The 100 trillion dollar road to encrypt the world

Foreword: Blockchain will store the wealth value of the world. This is a moving direction, but it is still too early, and the evolutionary form is subject to factors such as technology and regulation. Even so, it is a trend, only the length of time is different. This article makes a very bold assumption about the value chain of the blockchain, and believes that there will be $100 trillion in assets stored in the blockchain in the future. is it possible? Everything is possible in the future.

The writer is kyle samani, translated by the "Blue Fox Notes" community "Leo".

On April 19, 2019, the Yale Endowment Fund made a historic investment in two encryption funds. The Yale Endowment Fund has been the vane of other endowment funds, which signaled to many people that it appears to have officially entered the organization.

Here are a few reasons:

1. The encryption world is a large-scale market expansion (for example, how many people think Uber's potential market is comparable to the size of the taxi market before Uber); 2. The encryption world will absorb the currency premium of many non-monetary assets (these assets) Mainly used for hedging of inflation).

In this article, I will outline some of the key market opportunities for cryptocurrencies that are not licensed , such as BTC, ETH, BCH, XMR, ZEC, and all major smart contract platforms. (Note: All references to USD refer to USD for 2018)

Digital gold

The value of all gold in the world is about $7 trillion.

The industrial value of gold (for electronics) does not support a $7 trillion valuation. Rational market participants continue to use this valuation to buy gold because gold is considered a means of fighting inflation . Humans continue to dig up a certain amount of gold every year. The inflation rate of gold is about 1.5%. At the same time, we have no reason to believe that this situation will slow down in the foreseeable future. (Note: In the long run, gold is not scarce. It is said that the gold content of an asteroid in Eros "Eros" exceeds the sum of the gold that has been mined in human history.)

The cryptocurrency of all base layers (not layer 2) is digital gold because they are not affected by the inflation of the currency and can be used as a hedge against inflation in the portfolio. Even cryptographic assets like EOS, which are usually not considered to be digital gold, have an annual inflation rate of only about 1%, which is also lower than gold's inflation rate.

All cryptocurrencies—including BTC, ETH, and other cryptocurrencies—have some common key characteristics:

1. Transparent, auditable, and predictable supply plans . 2. Anti-censorship – you can consume the encrypted funds held by the intermediary. 3. No license required – users use these systems without the permission of any third party. Users only need to download the software and generate a private key to start. No one will find you in trouble. 4. Self-management – the user has an anonymous asset. Users do not have to rely on any trusted third party. By remembering the private key, users can transfer huge amounts of assets across borders. 5. Dividable – can be divided into small parts for the exchange of goods of different values. 6. Portable – meaning it can be carried around. 7. Interchangeable – means that all units are basically interchangeable.

As a value store, gold is almost completely inferior to crypto assets, except for the longer history of gold. Over time, cryptocurrencies will dominate most of the market value of gold, as investors trade precious metals for cryptocurrency for hedging inflation.

Expanding the digital gold market

Most people who have the opportunity to read this article are fortunate to live in a well-governed country with relatively stable legal currency. Many of them do not feel that there is a strong demand for hedging against inflation in the French currency.

However, most people in the world are not so lucky. Although there is no data to confirm this, perhaps about 75-80% of the world's population is reluctant to use local currency to store their net worth. Consider a simple thought experiment:

If you have to store 100% of all asset values ​​in a single currency, which currency do you consider? What legal currency will not be considered? There is not much that can go into your consideration. In some countries, French currency inflation is very strong, such as Argentina and Venezuela.

Securitized gold in regulated exchanges is inaccessible to most people. Even if these countries have local treasury, ordinary people will doubt that if there is a turmoil, the integrity of the vault gold may be destroyed by insiders or people.

The cryptocurrency is completely unlicensed. In order to store encrypted assets, a person only needs a smart phone (now $30 can be fixed) and network connection (intermittent, huge slow unreliable network connection). With both, anyone on the planet can use an intermediary-free wealth storage mechanism. This is an unprecedented event.

This means that most people in the world can get an intermediary-free way of storing wealth, and more and more of them will choose to do so, starting from 7 trillion US dollars to significantly expand the scale of the entire digital gold market.

The scale of this market expansion effect is hard to exaggerate. For the first time in modern human history, people have the option of storing their wealth in unintermediated currencies . If there is a problem with national governance, it will lead to people's lack of confidence in the legal currency.

At least $93 trillion in value is stored in French currency today. With regard to predicting the market expansion of future digital gold, it is impossible to have any reasonable and accurate predictions because people choose to use currency to trade encrypted assets. From a conservative perspective, the size of the entire digital gold is $30 trillion, perhaps 10 times more than gold, and $70 trillion.

