazon have a checkered history changing how their platforms operate to favor themselves at the expense of businesses who built applications on their centralized networks okay so for example microsoft marginalized netscape with internet explorer meta marginalized zynga with its own games google marginalized yelp by introducing its own revenues and amazon marginalized independent amazon retailers with amazon basic decentralized organizations care about these centralized organizations they don't care about those who are building

on it and the users who are using it they care about money they care about profits because that's who their shareholders are that's who they report to so centralized networks have fraught relationships with their constituents as the chart below popularized by chris dixon general partner a16z illustrates in the beginning a network rapidly grows by cooperating with developers creators and businesses to build its network we see this all the time once the network matures it moves toward the top of the s-curve as its user growth slows it pivots to extracting value from its users cooperation with the networks compliments um turns into competition as the centralized network infringes on the complements uh

businesses to extract value for itself decentralized networks foster sustained cooperative relationships with users developers creators and businesses the trust guarantee prevents a bait and switch that centralized networks are renowned for so basically what we're trying to explain here and there's some graphs but if unless you're reading it or watching on youtube you might not understand what i'm talking about basically there is an s-curve where in the very beginning these companies work well with all of their partners and users et cetera um and this this attracts a lot of people on board right and it creates growth eventually that growth stops there's not much more they can do and so instead of just trying to make it

a better user experience or provide more value they instead try to extract as much value as they possibly can from those who are using it while they are still the it thing right but um blockchains are different because those who use it also own it right those who use ethereum they own eth and so the incentive models are very different in a blockchain that is decentralized and owned by the community versus a centralized organization self-custodian assets create better user experiences decentralization enables self custody of assets the user directly controls and owns their assets in this way the owner

is not relying on a third party authority controlling and dictating what they can do with their assets okay centralized networks are predicated on the assets being controlled and in some cases owned by the governing authority in decentralized networks your assets truly are your assets and not someone else's liability savings at a bank may be your assets but they are also the bank's liability the bank controls the size timing frequency and amount of withdrawals into whom they can be sent for example my canadian bank did not allow me to send my own money to a crypto exchange and levied heavy fees to wire my money to my u.s account online content is also an asset right the pictures posted the tweets tweeted

essays written and followers cultivated are digital assets that are created by content producers but owned by centralized networks meta owns all the content across its platforms google owns users search history twitter owns all the tweets the business model of centralized networks is based on users creating and publishing content for free while the network monetizes the value created by its users we are essentially slaves to these centralized organizations and these tweets and these posts and all the things that we put on these um these networks or these applications or these platforms we should own them because we created them yet in this instance we don't

right so decentralized networks are valuable because users retain ownership in custody of their assets and are not beholden to third-party authorities dictating terms of use and monetization for example users can exchange their assets however they want and if they leave a platform they can take their assets with them including pictures posts tweets blue verified check marks and followers in centralized networks users are the product in decentralized networks the user is the owner paving the way for a better user experience this is so huge this is so profound such a big thing that's going to change probably change the world in a very big way is finally being able to own things

online and i don't think enough people really grasp this in the real world we can actually own something if i hold up a dollar bill i own that dollar bill okay there is no one that i need to trust to hold on to that dollar bill for me right but online in the digi same with a passport or i don't know a book or my computer or my headphones i own these and no one can stop me from selling it giving it to someone else doing whatever i want with it it is mine i physically own it okay online we that doesn't exist everything is trusted through third parties

everything your money in your banks as sam already alluded to here your profile and your accounts on facebook on google and whatever else um your content everything that you even when you just want to send money to someone you have to use stripe or paypal or whatever regardless it's all permission and it's all owned by someone else and we have to trust that they will do what we think they're going to do and for many that trust gets broken and what we want them to do or what we hope they are going to do does not happen and we have no say that is the digital world that we live in decentralized networks completely changes that and that's what self custody is it is a beautiful beautiful thing

