Editor’s note: This article is from IOSG (ID: IOSGVC), author: Joey Krug & Emma, ​​translation & proofreading: IOSG Venture, reprinted with authorization by Odaily.

core tips

1. As originally expected by the market, 2019 is destined to be the year when giants start sailing in the Crypto market. Although JPcoin does not belong to the DeFi category, it is enough to make the entire Wall Street financial market rethink Fintech and Blockchain business reforms. The New York Times rumored that Facebook will launch a common stable currency for social payment. Following the footsteps of predecessors such as Line, Facebook’s restructuring to drive its business value is definitely not limited to stable coins. In the future, giants will compete to develop within their own systems An open financial incentive system, liquidity, openness, and decentralization will also become obstacles for giants to advance in this field.

2. I believe that the fundamentals of freedom of information also apply to the financial system. By creating new decentralized financial markets, society will benefit from the impact of past information innovations. But this time, it will change values, money and finance.

3. Just as the Internet effectively created a parallel information infrastructure to the real world, cryptocurrencies will create a parallel financial infrastructure. And just as Internet innovation is not limited to local area networks, blockchains are not limited to private blockchains (Private Blockchains).

4. The new open financial infrastructure already exists. But it's still slow, expensive, and hard to use, just like the internet was in 1992. Fast forward a few years and it's going to be fast, cheap, and easy to use. One of the great things about the internet is that it helps us build encrypted networks faster, a luxury that didn't exist in the early days of the internet.

5. Why do people choose applications built on open source protocols instead of traditional centralized companies? There are two answers: lower fees and regulatory advantages.

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Joey Krug:Co-CIO of Pantera Capital,Founder of Augur

A new financial infrastructure

Blockchain and cryptocurrencies are the infrastructure of the new finance. Just like the Internet is the infrastructure for new media, neither will be built overnight.

When we look back at the history of access to information and the progress of freedom of information, we notice that societies have progressed by any metric: education, diffusion of ideas and new technologies, GDP per capita, poverty rates, etc.

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What does this have to do with finance?

Finance has not experienced similar innovations. In fact, the innovation of financial experience is not at the same level as the innovation brought by the Internet to social information freedom. At best, most transactions today are conducted electronically. The most critical parts, however, have not changed: the creation of new tools, contracts and agreements. Today we still cannot create a financial contract - such as a derivatives, loan or money market contract.

This idea sounds radical, no less radical than the announcement in ancient times that people other than literati could write their own books.

People might exclaim, "Shouldn't publishers control what is published, they'll censor sensitive topics!"

Others cheered, "What if people could post whatever they wanted, and be free to choose what they wanted to read?"

I think the same rationale applies to the financial system, and by creating new decentralized financial markets, society will benefit from the impact of past information innovations. But this time, it will change values, money and finance.

Given the sad state of financial markets, we're not just trying to create the printing press, the telegraph, or even television. Our goal is to allow the financial field to jump directly to the degree of decentralization of Internet freedom of information today.

It's actually quite natural to think of money as an extension of speech, and even if you disagree, Citizens United effectively supports that view. Just as one does not need a Supreme Court case to recognize that the bytes that make up information on a computer are speech, money can be speech if it can be expressed in bytes.

Citizens United: A 2010 U.S. Supreme Court decision.

Why did you do this? What will be achieved in the end?

Just as the internet effectively created a parallel information infrastructure to the real world, cryptocurrencies will create a parallel financial infrastructure. And just as Internet innovation is not limited to local area networks, blockchains are not limited to private blockchains (Private blockchains).

After Internet innovation, the remaining companies are either "native Internet" or offline giants (like publishers, music and streaming/video/tv). The same thing will happen here. The old financial giants either choose to adapt, support and eventually join this parallel system, or fade away.

This infrastructure will be borderless, cheap, fast, and most importantly, it will allow people to trade things they had no way of exchanging before.

Imagine being able to develop a new financial market that previously required Goldman Sachs to design a multimillion-dollar custom contract, but now requires only a few mouse clicks?

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What can we do about it?

