The Next Big Opportunities in Crypto: RWAs and Payments

As the cryptocurrency market continues to evolve, two massive opportunities are emerging on the horizon: real-world assets (RWAs) and payments. Qiao Wang, co-founder of Alliance DAO, a prominent Web3 accelerator, highlights these areas as the most promising for the next cycle in crypto.

The fundamental observation driving this trend is the substantial wealth stored on-chain, even during bear markets. With approximately $1.5 trillion in crypto assets, users are seeking ways to diversify their holdings and put their wealth to work. This is where RWAs come into play.

RWAs, in the broadest sense, include stocks, bonds, precious metals, commodities, and real estate. These assets have historically shown low correlation with each other and with cryptocurrencies, making them attractive for portfolio diversification. Crypto natives are increasingly looking to spread their wealth across these traditional asset classes, creating a significant opportunity for tokenization and on-chain representation of real-world assets.

The Rise of Stablecoins and T-Bills

Among RWAs, stablecoins have already gained significant traction in the crypto space. They solve a compelling problem that many might not immediately recognize: cross-exchange arbitrage. Stablecoins like USDT (Tether) have revolutionized the way traders move value between exchanges, offering near-instant and almost free settlement compared to traditional fiat rails.

T-bills (Treasury bills) are likely to be the next major RWA to gain prominence in the crypto world. As highly liquid and low-risk assets, they present an attractive option for those looking to diversify their crypto holdings with traditional financial instruments.

The Liquidity Challenge in RWA Tokenization

While the concept of tokenizing real-world assets is appealing, liquidity remains a significant challenge, particularly for assets like real estate. Individual properties lack fungibility, making it difficult to create a liquid market for tokenized real estate assets.

Qiao Wang suggests that rather than tokenizing individual properties, a more compelling approach might be to tokenize baskets of properties. This concept is similar to Real Estate Investment Trusts (REITs) in traditional finance, which offer greater liquidity and diversification.

The Power of Crypto in Expanding Access

One of the most compelling reasons to tokenize real-world assets is the increased access it provides to global investors. Crypto's nature as a global, distributed ledger allows people worldwide to invest in assets they previously couldn't access, such as real estate in specific regions or countries.

For example, someone from outside Arkansas could potentially invest in a tokenized REIT covering Northwest Arkansas real estate, an opportunity that might not exist in traditional markets due to the niche nature of the investment.

Crypto's Role in Reducing Costs and Increasing Efficiency

Beyond expanding access, crypto has the potential to reduce costs in certain financial markets. Qiao Wang gives an example of short-term commercial debt in Southeast Asia, where small and medium-sized enterprises (SMEs) often struggle to secure loans from traditional banks due to high default risks.

By tokenizing these short-term loans and making them available to crypto investors, SMEs can potentially access capital at lower interest rates. This is partly due to what Wang calls "adverse selection," where crypto investors, who may have less information than banks, are willing to take on risks that traditional lenders avoid.

The "Degenerate Energy" of Crypto Investors

An interesting phenomenon in the crypto world is what Wang refers to as "degenerate energy." This term describes the willingness of crypto investors to take on risks that traditional financial institutions might shy away from. This risk appetite can be beneficial for capital formation and providing liquidity to markets that might otherwise be underserved.

However, this "degenerate energy" can also lead to significant losses, as seen in the case of the FTX collapse in 2022. The crypto lending market saw interest rates around 8% for supposedly low-risk entities like FTX, which ultimately proved to be a catastrophic misjudgment of risk.

The Future of Crypto Payments

While RWAs present a significant opportunity, payments are another area where crypto could make substantial inroads. However, Wang argues that the idea of a "crypto Venmo" for domestic transactions in countries with efficient payment systems like the US doesn't make much sense.

Instead, the real opportunity lies in cross-border payments, particularly for remittances to developing countries. This use case has been discussed since the early days of Bitcoin but hasn't fully materialized yet.

Why Cross-Border Crypto Payments Haven't Taken Off (Yet)

Two main factors have held back the adoption of crypto for cross-border payments:

1. The lack of widely adopted stablecoins until recently
2. The absence of robust fiat on/off-ramps in many emerging economies

With stablecoins now having reached critical mass and fiat on/off-ramps becoming more prevalent worldwide, the stage is set for crypto to revolutionize cross-border payments.