okay so functional they're not just decentralized it's not the only thing that this does they're also functional what this means is blockchains provide unparalleled functionality to build applications on because they are programmable immutable transparent and permissionless okay so let's just look at these four categories here these four functions and just break them down by description so we understand let's talk about why this is valuable why does this actually matter so programmable highly expressive near-touring complete programming language meaning it can run and implement any program now why is this valuable well it creates smart contracts between parties that are guaranteed to execute if predetermined conditions are met meaning if i want to

send you x amount of eth it happens every single time right smart contracts replace laborious fact checking required for off-chain contracts with guaranteed accuracy and instant execution immutable transaction history cannot be altered this is huge in a world where we have corrupt and um you know centralized organizations who will lie and change things um for you know for the better of themselves so this ensures why is this valuable what ensures the sanctity of the blockchain by preventing a bad actor from changing the historical record to their benefit transparent all transactions are visible

and verifiable so why is this valuable what ensures integrity of the blockchain by allowing anyone to audit historical transactions imagine being able to go to meta or to google and asking them a question about what they do with user data or how much they spending on x you know or how much they are extracting from their users in revenue they're not going to tell you the exact amount of course not but we can just see it now that's the beauty thing of these open transparent blockchains permissionless i talk about this one all the time it's actually word of the day for one of last week's weekly rollup so anyone with an internet connection can participate without obtaining approval

and why is this valuable well everyone can participate and benefit from the innovation right there's a lot of people in the world that are blocked from doing certain things on the internet right we think about north korea and china as big examples china can't use facebook and many of the applications we use um on on the western side of the world but if we go deeper we look at a lot of middle eastern countries in african countries that can't use stripe right or paypal and the things that we use to just buy things on the internet they don't even have that capacity um so this a lot and this is just money i'm talking about here but this permissionless list permissionlessness i think that's the way you would say it is a beautiful thing because it means

anyone can benefit from this and that's huge so combined this functionality provides more latitude for developers to build applications than centralized networks composable i don't think that we talk about composability enough on web3 academy so i like this one composability equals building blocks okay so blockchains are composable meaning each component can be recombined into another the output of one can be the input of another they talk to one another and leverage each other's code in each other's utility a platform is composable if its existing resources can be used as building blocks and programmed into higher order applications so quote from jesse walden founder at variant

so composability is valuable composable blockchains are like lego blocks each piece can be combined with any other piece to build this is a new valuable way of building because one it's open source web one when we first built the internet we tried to build it in an open source manner but things quickly became closed um so open source composable blockchains are open source everyone must be able to see what the code is in order to develop new code that interacts with it open source composability unlocks what has been locked behind firewalls of banks and big tech companies right number two efficient development composability fosters efficient development because problems are only solved once

right non-composable so centralized networks are inefficient because engineering talent repeatedly has to solve the same problems if google solves a problem well facebook's also got to go solve it because google's not going to tell facebook they're competing right open source composable blockchains allow developers to use what is already built as a building block for something new number three accelerates innovation composability channels talent to a to new product development accelerating innovation composability allows anyone to take existing programs and build on top of them unlocking previously unimaginable use cases and number four promotes a cooperative mindset centralized networks enforce intellectual property law they sue one

another and lobby for favorable regulation to preserve the competitive advantage their walled garden right so composable blockchains where the code is public promote cooperation because it's inevitable that their code is leveraged to build higher order applications the higher order applications are beneficial to the network it's built on because they create new use cases propelling additional demand for the network a great example of this is some of you may have heard of the term defy lego so back in 2020 we had this sort of defy summer it was called which is where things just went crazy users were coming in also in a bunch of these applications we could use there was a bunch of like yield opportunities and there was a lot of opportunity to create to make money

