The Rise of The Crypto Neobank - TOKEN2049 Singapore 2022

so my name is Diego Monica co-founder president bankridge digital Anchorage is an Institutional platform that allows institutions to build regulated products on top of us that is that it just what we do but today I'm actually not going to talk about Anchorage very much at all today I want to talk to you about a phenomenon that I've seen happening over the past say 12 to 18 months but it's actually been pretty exciting that I've been personally interested as an angel investor as a user and just as somebody that is in this space now I've been calling this crypto new Banks we'll talk later why the word bank is actually misused in this context but at least this is the best name that I've come up with so the rise of crypto new Banks here's what I'm going to be talking about today and for you to have a little bit of a sense of where I'm coming from I wanted to give you just a little background a little bit of my journey and where I come from and why am I here on stage today the first thing that I want to tell you is that 15 years ago I was working on something that was absolutely useless I was actually telling this story yesterday which was a PhD in distributed systems and security which 15 years later actually has some modical amount of utility given that all of blockchain is distributed systems at its core off of my PhD was actually the reason why I originally got interested in Bitcoin the same papers that were quoted on the Bitcoin reference were the types of research that I was doing during my Master's in during my PhD this actually lucky enough led me to join a company that was a fintech founded by Jack Dorsey the co-founder of Twitter a company called Square I was an early employee at Square employee 40. and it was that square that I really started working on my security chops I led the security team build security infrastructure that ended up moving hundreds of billions of dollars a year in terms of gross payment volume through our rails that late later it led me to a company called Docker which is actually a core infrastructure company where I led the security team in ship Docker that now runs on over half of the internet every single cloud provider probably every single person in this audience that is a developer has used it at one point or another and finally this got me to start Anchorage as you can see my background has been from academic to security engineer to then being an entrepreneur and now later actually in a little bit become a banker because Anchorage is actually the first and still only federally Chartered Bank in the United States that actually means that we have the same license as JPMorgan Chase Goldman Sachs bny Mellon You Name It We actually are a bona fide Bank we can custody Securities we can actually custody crypto assets even though we only do crypto we don't touch Fiat but we now have clients like Sovereign wealth funds clients like Visa clients like all of the large Banks and so on and so forth so this is how I got here and really an academic turned engineer turned entrepreneur now turned Banker and so going into crypto new Banks and the Talk itself the three topics that actually want to cover have nothing to do with Anchorage but it really is the sum of my experiences I want to talk about alignment of incentives which should be very familiar to everybody that works in crypto I want to talk about crypto Network effects and just Network effects more generally and then I'll tie the two together and talk to you a little bit about crypto new Banks and the reasons why these are so exciting and why I see them as something to actually keep an eye out for in the next few years and we'll start with the obvious one everybody understands alignment of incentives especially if you're in crypto you have realized intrinsically within yourself that what we've built as a community is an incredible way of aligning the incentives of the participants of a network at a high level alignment of incentives is as simple as having multiple parties collaborating in a way where one being benefited benefits both so there's Mutual beneficial collaboration happening and the incentives have been structured as such the interesting thing about this is that this is absolutely core to crypto in the way that we've really achieved this has obviously been with tokens uh with cryptocurrencies with the actual ownership of assets to a large extent we can't gloss over it a lot of details but at a high level crypto assets really provide ownership rights to a user of a network at its most base core principle that's effectively what they're doing those could be ownership rights of an nft but they actually are more likely to be ownership rights over governance or ownership rights really over economic interest the actual value accrual of the network itself the reason why this is so interesting and so unique is because this stands in Stark contrasts with the current status quo all of you are very familiar with every single one of these four brands these were some of the most important companies created over the past 20 years and they're actually the same companies that are responsible for the original sin of the internet monetizing with ads if you look at all four of these the way that you interact with Facebook is you create content pictures in this case and you send them out to this social network in the case of Google it is the user that creates content that gets indexed that then gets available as a search engine in the case of YouTube you are generating the YouTube videos and you're sending it to this network and obviously in the case of Twitter I guess you're sharing memes of cats and just being offended by Elon Musk all day long but in every single one of these cases you as a user contribute content and what are you getting in return what you're getting in return is free with an asterisk access to everybody else's content the really interesting thing about this is that if you think about it there's a massive misalignment of incentives right here in this current model in something that when you align incentives you want to have is stability you want an ecosystem and you want a game theoretical stability of the incentives together which is not the case with traditional companies why well because when you monetize with ads and by having the internet not having monetization built it in from day one that has been the original sin we didn't have a native mechanism to pay on the internet a native mechanism to monetize microtransactions actually are something that we've only started working in the past three or four years and there has not been technology that have allowed us to actually get it to massive scale and so ads and monetizing ads have actually created a really weird incentive to have every single one of these companies gobble up and hoard data as much as they can the Gob data and they hoard it because it helps them gives better ads which helps them monetize better but that is not aligned with the users that provide the content in the first place the only incentive that you have to continue participating is the free access to other users contents at no point as the user of Facebook do I have governance rights at no point as a user of Facebook do I actually get to own some of the economic upside that is being created the reality is that every single one of the current companies that own the internet capture the value to their stockholders and to their employees and not to the users that are actually participating in creating a lot of the value and this is extremely important because it is this instability of the incentives that have actually created um deterioration in Trust if you look at institutional trust across gen Z Millennials you have Gen X and you have obviously the Baby Boomers you realize that institutional trust has fallen off a cliff in the past decades and we're not just obviously talking about governments or trust in journalists nobody trusts journalists anyway these days but we're talking about tech companies the companies that