For any financial system, there are basically two core components needed: the underlying asset and derivatives.

The underlying asset is something that exists in the real world: stocks, bonds, commodities, etc.

A derivative is a contract that derives value from the performance of an underlying asset. For example, a derivative on Tesla stock might entitle you to buy Tesla at a certain price at a future date, or it might be a cash-settled agreement to pay Tesla’s price today versus its The difference between prices after one month. Much of the activity and value in the financial system resides in derivatives. People will think, why should I buy something whose price will change (underlying assets) instead of something whose price can be designed according to my unique expectations and needs (derivatives)?

Any properly functioning financial system requires a series of basic tools, such as:

• Leverage – that is, how many times you gain or lose for a dollar increase in the price of something

• Margin - the ability to borrow money against something you already own to buy more

• Unit of account – something that can be traded stably (eg USD)

• Exchange infrastructure – where assets are actually traded

• Infrastructure for Lending and Issuance - Issuance of debt and equity instruments.

Projects that can use these core tools can be divided into three categories: projects that issue underlying assets on the blockchain, projects that trade derivatives based on underlying assets, and projects that trade other derivatives.

Current projects can meet all the needs of open financial infrastructure:

Leverage: For example, the architecture of smart contracts can meet the needs for implementing leverage functions. Margins (and loans) require systems like Dharma, which enable people to borrow cryptocurrencies using other cryptocurrencies as collateral.

Unit of account: Stable cryptocurrencies are a challenge for a unit of account. It's not as simple as simply tokenizing the dollars -- the depository bank could accidentally freeze the account. A better approach is to create something like Maker, which is developing an asset-backed hard currency. The first decentralized stablecoin on the Ethereum blockchain. In fact, the Dai stablecoin is backed by over-collateralization of other cryptocurrencies. Despite the controversy in the market, Dai still has a value of one dollar.

Infrastructure for transactions: 0x is an open protocol for decentralized transactions on the Ethereum blockchain. 0x is building a lot of trading infrastructure and developing protocols for trading.

Today's blockchain community is building the underlying infrastructure necessary for a well-functioning financial system. This technique is applicable to multilateral markets.

small amount of traditional assets

I don't think all traditional assets will migrate to the blockchain, and those assets that are on the chain will also face restrictions because of their impact on the real world.

Security tokens are a great "9 to 10" innovation, but they are not a "0 to 1" innovation like the projects above. The greater the interaction between the real world and the blockchain, the more challenging the project as a whole - as the security benefits of blockchain technology start to fade.

For example, if an owner of a Token-marked stock loses his private key, his stock may be subject to repossession. As more and more governance layer protocols are added, these governance protocols will eventually transform the entire ecosystem into a Wall Street 2.0 database with a smoother backend and less public blockchain interaction.

Some exceptions are Harbor, which seeks to tokenize real-world assets and make them tradable on Ethereum. The advantage of this is that it can securitize assets at a lower cost while obtaining more global liquidity - the latter is probably the biggest benefit. I think while it will be difficult to monetize the space, there will be a few players like Harbor who will dominate and most of the value generated will be transferred to the companies and assets being tokenized.

For issuing debt, the Dharma protocol is very suitable and closer to the digital currency world. For derivatives on the underlying asset, there are projects like dYdX - a decentralized open-source protocol for margin trading and Ethereum-based token derivatives trading.

For other transactions, even assets without an on-chain basis, use Augur, a decentralized source of trusted data oracle and prediction market protocol.

While it will only take a few decades at most to tokenize most real-world assets, once the blockchain scales and there is a good fiat-to-digital pipeline. These new financial agreements will be able to take off faster than a Model 3 (Tesla) in orbital mode.

What about other than finance?

Blockchain technology benefits multilateral markets - especially financial markets. Other use cases merging with financial markets include: file storage marketplaces like Filecoin; computing power marketplaces; item marketplaces in video games; domain name marketplaces like Handshake; regular betting/gambling like FunFair; sharing economy protocols like Origin. These projects will drive the classic decentralization movement: cut the size of existing profit-making companies and replace them with software. As software is replacing the world, some software will replace other software.