um and the reason why this was worked out the way that it did is because for a long time we had basically just had maker dow which was a way for you to take out a loan of dye a stable coin so long as you used your eth as collateral and so next what happened was there was other applications that were built during you know before this defy summer so uniswap which is where you can exchange tokens right you can just exchange your eth for uni token or ave token or whatever and then there was also um other lending platforms where you could put other tokens other than just eth up for collateral and you could lend them out and gain some interest on it right so not taking a

loan but you could gain some interest by lending um and what happened was all of these protocols because they're all open sourced they started building on top of each other and so let's say you don't have i don't know the uni token but you wanted to lend that out in ave well they built in ways where just automatically you go in to do this and it just does the switch for you by using the underlying uniswap protocol you didn't have to go over to uniswap ave or whatever other you know d5 application you were using at the time could just build over top of it and link into it it didn't need to create a swap feature because there was already a protocol that has built that right this is the idea of these sort of legos where you sort of piece them together once one protocol solves a

problem this example is swapping or lending you just build on top of it and now all of a sudden you have lending you have swapping and you have whatever feature it is that you're building and then someone else can build on top of that and they all benefit from from each other that is the cool composability ecosystem that we're building here with web3 number four is native economics so blockchains issue tokens to incentivize behavior facilitate governance and enable contributors to capture potential economic upside from creating a valuable network the creation of digitally native assets in the form of tokens right is valuable because for the first time in history economic value can be seamlessly created stored and transferred online

this is that digital ownership right non-custodial so creating storing and transferring economic value online is valuable because it pioneers the ownership economy an internet native economy where users own the value they participate participated in creating it allows creators an unparalleled unparalleled ability to independently control and monetize their creations it allows assets to be transferred globally nearly instantaneously at low cost maybe not yet at low cost but it's coming the tech is coming i swear it is advancing entirely new digital economies artists and gamers are examples of new economic activity powered by native

tokens dapps like audience provide new monetization avenues for disenfranchised musicians there are 2.6 million active musicians defined by uploading more than 10 songs um on spotify yet only 16 500 or 0.6 percent earn more than 50 000 per year and that's due to the high take rates of spotify the appeal of audience which is kind of the web 3 version to musicians is they get 90 of music revenue right they own their own catalog and they determine how they want to monetize their content audio audience's native token is used to ensure security of the network by rewarding validators artists are rewarded in audio and users use audio to

gain access to gated content audience is owned and operated by its artists its listeners and network validators it is governed through ownership stakes in audio so you think about how that works like if you think about a country right let's say the u.s the u.s okay they have the u.s dollar and companies need to be paid in u.s dollars it's legal tenders companies have to accept u.s dollar um employees need to be paid in u.s dollar when you pay your taxes you have to pay the government back in u.s dollars right this is a whole economy which runs off of the us dollar right and so people are um obviously those who use the us dollar want the u.s to do well they want

to vote and they want to do things because they're incentivized because all of their life savings they own real estate in the u.s they earn in u.s dollar their savings are probably in u.s dollars they probably invest in u.s companies so they want the u.s to do well they are incentivized for the u.s to do well because of these economic incentives well this is what we're now able to do online digitally and this is what you see with audience where they have this own ecosystem right the users need to hold audio the token the creators need to hold audio the token those who validate the network need to hold audio and earn audio the token and so all of the different constituents of this ecosystem are incentivized to help

audience um improve and do better and so maybe they're more incentivized to vote and help figure out how to make this platform better because ultimately that means their holdings and the things they get paid in is going to go up right so they're incentivized to help the platform that doesn't happen with facebook or with spotify people could give two shits right because they're not earning anything from it so another example blockchain video games like axiomfinity are pioneering play to earn gaming models gamers buy or rent axey nfts to join the game axis native tokens are used for staking governance and payment gamers can earn tokens by playing the game and spend them in game to create

new characters so you have these burning mechanisms as well as these earning mechanisms and through exchanging exchanges tokens can be exchanged for other digital assets and fiat currencies so axe infinity is not available on mobile app stores it has painfully complicated process to acquire these axion fts to start playing yet it has 1.5 million daily active users right now it's down from i think it was three million uh back in november um and it generated four billion dollars of nft volumes since march of 2022. so again people are incentivized to use this game they're incentivized to improve the game and be involved in the decisions of the game because they have actual real assets in ownership of them