The contrast is that 85% of the world's population does not currently have access to unintermediated currencies, and they as a whole do not control so much wealth, so it is unlikely to expand the market 10 times. However, this does not recognize that all liquid assets are priced above the margin. Investing a dollar can make the nominal market value of an asset more than one dollar.

Hidden wealth

The world's elites deposit $20-30 trillion of their wealth into offshore bank accounts. These assets have a clear intention to escape the government's sight, so that they are not easily detained or taxed. The cryptocurrency is an unregistered asset. Without the threat of physical violence, others cannot seize the encrypted assets.

As investors understand the power of crypto assets, especially some privacy tokens such as Monroe, Zcash, Grin, Mobilecoin, etc., this may allow these wealthy elites to convert a significant portion of their assets into de-mediated cryptocurrencies. .

It is unclear how much of this wealth will flow in, especially considering the volatility of cryptocurrencies . For a long time, substantial asset inflows are expected.

Let the currency premium of productive assets deflate

Since President Nixon decoupled the dollar from gold, investors are increasingly storing their wealth in various non-monetary assets to avoid inflation.

It is real estate, debt and stocks that attract these assets. Since the central bank printed a large amount of money for more than a decade since the financial crisis in the past, they mainly bought debt. This artificially led to an increase in the price of debt and reduced the rate of return, which prompted investors to allocate more capital to other asset classes, mainly real estate and stocks. As a result, a large amount of wealth in the world is stored in debt, stocks and real estate, especially as a model for avoiding legal currency inflation.

The global real estate market is worth $225 trillion, of which $30 trillion is in the United States. The global stock market is worth $72 trillion, of which $30 trillion is in the United States. The global debt market is $215 trillion, of which 40 trillion is in the United States. These asset classes add up to a total of about $513 trillion.

It seems that about 1-5%, or 5-25 trillion US dollars, these values ​​are not actual production value, but the wealth storage mechanism. Although it is impossible to measure this, the P&E ratio of the S&P500 and the vacancy rate of large city apartments such as London in New York can be seen.

Cryptographic currency is a better asset storage mechanism than real estate, debt, stocks, oil futures, art collections and other assets. The currency premiums of the aforementioned assets have already been formed. In addition, cryptocurrency is an unnamed asset that cannot be seized, has no property tax, is not as taxed as oil futures (income tax treatment), and is interchangeable and liquid (unlike real estate).

Although many people have realized that many assets can be stored as a hedge against the value of legal currency inflation, we will review and believe that the non-monetary assets that receive the currency premium are crazy for a long enough time , they are calculated in trillions of dollars. .

Since we have objectively better unmediated currencies, capital will slowly flow from non-monetary assets to monetary assets, of which cryptocurrency is by far the best choice.

Tokenized world assets

Real estate, debt, stocks and electronic legal currency constitute the vast majority of the world's wealth, and these assets are not unregistered assets. Record keeping and asset transfer in each asset class are separate. The systems that manage these assets are complex, opaque, slow, and expensive.

If we can reconstruct all asset ownership systems today and there is no historical burden, what do we do? Technically, the answer is very clear (if you don't fully understand the next paragraph, it doesn't matter):

The asset owner (or custodian) generates a private key, transfers the asset by signing it, and then broadcasts the information to the public, thereby allowing the world to confirm that the asset is not double-flowered. Each private key is bound to a public key. (Note: It is a public-private key pair.) Among them, when KYC/AML is required, the public key can be mapped to some out-of-chain recognition systems. (eg tax number)

In other words, it is the blockchain .

The world’s total assets – more than $700 trillion – will be tokenized on the blockchain, including the currency itself. Some chains will require licensing, while other blockchains allow the central bank to issue currency. However, all wealth will be tokenized.

It is also possible for world assets to be tokenized on a non-permitted public chain. If this happens, then the chain will bear the value of hundreds of millions of dollars in assets.

In all blockchains—PoW and PoS-based systems—security depends primarily on the total network value of the base layer tokens , followed by inflation.

In other words, the more valuable a blockchain is, the safer it is. This is the source of self-circulation and powerful network effects.

As explained in this article, blockchains that protect assets around the world must be valuable. We don't know if the $1 trillion base layer value can protect the value of 10 trillion or 100 trillion dollars above it, but my instinct is that the appropriate ratio is between 1:10 and 1:100 (about attack The security boundary of the public chain is a very technical concept, beyond the scope of this article.) (Blue Fox Note: Why this ratio is appropriate, the author did not give a clear explanation, logically, should still be from the perspective of profit and loss ratio Conclusion.)