we've actually trusted for the past 20 years the companies that a lot of us here Millennials still trust the most as you can see Millennials are the generation I trust the most that has changed dramatically and gen Z does not trust Google gen Z does not trust Facebook all of these brands are going down in terms of institutional trust alongside governments and part of the reason for that is because after almost two decades the misalignment of incentives has demonstrated itself and gone to a point where users feel that they are not part of the network and they are not benefiting as they should so this is extremely important lack of trust in the fact that alignment of incentives is so important in how that has been one of the superpowers of crypto moving on to the second topic and I'll tie both of them in on the next one is Network effects again everybody here same as the animated incentives you understand what a network effect is when you add more users to a network the network becomes more valuable when a user participates in a service the service gets more value out of having more users that's part of it of course that only happens when you have positive feedback loops you can also have negative feedback loops that end very quickly but this is actually a superpower that when you can create a business or a network that really has positive feedback Cycles in Loops you get to see massive growth the reason why I'm talking about this is I don't want to cherry pick a set of assets so what I did was last year Missouri published a report of all of the assets published on coin lists coin list is um a company that publishes tokens and this is the full list of 22 tokens that they've actually launched and they have the return from inception to date as of last year and the thing that I want to for you to think about is that percentage of return over there return since listing one of the interesting things that is weird about crypto when we talk to someone that hasn't gone deep into the rabbit hole is that this always feels too good to be true how in the hell can you generate sixty thousand percent Returns on an investment this is obviously a scam this is obviously a pump and dump this is also obviously something that can't work it is not based in reality that is the Instinct and of course where a year later and even though over the past few days here in Singapore I haven't felt the bear Market at all it feels like we're not in the bear Market anymore but even today during the bear Market one dollar putting every single one of those companies as of this day would have given you fifty dollars so that's a 50x increase even in the smack middle of a bear Market the reason why I'm pointing out all of this is because even though it is very weird to think through how the hell do we have five thousand percent of return or six thousand percent of return this is actually something that humans can't really understand which is the power of exponential growth and the true power of the economics behind the network effects what I want to tell you is that this is not obviously unique to crypto companies like alphabet and Google and YouTube and Facebook have benefited from the exact same network effects and from the exact same type of monetization obviously over a longer period of timeline but with the exact same types of returns five thousand percent six thousand percent so what has been happening is that the internet has allowed us to have faster distribution and since we have faster distribution we get to bring economic value from Network effects from the future to the present and instead of taking two decades it might take a couple of years but it is the same exact mechanism it is the pricing mechanism over a network effects that allow us to generate this type of return there is no magic there is no scam Google is not a scam it is simply the power of exponential growth in a network effect in use so now that I've talked about Network effects and I've talked about the actual alignment of incentives let me talk to you about crypto new Banks in my definition of crypto new Banks there are banks with network effects that benefit the participants both of those things now should be incredibly obvious Network effects the fast power of growth in bootstrapping a community and adding more value but where the benefit accrues to the participants in thus is incentive Alliance the way that these usually look like and there's many types of variation but usually they start with a base token and this token might actually provide many rights but at least it has to provide one basic right some of them have economic value some of them have ownership value some of them only have bragging rights as value but all of them in general have governance rights as the core value of the token that is basing the ecosystem and maybe let me just detour a little bit on what I mean by governance when we talk about governance people point out okay Diego but equity in Google has the ability of doing corporate governance how is this different the reason why this is different is because it is a different abstraction level when you're doing corporate governance you are effectively deciding on merger agreements and firing the CEO when you have Community governance you're actually deciding on future products on how the ecosystem splits the value amongst itself and what the future direction of the whole Community is and that is the fundamentally different Valley why because once as a user you have the ability of doing governance participation you are now incentivized to continuously use the platform there is massive stickiness in you being able to actually be part of a community that is contributing to the direction of the bank that you're using what does that lead to that leads to referring your friends and further stickiness which leads to allowing the actual crypto new bank to generate new products that are profitable which then in itself leads to the governance ecosystem and mechanism to have more power in itself it decides over a larger bank with larger products thus creating a positive feedback cycle here on the government's token this is extremely important in every crypto new bank shares this particular trait another trait that they share is the fact that at no point do they touch Fiat currencies all of them actually from being invested in them to payroll all of them primarily use stable coins and even though we're not fully in terms of integration there with not allowing at no point we go to Fiat rails we are almost there and then finally and all of them have different sets of services and here is where the word Bank might be a misnomer these are not traditional Services of traditional Banks they are not insured that is incredibly important for users to understand but the equivalent sets of products that you have the checking account now gets turned into stable coins indirectly to an address savings accounts can be done directly on Bitcoin in ethereum stable stores of value you can have term deposit accounts by generating yield with staking on your stable coins you do peer-to-peer payments you have wrap stocks so all of the functionality that has been aggregated on a traditional bank now gets to be done in a way that is controlled by an actual feedback positive loop with network effects that has alignment of incentives so this is incredibly unique and you're only going to see more and more of it so in summary alignment of incentives in crypto is one of our superpowers when done right and there's been a lot of successful experimentation and obviously a lot of failed experiments there's also a strong Demand right now for alternatives to the discredited institutions that we currently have and what this is materializing in is the use of network effects to bootstrap these crypto new banks in a way that we have the economic rights and the government rights to it but that they are incredibly fast at bootstrapping and this is not fantasy they exist today and more of them are coming so that is the note that I wanted to leave you with thank you very much [Applause]