so at this stage whether or not audience acts infinity or other dap tokens increase in value is not critical they are examples of how blockchain powered tokens can create store and transfer value natively online ushering in entirely new digital native economies in 1997 ebay sold 500 million dollars worth of beanie babies the five dollar plush toys soared to thousands of dollars in price and then crashed beany babies were over hyped fads like many before and perhaps like entities today but they served a purpose the beady baby market mania helped build ebay and ultimately online commerce in its 1998 ipo prospectus ebay noted a softening in the beanie baby market as a risk factor nfts like beauty babies um to ebay

are bringing millions of people to a new network that is what is critical not the price of a jpeg right um so some very interesting comparisons there between ebay and uh and beanie babies and nfts it's very very true so all of this what does this bring so an innovation super cycle it's impossible to envision the ways blockchains can innovate right when a clunky phone with no keyboard gps functionality and a camera was introduced back in 20 2008 sorry users didn't know what to do with it right calls dropped typing without a keyboard didn't work very well the battery lasted a few hours the internet connection was poor but as the as the connection and functionality improved

free global communication apps like whatsapp were developed right the camera was used to share photos on instagram uber leveraged gps to order cars um and food right as more apps were developed the quality of the smartphone improved which then allowed for even better apps more developers and entrepreneurs flocked to the building eco to the budding ecosystem and the innovation cycle fed itself right so a similar cycle is afoot here of blockchain only the decentralized functional composable and native economics of programmable blockchain are powering an innovation super cycle right the bedrock of the innovation super cycle is the trust guarantee insured by decentralized blockchains it creates a cooperative relationship

between network constituents the cooperative relationship secures a safe building environment where entrepreneurs need not fear de-platforming as a result more developers join the network the decentralized and functional nature of blockchains leads to more developers joining in building better products this is the flywheel right they grow exponentially by adding more developers whereas centralized networks only improve at the rate of which the owner improves them so native economics enables this creation storage and transfer value online seamlessly between network participants it cements the cooperative relationship and simultaneously new users and entrepreneurial developers conceive derivative products

right built on top of existing products so derivative products bring even more users into the network leading to more capital making the network an even more fertile development platform the innovation super cycle feeds itself right this is so key is if we just think about everything i just talked about there a lot of people use blockchains not a lot of people but a decent amount of people use blockchains right now and the experience is not great and it's hard for us to envision all of the things that may come from this just like when the internet first started it was hard for people to realize no one would have predicted back well i'm sure there was someone but not many people would have predicted that back in 1995 i would be speaking to you sharing a screen and covering this topic through

um through my laptop that you're listening to on spotify or apple podcast whatever as you walk around outside or go for a run right like that would not have been thought of but the tech developed right internet got faster then we got uh mobile then we had apps and so that's what's gonna happen here with blockchain a lot of the things are not super usable right now especially for the masses but it's coming and once it begets it gets faster and cheaper then things that we can't even think of today are going to be built out and this is just going to be a flywheel of as people see this more users come in and then more developers come in and it just keeps happening okay so innovation is booming blockchains are a hotbed of innovation attracting billions of dollars of

capital and talent the combined market cap of all programmable blockchains is nearly 500 billion this was written in march um this is probably lower today because while we were in a bear market that's life there are 25 program of blockchains with over 1 billion in market cap ethereum is by far the largest with a market cap of 330 billion i think it's about 220 billion right now but over 10x the size the second largest combined market cap of all crypto assets is nearly 1.7 trillion i think it's probably closer to a trillion right now unfortunately innovation in capital is ballooned in three main sectors so we have d fire decent decentralized finance right so this enables a new way to transact