What is the appropriate reason for this range of ratios? At the current level of the encryption market, such a ratio is dangerous. However, as more and more of the world's wealth is stored in the blockchain, the law of large numbers becomes real, making it more difficult to attack systems on an absolute basis. Then the question comes, what ratio will become unsafe?

Even if $500 trillion is stored on the public chain, the ratio is 1:1000, which means the base chain is worth only $500 billion and may be attacked by a few percentage points. My gut feeling is that this is an overly radical assumption, but the value of the $5-50 trillion magnitude is enough to secure any attacker. (Blue Fox Note: Whether the future will be concentrated in one chain is not known.)

It is unclear whether investors will or will choose to deposit assets in local, unintermediated currencies to protect the security of their remaining assets. However, when it is combined with the arguments presented in the next section, this becomes more attractive.

Honest, transparent, market-driven, global, risk-free interest rate

If you don't use CPI to define inflation, but instead use the amount of government-issued currency, then most government treasury bills around the world will provide negative real interest rates.

Crazy.

In a PoW system like Bitcoin, with a fixed supply, the mobile market for Lightning Networks sets the system's risk-free rate. In PoS systems such as Ethereum 2.0 and EOS, the system's risk-free interest rate will be the benefit of pledge assets.

If investors choose to lock capital in the PoS system to earn risk-free interest rates, even in the case of permanent inflation, it can guarantee to beat inflation. Considering the hard top of Bitcoin, investors who provide liquidity to the Lightning Network will beat inflation. (Note: That is to say, the node operator of Lightning Network has higher capital gain than inflation.)

In the long run, this will change the asset-allocator's view of risk-free interest rates, yields, and risk premiums for all assets. This will eventually accelerate and expand capital outflows from other assets and into the encryption market.

Contrary to this idea, especially for long-term unconstrained PoS systems (such as Ethereum Casper), crypto assets will be at least somewhat unstable relative to the US dollar, and their return relative to the US dollar. In fact, it is not without risk. In practice, investors don't have to worry about this because they can hedge against this risk by selling futures when they choose unconstrained.

New possibilities

From a macroeconomic perspective, the only way for mankind to create new wealth on a global scale is to give growth to the value of the production process, which requires specialization and ultimately by trade .

(Violence and inflation do not bring new value. Instead, they simply change the ownership of existing wealth, and in many cases it actually destroys wealth.)

Before the company was invented, the company could not substantially exceed the scale of the family workshop. In the fifteenth century, the company's invention changed all of this, allowing investors to collectively take risks and share returns. This invention is a new way of coordinating human economic activity – one of the biggest outbursts of wealth creation in human history.

In the past 100-150 years, this situation has accelerated dramatically as the financial system established the means to extend the concept of equity from the private market to the public circulation market.

Since the invention of the stock company system, smart contract platforms such as Ethereum, EOS, Dfinity, Algorand, Kadena, Tari, Solana have promoted unprecedented new economic activities for the first time. This will eventually lead to not only more trade, but also more efficient trade, by opening up new design spaces that we can't even imagine today, which will accelerate the pace of wealth creation.

As the global economy becomes more international and local at the same time (at the expense of cross-border trade), there will be plenty of opportunities to connect supply and demand in an unparalleled way, for example through blockchain smart contracts. Moreover, as Chris Dixon said, the modern giant has hampered innovation.

The overall impact of frictionless and programmable value flows is unpredictable at this stage. But if the overall assumption is correct, smart contracts will unlock new trades and ensure that existing companies don't stifle innovation, so there are trillions of dollars worth of value.

This is also known as the Web3 vision or value of the Internet .

appendix

To understand the magnitude of this opportunity, we can add them all:

Digital Gold: 30-70 trillion US dollars

Reduce the currency premium of real estate, stocks and debt markets: $5-25 trillion

Replace offshore bank accounts: $1-10 trillion

Ensuring global asset security: $1-10 trillion

Blockchain releases new economic activity potential: $1-10 trillion

Together, there can be at least $50 trillion and a chance to hit $100 trillion .

It needs to be stated that all of the above content is compatible with the dominant position of other legal currencies such as the US dollar and the euro. It does not need to challenge the legality of the US dollar and other legal currency to achieve a market value of US$100 trillion. Conversely, cryptocurrencies will challenge the legitimacy of some weak currencies, such as Venezuela's Bolivar and Argentine pesos, and it will also reduce the currency premiums of property, debt and stock markets.

The only question left is: How can I get there?

Risk Warning: All articles in Blue Fox Notes do not constitute investment recommendations. Investment is risky. Investment should consider individual risk tolerance. It is recommended to conduct in-depth inspections of the project and carefully make your own investment decisions.