About currency and money?

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Liquidity is king

A new financial system sounds exciting and promising, but it cannot function without underlying liquidity. What is liquidity? You can think of it as a rushing stream of water. Fish cannot swim in dry streams. On the other hand, water-filled streams maintain a small ecosystem. Imagine you buy Tesla stock: if you try to buy $5,000 and your order gets filled instantly, the market is liquid from your perspective. But if you decide to buy an item worth $5,000 and it takes a day to fill your order, the market is illiquid. To encourage liquidity, there needs to be fair, simple, cheap and fast transactions in every market. Currently, blockchain-based financial markets do not share most of these characteristics. So I don't expect to see a lot of liquidity and applications in the short term.

There have been clamors that the lack of users means that blockchain technology is useless. They may not have a deep understanding of liquidity or why it forms. For something new to be adopted and widely accepted, it needs to provide an experience that is 10x better than what exists. In blockchain technology, we do not yet have this condition.

Lack of liquidity is a big constraint. If people can't trade quickly and make markets because trade execution is too slow or too expensive, it's basically impossible to steer the market. Once the issues I discuss later are resolved, I believe we will witness the steepest S-curve ever seen in the history of mass adoption.

Bootstrapping a market in the cryptocurrency world is not the same as building a Web 2.0 application, and you can't simply spin up more servers to handle a lot of traffic. In the cryptocurrency world, you can't get any meaningful traffic without very high network throughput, because liquidity begets liquidity. If traders cannot make markets on financial DApps, they cannot add liquidity to the market.

Companies About Open Source Protocols

What about the companies built on top of all these open source resources?

Fiat-to-crypto swaps seem like a clear opportunity to capture value, so what else?

On top of these open source protocols, we can easily see a bunch of mini-Red Hat-style businesses flourish. There are almost limitless opportunities for these companies to provide value-added services that create value in a non-rent-seeking manner. Some examples include: making it easier to build smart contracts, providing tools for writing smart contracts more securely, KYC/AML compliance, better transactions, escrow solutions, dispute resolution and arbitration tools, remittances, asset management tools, etc.

In the traditional corporate space, I believe the most significant value creation we will see in the medium to long term is the development of easy-to-use interfaces on top of protocols. We've only just seen projects like Veil aiming to create a derivatives and sports betting site on top of Augur.

Why do people choose applications built on open source protocols instead of traditional centralized companies? There are two answers: lower fees and regulatory advantages.

lower costs

If the protocol is designed correctly, the protocol will not be able to be forked and usage fees will be reduced, with minimal fee levels charged to execute transactions without compromising the security of the network. Augur, for example, employs an almost sacred approach known as Amazon’s Jeff Bezos mantra, “Your earnings range is my [agreement’s] opportunity.”

So, from a fee level standpoint, there's no reason not to build on open source protocols. If you fork the protocol to lower fees, you sacrifice security. For example, if the cost of securing a given network is $1,000 and a miner or gambler only gets $500, then they have an economic incentive to do evil. However, if they are paid $1,000, the network can accommodate their motivations, thereby ensuring safety, and everyone on the network will be satisfied.

This begs the question, "How will these companies make money?"

The answer is to provide valuable and affordable services. Taking the Augur protocol, and user interface (UI), hosting it on AWS and deducting a $50 fee on transactions will not last, nor is it a sustainable business model.

Providing liquidity for market making, or taking risk as a trader, will always be rewarded by those willing to pay for liquidity. Competition may exist, but people are still willing to pay for instant liquidity.

laws and regulations

We are starting to witness a breakdown of regulatory compliance. In the case of Coinbase, if they created and operated Bitcoin (as a centralized network), they would be taking on a lot more responsibility than they currently operate, which is only running on the Bitcoin blockchain and using Bitcoin. Compliance Obligations.

In the former case, Coinbase would be characterized as the operator of Bitcoin, creating huge compliance obligations. Imagine the hassle of having to deal with the transfer of funds from multiple anonymous users around the world!