globally at scale with near instantaneous settlement and low cost it also provides access to previously gated capital so tvl or total value locked measures the total value of assets held in d5 smart contracts and is a gauge for the size of dpi market there's 150 billion dollars of tbl at time of this writing up from 90 billion in april of last year uh and it was at 6 billion in august of 2020 that's how much uh defy has grown um in in the last just two years then we have nfts obviously a huge huge huge market right now and they allow people to own things like art photos code music games and virtual world objects credentials

governance access the list goes on this kind of nfts are the swiss army knife of web3 nfts provide a novel new form of monetization for content creators in the last year there has been 56 billion dollars worth of nft sales that is insane sales volume have declined to 0.8 billion per week since their january 2022 peak of 4 billion but up significantly from early 2021 volumes of 5 to 30 million per week huge different difference that majority of nft sales are our digital art by comparison the traditional art market did 37 billion in sales in 2021 down from peak of 50 billion in 2007 so nfts is quickly quickly going to

surpass dows this is the other big unlock here um that's happening uh with with blockchain so decentralized autonomous organizations so they facilitate new ways of organizing people to collaborate and achieve a shared goal 2021 saw massive growth in dows and today the value of all treasury assets on dows so you can think of undoubted balance sheets totals 11 billion dollars you can think of that similar to the treasuries held in companies balance sheets right but this is dao's balance sheets so community-owned companies you can call it and as we wrap up here blockchains are just inherently valuable because they are decentralized functional composable and have native economics these unique

features make them the most novel and fertile fertile development environments that will continue to spark innovative products and experiments to cement the uk's for blockchain security and scalability need to improve and that will be a topic for another post which is likely what we will talk about with sam in our interview coming up in just a couple days we will talk about comparing some of the blockchains in this in this ecosystem and understanding the security and the scalability of these and sort of where this stuff is going um i think it's clear from this article here that i just read how valuable this stuff is right there are people all around the world

that want to build businesses they want to send money to their family back in another country they want to transact they want to interact they want to do whatever it is they want to do in the internet and finally with blockchains they have the ability to do this permissionlessly 24 7 whenever they want there is no nine to five hours like the banks have there is no geo blocking um or d platforming it is just open and permissionless and of course this is where innovation is going to go why would you ever build on a centralized network when you have the option to build on a decentralized network that is permissionless and composable and has all these things we just talked about

of course this is where the innovation is going to go and entrepreneurs are going to build of course right it's so obvious and so to me web3 is inevitable because it just makes sense the incentives are there for everyone the users the developers the entrepreneurs literally everybody and that to me is the really cool thing about what blockchains enable because without blockchain you can't have any of this it's just not possible so thank you sam for writing this article and allowing us to share it with our web3 academy community um i hope all of you enjoyed this um and make sure you join our discord so that you can have a chat with us sam is in there and you can ask him some questions ask

the rest of us questions we're always chatting in there and just trying to learn and explore um the forefront of web3 so please join us in there the link to the discord is in the show notes finally if you want to write for web3 academy and get your article in front of our audience we would love to do that so please shoot us a message on discord or just go to the application in the show notes and send us what you what you've written and we'll take a look and even if it's not great we'll help you make it great we have writers um and we will help improve don't be shy we want to share what the minds of web3 and especially those in web tier academy are thinking okay thank you all so much for joining me today and listening and i

will see you all in the next episode thank you for listening to web3 academy we hope this helps you along your web3 journey if it does please share this episode and subscribe so you don't miss the next one by the way if you have yet to join the discord community you are missing out this is where all the magic happens this is where we learn where we ask questions where we network uh you want to be in there the link to join is in the description below and finally a quick disclaimer nothing in this podcast was financial advice crypto and web 3 can be risky you can literally lose it all in fact if you invest on account of what we say you probably will lose it all so don't do that in all honesty the point of this podcast is to remove the noise of markets and price and focus on

utility implementation anyway so you should not take any of this as financial advice thank you friends and see you in the next one