Stablecoins: The Key to Efficient Cross-Border Transfers

Stablecoins offer significant advantages over volatile cryptocurrencies like Bitcoin for cross-border transfers. When using Bitcoin, a remittance involves two currency conversions (e.g., USD to BTC, then BTC to the local currency), each incurring spreads and fees. With stablecoins, only one conversion is necessary (e.g., USDC to local currency), reducing costs and increasing efficiency.

The Global Adoption of Crypto

Recent data from Chainalysis reveals that crypto adoption is highest in emerging markets. The top five countries for crypto adoption, adjusted for purchasing power, are:

1. India
2. Nigeria
3. Vietnam
4. Ukraine
5. United States

This data underscores the potential for crypto to address real-world financial challenges in developing economies.

Abstracting Away the Complexity of Crypto

For crypto payments to gain widespread adoption, the underlying technology needs to be abstracted away from the end-user. Wang envisions remittance applications that look and feel like traditional finance apps but use crypto rails under the hood. Users would initiate transactions from their bank accounts and receive funds in their local currency, unaware of the crypto transactions facilitating the transfer.

The Rise of Decentralized Physical Infrastructure Networks (DePIN)

Decentralized Physical Infrastructure Networks (DePIN) represent an exciting development in the crypto space. These networks leverage blockchain technology to coordinate and incentivize the creation and maintenance of physical infrastructure.

Wang argues that speculation is a key driver of DePIN's success. The ability to speculate on tokens associated with these networks bootstraps their growth and adoption. This challenges the notion that crypto needs to move from a speculative phase to a utility phase, as speculation itself can be a form of utility.

Speculation as Utility in Crypto

Contrary to the common narrative that crypto needs to move beyond speculation to find true utility, Wang posits that speculation is itself a form of utility. For many crypto users, the ability to speculate on assets provides both the potential for financial gain and a dopamine hit, which can be considered valuable experiences.

This perspective highlights a disconnect between venture capitalists, who often shy away from speculative use cases, and crypto users, who overwhelmingly engage in speculative activities on-chain.

Where Are Developers Building?

Understanding where developers are focusing their efforts is crucial for predicting the future of the crypto ecosystem. Currently, the top four chains (excluding Ethereum) attracting developer attention are:

1. Optimism
2. Arbitrum
3. Polygon
4. Solana

Notably, Solana has consistently remained in the top four, even in the aftermath of the FTX crash. This resilience in developer interest was one of the reasons Wang remained bullish on Solana during its lowest points.

The Solana Comeback

Despite the setbacks following the FTX collapse, Solana has shown remarkable resilience. Many builders initially pivoted away from Solana to Ethereum Layer 2 solutions in the months following the crash. However, Solana quickly regained its position as a top destination for developers.

Wang attributes this comeback to two key factors:

1. The strong and passionate developer community
2. The consistently low fees on the network

These attributes made it "obvious" to Wang that Solana would bounce back, a prediction that has been borne out by recent price action and adoption trends.

The Ethereum Ecosystem and Layer 2 Solutions

While Solana has been gaining ground, the Ethereum ecosystem remains dominant, particularly with the rise of Layer 2 (L2) solutions. The success of projects like Arbitrum and Optimism demonstrates the strong network effects within the Ethereum ecosystem.

However, the proliferation of L2 solutions presents a challenge for developers and users alike. The multitude of options (Arbitrum, Optimism, Polygon, Starknet, zkSync, etc.) can be overwhelming and confusing for newcomers to the space.

Solana's Simplicity vs Ethereum's Network Effect

This complexity in the Ethereum ecosystem presents an opportunity for Solana. From a developer's perspective, Solana offers a simpler proposition: a single, fast, and cheap chain to build on. This simplicity could be attractive to new developers entering the space who might be overwhelmed by the choices in the Ethereum ecosystem.