Instead, they only use Bitcoin and therefore only need to meet the KYC/AML requirements of their customers. In other words, these trading systems divide regulatory compliance obligations in a highly fragmented manner. Among the many benefits of smart contracts is that it enables fairer, programmatic, transparent and open markets. In these markets, things happen programmatically, and the rules are pre-coded and fair for everyone.

It is impossible to require an exchange to comply with the requirements of more than 150 jurisdictions, but it is entirely possible to fully comply with the requirements of local jurisdictions.

Similarly, for other projects that are emerging (like Veil), counterparties can be KYC/AMLed when they are traded and wagered in the country they operate in, but may not have to be registered as an exchange themselves (because ether Fang nodes will do this), Veil is just another trader on a P2P exchange. If Veil got into the business of creating markets or matching orders, that might be different, and it might need to register as an exchange. Either way, "Veils" in different geographic locations can launch and provide their own compatible interfaces to distributed protocols such as Augur or 0x.

Back to "Companies Based on Open Source Protocols"

I believe these types of businesses will create a lot of value because they're in the very sectors where consumers interact the most. The worst case scenario is that if you are a user of an application built on a decentralized protocol, when the application goes down, you can always recover from a backup in the decentralized network.

Projects built on open source protocols will differentiate themselves in different ways, removing certain features, adding functionality, making things easier for users or simplifying the process. For example, it seems to me that one could create a multi-billion dollar company by creating an easy-to-use betting-style UI on top of Augur. They will profit from the spread as the counterparty to the deal and be able to compete with programs like Bet365. As Jeff Bezos said: Their profit is your opportunity.

Companies building on open source protocols sometimes forget a key factor: while the protocol performs many backend/backend related tasks, it doesn't do the marketing itself. Much of the company's focus should shift to user acquisition and marketing. And don't forget that it's not the protocol's job (or ability) to sell your product, any more than Google Search's job is to sell your website.

scalability

• nascent infrastructure

• scalability

• nascent infrastructure

nascent infrastructure

In terms of infrastructure, building something in cryptocurrency/blockchain is more akin to building a rocket or biotech than it is to building something like Snapchat. Developer environments, languages ​​and tools are so new in the cryptocurrency world - it makes it very difficult to create something. It's like the early days of the internet, creating a simple website was difficult. On Ethereum, you can use Solidity to write smart contracts. Solidity goes a step further than Bitcoin's scripting language, but it's actually limited in what it can do. Only after 2015 did it become possible to build these things. Testing Solidity is also time consuming because there aren't any good testing frameworks for testing Solidity smart contracts. Truffle is one of the few solutions out there, and it's not easy to use.

The most important challenge is making sure the written code is correct. There are two aspects here: specification and implementation. When specifying a protocol design, it can be very time-consuming to ensure that the technical specification is logical. Also, the code must be economically sound.

Cryptocurrencies are very rarely a close marriage of computer science and economics, and if you don't get both right (i.e., compatible with incentives), then your system won't work, or worse, an attack could lead to catastrophe sexual failure. This requires a lengthy game-theoretic debate on different attack vectors and ways that can go wrong. Once you have a specification, the next step is to implement it, and when you do, it must match the specification exactly, otherwise the system will not be able to do what it was intended to do.

Once the code is written, it has to be security audited by multiple independent third parties, bug bounty programs, manual code reviews, write extensive test programs, run static analysis tools that detect common vulnerabilities, and make sure that any critical These steps are executed in the code.

What are your thoughts on the Rockets?

If you're NASA and you're building a rocket and then launching it, you only have one chance to get it right. Any bug in the rocket's code could inadvertently cause it to explode. A replacement rocket could of course be launched as well, but the damage from a rocket failure is quite costly and has tragic consequences if someone is on board.

In the crypto world, launching a smart contract is the equivalent of launching a rocket. The cargo of smart contracts is money. There is a fundamental and critical difference between NASA rockets and smart contracts: the rocket's code is closed source while smart contracts are open source. The analogy is like a rocket in flight that can be blown up by anyone who wants to give the order. Since the code is open source, anyone can read all the blueprints to try to find ways to attack, which is the challenge of writing secure smart contracts.

