🎧A First-Principles Approach to Crypto
A conversation with Lex Sokolin - Consensys, Fintech Blueprint (Part 1)
My recent conversation with Lex Sokolin has changed my perspective on crypto as an investor.
Below I highlight some key learnings.
Listen to the full interview or watch on YouTube.
Digital Wealth Managers are like ‘Spotify for CD-ROMs’
In 2011 Lex founded NestEgg Wealth, a robo-advisor and then became COO at AdvisorEngine (acquired by Franklin Templeton), a digital wealth management technology platform. So when he describes wealth managers as ‘Spotify for CD-ROMs’ comes from first-hand experience.
There are two parts to the metaphor.
The first is about transforming the store. The second is about transforming the manufacturing
Transforming the store
Web 2.0 FinTech is about taking the distribution of financial products out of human hands and putting it onto technology chassis, which delivers it to you on your phone or your browser. And that's deeply unsatisfying.
It is not something that will change or transform real behavior. If you're an entrepreneur, you're not trying to settle. […]
Whoever you're competing with, you want to win unconditionally, because what you're working on is a step above anything they've done. And so we have evidence of that happening the way that Netflix decimated and humiliated blockbuster into nothingness, the way that Amazon decimated and humiliated the bookstores.[…]
There are a few examples where new brands broke through, and the new brands are fantastic Square, Stripe and the rest. But it is not a such a significant step as to transform the fabric of reality, and again, it depends on what kind of entrepreneur you are.
And for me, that was always very motivating. I want a new page to draw on. I don't want the old page to color in for others.
Transforming the manufacturing
Where we are today is this idea of not transforming the store, but changing the factory. The transformational thing is not how I can deliver to you CD ROMs on the internet, how to be the Spotify of CD ROMs.
The transformational thing is when Napster kills the music industry, that is the spear that pierces the beast. And so digital distribution is in place, but digital manufacturing is not. Whereas for things like Google, it was the digital manufacturing of content through websites that made Google able to distribute it through the search engine.
What I see in crypto is the ability to make financial instruments in a way that is digitally native, on chain. Where anybody can be a financial engineer, if they want to. It's open source. And that drives the cost of digital manufacturing to zero.
🤔My perspective:
I thought of fintech and financial data as a new ‘layer’ of the internet and wrote about it here. Of course, our financial system will not move on-chain instantly (again, if it does, we will need bridges), but if you are building something investment-related, you should think of internet money and infrastructure, i.e. blockchain.
Crypto as an emerging market
You can think of web 3.0 as an emerging market and already in this emerging market, there are asset classes and I think anybody that looks at the space should think about an asset allocation, they should think about specifically what exposure they want to, what themes.
And then what is their risk tolerance? What is their risk capacity and so on.
There are things that look like fixed income. That generate interest rate returns on particular assets.
There are things that look like equity exposure in the sense that the underlying performance of a particular project might correlate with, appreciation or depreciation in that asset.
There are things that look like functional objects in the way that you would buy a house or in the way that you would buy a piece of art or in the way that you would buy some rare thing and expect it to go up in value over time.
🤔My perspective:
Rather than looking at all blockchain activities as one asset class, the emerging-market metaphor has the merit of picturing it as a space where you can find multiple asset classes. Like in any country, you’ll find stocks, bonds, commodities and more. And it’s emerging, so it’s riskier.
However, thinking of it as a country could make us lose tracks of first principles thinking. So, in my mind, I picture it as a different planet.
Here’s a clip from Avatar, a great movie about arriving on a different planet, which may inspire you on your crypto journey.
Next: a deep dive into yields and associated risks in crypto
Thank you for joining me in the exploration of the future of investing. In this newsletter, I’m looking at alternative assets, defi, investment technology and trends - without the hype.
George from Investorama.