On the other hand, Ethereum's massive network effect, with its large user base, substantial TVL (Total Value Locked), and extensive developer community, remains a significant draw. This creates a tension between the simplicity of Solana and the network effects of Ethereum.

The JavaScript Analogy

Wang draws an interesting parallel between Ethereum and JavaScript. Despite its flaws, JavaScript became the dominant language for web development due to its first-mover advantage and the extensive ecosystem built around it. Ethereum, as the first smart contract platform, has similarly built a vast ecosystem that gives it a strong network effect.

However, this analogy isn't perfect. The competition for block space on Ethereum can make it expensive for new applications, potentially pushing developers to seek alternatives like Solana.

The Consumer Adoption Angle

An intriguing perspective on the Solana vs Ethereum debate draws parallels with the smartphone revolution. Just as Apple's iPhone started with consumer adoption before gaining enterprise acceptance, Solana could potentially follow a similar path. If Solana can win over consumers with its speed and low fees, it might eventually challenge Ethereum's dominance, even in more institutional use cases.

The Role of Price in Crypto Ecosystems

Wang emphasizes that price often leads other metrics in the crypto world. Price movements can influence developer activity, VC sentiment, and user adoption. This is evident in the correlation between the price action of Ethereum and its associated L2 tokens, which tend to move in tandem.

Interestingly, Solana's price movements have recently shown less correlation with Ethereum, potentially indicating a decoupling of the two ecosystems in investors' minds.

The Emergence of Super Apps in Crypto

The concept of "super apps" in crypto, particularly around wallets, has been a topic of discussion for years. Wang previously argued that wallets, as the primary interface for users, hold significant power in the ecosystem. This was exemplified by MetaMask's success with its in-wallet swap function, which generated substantial revenue despite charging higher fees than dedicated DEXs.

However, recent developments have caused Wang to reconsider this thesis. The success of projects built on messaging platforms like Telegram and WhatsApp in Latin America suggests that these widely-adopted communication apps could become the dominant interface for crypto interactions.

Coinbase: A Giant in the Making

Coinbase emerges as a particularly interesting player in the crypto space. Wang sees Coinbase as one of the best broad exposure bets in crypto, alongside Ethereum. Several factors contribute to this view:

1. Diversified business model: Coinbase's trading and stablecoin businesses act as natural hedges against each other in different market conditions.
2. Launch of Base: Coinbase's Layer 2 solution has quickly gained traction, accumulating significant TVL.
3. Identity initiative: Coinbase's recent launch of an on-chain identity solution leverages its vast user base and KYC data, potentially enabling a wide range of new applications.

The Power of On-Chain Identity

The concept of on-chain identity is crucial for the future of crypto applications. Wang argues that the path to successful on-chain identity is not through dedicated identity startups, but rather through widely-used applications that incorporate identity as a side benefit.

Coinbase's approach, leveraging its extensive KYC data from millions of users and connecting it to its Base L2 network, could be a game-changer. This creates a powerful foundation for building compliant DeFi protocols and other applications that require KYC.

The Unique Opportunities in Emerging Markets

The podcast highlights the significant opportunities for crypto adoption in emerging markets. With four of the top five countries for crypto adoption being developing nations, there's a clear demand for the financial solutions that crypto can provide.

Wang emphasizes that founders from these regions often have a unique advantage in understanding local needs and building solutions that resonate with users in emerging economies. This challenges the notion that founders from elite backgrounds always have an edge in the startup world.

The Resilience of Non-Elite Founders in Crypto

Interestingly, Wang observes that founders from non-elite backgrounds often show more resilience in the face of crypto's cyclical nature. Unlike founders from elite tech backgrounds who might be accustomed to consistent growth metrics, those from less privileged backgrounds are often more willing to persevere through bear markets and periods of stagnation.

This resilience, combined with a deep understanding of local markets and user needs, makes founders from emerging economies particularly well-suited to building successful crypto projects that address real-world problems.

The Future of Crypto: A Global Perspective

As the crypto industry matures, it's becoming increasingly clear that its future lies not just in developed markets but in solving real-world problems for users around the globe. The success of projects in remittances, payments, and financial inclusion in emerging markets underscores the transformative potential of blockchain technology.