A Decentralized Approach - Using "Autopilot" as a Metaphor

There are two approaches to creating decentralized applications. One is to be fully decentralized from day one, and the other is to start relatively centralized and gradually become more decentralized over time. This is similar to different approaches to autonomous driving. With Tesla, you can start driving closer to level 2 (partial automation) and work your way up to level 5 (full automation).

Alphabet's multi-billion dollar self-driving car project Waymo, you'll start at level 4-5 and wait to scale until you can drive autonomously in a safe way. Cryptokitties, or 0x, takes a Tesla-style approach, with centralization handling the user interface and gradual opening up. Augur, on the other hand, takes a more Waymo-esque approach, taking a fully decentralized approach from day one, focusing on improving the experience and scalability for mass production.

In terms of self-driving, I think a Tesla-style approach makes more sense because you can have real-world end-users test it. In my opinion, the security and trust issues make the Waymo approach more sensible in the crypto world. Everything is determined by scalability issues anyway, so you have more time to iterate when scalability issues are the limiting factor.

How do you feel about biotech companies?

If you look at a biotech company, typically they have what they call a pipeline, which is a collection of drugs that are currently in research and development. Plus, the company hopes they can address a host of unresolved research questions, and in doing so, they'll eventually be able to release a drug to the public that would confer a benefit. These drugs usually go through three to four phases. First you've found a drug candidate, and if it looks promising, then the next step is the start of trials. Sometimes it starts with animal trials, or sometimes it goes straight to human trials.

The interesting thing about biotech is that these companies (many of which are public companies) are fundamentally driven by need to solve research problems. And with encryption, you have all these unsolved research problems: computational scalability, proof of stake, data access issues, etc., you have to work on these in a certain timeline. People would love to see Ethereum release Casper (a Proof-of-Stake protocol), and people are asking for all these unsolved computer science problems to be solved within two to three years. Of course it's early days for the crypto world and I think we'll see this dynamic in the next 5-6 years (I might even be underestimating). After that, I think the crypto world will look a lot more like traditional software development.

scalability

scalability

When we consider what will catalyze this market, two remain the most important: scalability and fiat currency deposits.

The reason scalability is so important is that without it, these applications are neither fast, cheap, nor easy to use. It’s easy to look at Bitcoin these days and say, “The digital currency has only seen limited scaling in a decade — it’s never going to scale!” I think that’s short-sighted for several reasons. One is that Bitcoin is mainly used to transfer value, and there are better solutions (such as Lightning). Furthermore, it is not a scalable smart contract platform for payments that has only been in development for three short years.

For example, Ethereum only took about three years, and while the first few years were spent improving the developer experience (UX), bug fixing, etc., the next three years will focus on scaling technologies. Additionally, until recently there were no applications or projects running on Ethereum. From a practical point of view, until there are real applications, people working on scalability can look at these real use cases to study how the scaling problem should be solved.

There are two places where blockchains can be scaled: layer 1 and layer 2. We will analyze it below.

Layer 1 is simply the underlying blockchain such as Ethereum and Bitcoin. The main scalability challenges boil down to network, storage and computing power. The network is the biggest bottleneck. If you want to spread a block full of data around the world, you send it to a few computers, which in turn send it to a few other computers, and so on, until the entire network has received the block . This takes a lot of time, which is why Ethereum and Bitcoin have relatively long times between blocks. If you can figure out how to reduce the propagation time and reduce the time it takes to send a block on the network, you can improve throughput and speed. Even if your computer is 10 times more powerful than today's computers, the problem of network propagation is still not solved, and since bandwidth is still the limiting factor, throughput will still not change or increase significantly.

Some ideas for solving network problems include compressing data so that nodes send only small amounts of data. Another approach is to try to reduce the number of hops required for the entire network to receive a block of data by building something like a content delivery network (CDN) for the blockchain, which is what the Bloxroute project is doing. This should result in a meaningful 100x increase in throughput.

Another attempt is to not require every computer on the network to know about every transaction, or effectively "break down" things. I'll discuss sharding and STARKS (another technical solution) separately, since they essentially solve all three barriers to execution-time scalability. There are also Direct Acyclic Graphs (DAGs), which allow one to process and broadcast transactions in parallel, which may help solve network problems. The challenge is that no one knows how to achieve global transaction ordering in DAG. The lack of transaction ordering functions makes transactions and financial applications very difficult.

It's also possible to do things like separate processing transactions from consensus, or use both fast and slow paths in a relatively centralized network by default, but fall back to a fully decentralized approach if something goes wrong. This is another great one-of-a-kind attempt to increase throughput by a factor of 100 or more.

storage and computing power

Two other big challenges are storage and computing power. Computing power is easier, it's almost always increasing, even my MacBook Pro can do thousands of transactions per second. If we want to improve it even further, we can do a lot of work by switching to using Web Assembly, which is more optimized than EVM and can be executed as native code, while EVM is quite slow. Non-interactive transactions can also be processed in parallel by multiple processor cores/threads.

There are two problems with storage, one is that today's blockchain requires a lot of read and write operations. This can be solved through parallelization - Ethereum has already started to do this work.

Another issue is storing the large amount of storage and blockchain-related data generated by the blockchain. Bitcoin and Ethereum require hundreds of gigabytes of storage, and someday this will reach tens of terabytes. One solution to this is to use some gadget to finalize blocks at certain points, allowing nodes to cut off history and only store newer blocks. However, there is still a need to store all state data related to the blockchain, and further research on how to store data more efficiently, compress, and use less data are very important topics.

There are two technologies that solve all layer one scalability issues: sharding and STARKS. Both sharding and STARK are promising. In my opinion both are about three years away from mass production and use.

Fragmentation means that each node in the network does not need to store all data, process all transactions, or even broadcast all blocks. A simple way to understand it is assuming that the blockchain is to be cut into n slices, and users only need to pay attention to the slices they use.

Of course, security concerns arise: how do you ensure that shards cannot be hacked, how do you handle invalid transactions, how do you censor something? There are challenges in implementing communication between shards. For example, suppose an Augur market is distributed on shard "A" and Dai is distributed on shard "B": each other needs to communicate securely in order for Augur to use Maker. Assuming all the challenges listed above are addressed, including the problem of making sure data doesn't disappear through sharding (data availability), you end up with a scalability solution that solves network problems, compute problems, and storage challenges.

For STARKS, the idea is that you can bundle a bunch of transactions together and prove that the transaction was processed in a trustworthy way, and then the nodes just come and verify that proof. So one day you can process 10000 transactions by validating a single proof. Of course the stark scheme has issues like evidence size and creation time, but companies like Starkware are addressing these issues. Requires less computing power and network bandwidth because the technology enables one to verify batches of transactions rather than verifying each transaction.

Layer 2 deals with the protocol and technology stack and contains the following systems

• side chain

• side chain

• Plasma (Examples: Gluon Plasma and Arbitrum)

All of these systems support smart contracts without certain limitations of scalability, and each has different tradeoffs.

For the state channel, the contract is mortgaged with capital, and then the transaction information is signed to transfer the funds. The tradeoff for this is liquidity/capital locked, with collateral being at least 2x the transaction volume, so this technique is suitable for use cases like payments. But I believe it is unlikely to be applicable in the case of transactions, as such a collateral requirement would put users off.

Sidechains are systems like POANetwork, Cosmos, and Polkadot. All of these approaches are connecting parallel systems to chains like Ethereum and using these new networks as new avenues for scalability. For example, Augur, Maker, and 0x may all run their own parallel chains in these systems, but it is difficult to guarantee security and seamlessly connect these chains together. Polkadot and Cosmos have made great progress in this regard, and to some extent Plasma can also be considered a sidechain.

Although Plasma does not require excessive mortgage funds, there are still many unsolved problems: it takes a long time to get back to the main chain for settlement/extraction, and a relatively large amount of data needs to be recorded. This makes it difficult to process on account-based models or Turing-complete smart contracts like Ethereum. I think these issues will eventually be resolved, although it's still early days. The most promising thing I've seen for this problem is called Gluon Plasma.

Finally, we have Arbitrum's solution. I think this is the most interesting tradeoff because it doesn't involve liquidity or time, but rather a minimized trust tradeoff. The tradeoff that Arbitrum handles is that there must be one honest person/node in the validator set. If there is an honest node, the system will operate safely. As a user you can effectively deposit funds into a separate VM and then process all transactions there quickly. If there is a dispute on-chain, the point of divergence can be pinpointed and verified on-chain. Whoever is wrong loses their staked funds, so all have an honest economic incentive.

Legal currency deposit channel

Fiat currency deposits are an important part of the digital currency world puzzle. A big part of the benefit of encryption is that it makes things cheaper in the long run. A simple example is the concept of payout ratios in betting: If you bet $100 on a bunch of random dice and got $92, your payout ratio is 92%, or your fee is 8%, all under the same conditions. Now if you want to use a decentralized exchange, or something like Augur, your fees will be around 10% or more: ethereum daily price volatility is around 5%, fiat deposit costs a few percent, And a transaction gas fee of a few percent. Scalability will help with that last problem, and projects like Maker (Dai) will help with volatility. But the statutory deposit cost still needs to be resolved. There are two aspects to consider for this:

• Legal currency deposit issues on exchanges and institutions

• Fiat currency deposit issues for brokers and ordinary consumers

I believe that Bakkt, a newly formed subsidiary of Intercontinental Exchange, will solve the problem of institutional fiat deposits by providing low-cost exchange trading infrastructure. No one in the world manages the global trading network better than ICE - ICE is their butter and bread.

In the world of cryptocurrencies, consumers are critical to the future of any decentralized application - consumers need to be able to convert their assets into cryptocurrencies cheaply and easily.

Massive mainstream adoption may never happen if they are forced to leave the app and enter an exchange for a 2-4% fee. Instead the winner here looks more like Stripe, just for deposits of DApps. In my opinion Wyre is the only contender in this space, they pool liquidity from exchanges, OTC providers and others - which also leads to low cost transactions with ACH support and debit card deposits. In short, the ability to buy and sell Dai with fees of less than 0.5% makes a huge welcome difference.

All of the above questions culminate in this question,Should we be looking for value in this area?

In order to give full play to the advantages of this emerging market, I will focus on the medium and long-term. The market in the short term is usually irrational, and it will take some time to resolve the mixed situation. In short, today's market does not recognize the special attributes of many projects that are actually useful, have strong development teams, and can attract users. Only when the technology starts to scale and cheaper access to fiat on-ramps becomes more viable will the market start to recognize which projects have merit and which don’t. In Warren Buffet's words, when the tide goes out, we'll see who's in a bathing suit and who's not.

So it makes sense to buy and hold assets for the long term in this space while everything goes on. Additionally, the nascent nature of the market often requires a longer reaction time for the underlying fundamentals to develop positively.

You need to focus on three things:

This is easier said than done.technology

technology

When I look at projects in this space, I look first at technology. This may seem silly because it goes against almost all conventional wisdom. But given how young the crypto world is, a project is more like building a biotech or rocket-building company than a traditional software startup.

There are some exceptions to this rule for helping or supporting businesses with a potential vision. When evaluating technology, you need to understand whether it makes sense. This sounds abstract, but it's more concrete than it appears. Say, you invest in a company in the energy industry, and someone presents you with an idea that violates the laws of physics - like a perpetual motion machine, you should avoid that company/project.

economics

economics

After evaluating technology, it is critical to evaluate the economics of a project or company. Cryptography is one of the few fields where computer science and economics are closely related.

A common mistake is to create cryptocurrencies that are only used for certain in-app payments. It's akin to forcing all Walmart shoppers to only shop with Walmart gift cards. First of all, this severely restricts the market. Second, cryptocurrencies in this example would not be considered assets of value. People will only buy into the exchange when they need to use it, and sell it after the transaction is complete.

As a prerequisite for maintaining economic activity, cryptocurrencies do not need to accumulate much value. So it is important to have a useful token, for example as a collateral mechanism, or as a yield asset. It is also crucial that the incentives in the system work, and a few people should not be allowed to cause the system to crash or fail. Any institution that is compatible with incentives should not rely on altruism or goodwill to function. On the contrary, for network participants, a reasonable profit-maximizing response should be the most profitable decision and behavior, and it is the most honest decision and behavior.

team

team

market

market

When you look at the market, the thing you want to invest in may have a large market after the specific technology and user acquisition problems are solved. Or there is a project that looks like a toy, but people have fun with it. The second category might suggest that the audience for this toy's application is much larger than it first appears. Another way to think about this technology is the long tail of finance: just as Amazon became the long tail of internet retail and eventually monopolized most of the market, crypto will start with the long tail of finance.

Product and traction

Beyond that, there's product and traction, which are the two most important things. A lot of crypto projects don't have this yet, because the whole field is still very early, the infrastructure is just starting, and it takes a lot of time to build the product. Over time, the speed to market will decrease, and even in the seed stage of a crypto project, these two factors will be very relevant. Right now, they are mostly for late-stage funding rounds or new protocols that are gaining traction, but the market ignores them. A product that people love and is easy to use is king, but even more so is driving users to it and gaining widespread adoption. Remember, ideas are everywhere, successful execution is the most expensive!

constant reassessment

Once you have purchased an asset, the next step is to constantly reevaluate whether you should continue to buy new additional assets, sell existing assets, or buy more of your existing assets. We just bought a new property, but what about the other two? If an asset is cheap compared to underlying fundamentals (i.e. yield), or it has hit some milestones and the market simply isn't reacting, then continuing to buy is a no-brainer. Most cryptoassets have not yielded yet, so when you decide to add to your position, you mostly have to consider the second category just mentioned.

Summarize

Summarize

Some people will ask should they invest in Token or equity? I think both are good investments. Choose between different stages and different liquidity conditions, but the underlying assets you invest in are actually backing things that are ultimately similar. Some projects are already liquid and can be traded publicly. Some are brand new doing ICOs, and some are regular companies with only equity structures. Of course, as mentioned above, your evaluation of them will also vary. Traditional companies are very different from open source projects, but I believe that in this ecosystem, you can make money from both.

Right now, the pricing of these assets is effectively a beauty contest based on branding. Predicting what a crowd thinks is very difficult. So it makes more sense to buy products with strong fundamentals, because as scalability and on-ramp barriers are removed, they will become so good that the market can no longer ignore them.

If you want to benefit from the collapse of the financial system, I think your best bet is to buy the projects that would benefit the most from addressing both obstacles. That means having a longer time horizon (on a three-year scale) and not keeping an eye on price fluctuations because these things take time to develop. As long as the blockchain only executes 10 transactions per second, and fiat deposit costs range from 2% to 4%, there’s no reason to worry that the project you’re investing in today isn’t building a huge user base.

Your project may be vulnerable to short-term fluctuations in the market. Simply because the current market is a beauty contest with pricing based on brand rather than utility. As an informed and disciplined investor, you have to ride out this period.

On the contrary, if a smart contract platform including DApps executes 10,000 transactions per second and has a deposit channel of %0.5, and your position project still has no users. That would be a warning sign, and that's when you should be worried.

Now in the trough of disillusionment, if you believe this technology will grow, it's time to invest. The killer app for decentralized/parallel financial system use cases already exists. They can be used, just slow and expensive. When technology is limited in scope and widely perceived as slow and expensive, and a "never get faster or cheaper" mentality prevails, it's usually the best time to invest.

I think to make money in this market, you have to go against the trend and make the right choices about which projects and companies to invest in. It would be easy to just pray that Bitcoin eventually becomes digital gold. But I think we are standing on the precipice of a much bigger one: we are facing the early beginnings of innovation in the entire financial system.