While speculation remains a significant driver of activity in the crypto space, the industry is gradually moving towards creating tangible value through improved financial infrastructure, increased access to investment opportunities, and more efficient cross-border transactions.

Solana's Position in the Evolving Landscape

In this evolving landscape, Solana stands out as a blockchain that combines the simplicity developers crave with the performance users demand. Its ability to handle high transaction volumes at low costs positions it well to serve both speculative use cases and real-world applications, particularly in emerging markets where transaction fees can be a significant barrier to adoption.

As the industry moves forward, Solana's focus on performance and user experience could play a crucial role in bringing crypto to the masses, potentially challenging Ethereum's dominance in certain areas while carving out its own niche in others.

The coming years will likely see continued competition and innovation across the crypto ecosystem, with platforms like Solana and Ethereum pushing each other to improve and adapt. For users and developers alike, this competition promises to deliver more efficient, accessible, and powerful blockchain solutions that can address a wide range of global financial challenges.

Facts + Figures

• There is currently $1.5 trillion of wealth stored on-chain, even in the bear market.
• Stablecoins solved the problem of cross-exchange arbitrage, enabling nearly free and instant settlement.
• Four of the top five countries for crypto adoption, adjusted for purchasing power, are emerging markets: India, Nigeria, Vietnam, Ukraine, with the US in fifth place.
• Coinbase has KYC data for approximately 100 million users, which they are now linking to their Base layer 2 solution.
• The top four chains attracting developer attention (excluding Ethereum) are Optimism, Arbitrum, Polygon, and Solana.
• Solana has consistently remained in the top four chains for developer interest, even after the FTX crash.
• Coinbase's in-app swap function generated around $200 million in revenue in 2021.
• The previous interest rate among OTC desks in crypto was around 8% before the FTX collapse.
• Solana's price movements have recently shown less correlation with Ethereum, potentially indicating a decoupling of the two ecosystems.
• Coinbase's Base layer 2 solution accumulated around $100 million in Total Value Locked (TVL) shortly after launch.
• The idea of "crypto Venmo" for domestic transactions in countries with efficient payment systems like the US is considered nonsensical by Wang.
• Wang estimates that 70-80% of trading on Solana goes through Jupiter's aggregator.
• Four of the top five countries for crypto adoption are emerging markets, according to the Chainalysis report.

Questions Answered

What are the two massive opportunities in crypto for the next cycle?

The two massive opportunities in crypto for the next cycle are real-world assets (RWAs) and payments. RWAs include a broad range of assets like stocks, bonds, precious metals, commodities, and real estate, which offer diversification for crypto holders. Payments, particularly cross-border transactions and remittances, present a significant opportunity for crypto to solve real-world problems in emerging markets.

Why haven't cross-border crypto payments taken off yet?

Cross-border crypto payments haven't fully taken off yet due to two main factors. First, stablecoins didn't have enough critical mass until recently, making it difficult for people to hold and transfer stable value. Second, there was a lack of robust fiat on/off ramps in many emerging economies. Now that these issues are being addressed, the potential for cross-border crypto payments is increasing significantly.

How does Solana compare to Ethereum for new developers?

For new developers, Solana offers a simpler proposition compared to Ethereum. Solana is a single chain that is cheaper and faster, making it easier for developers to understand and build on. In contrast, Ethereum has a more complex ecosystem with multiple layer 2 solutions, which can be confusing for newcomers. However, Ethereum still has the advantage of a larger user base, more TVL, and a bigger developer community, which are attractive factors for many developers.

What is the "degenerate energy" in crypto and how does it impact the ecosystem?

"Degenerate energy" refers to the willingness of crypto investors to take on risks that traditional financial institutions might avoid. This risk appetite can be beneficial for capital formation and providing liquidity to underserved markets. However, it can also lead to significant losses, as seen in the case of the FTX collapse. This phenomenon impacts the ecosystem by enabling new financial products and services, but also introduces potential instability and risk.

How is Coinbase positioning itself in the crypto ecosystem?

Coinbase is positioning itself as a major player in the crypto ecosystem through several strategic moves. They've launched Base, their own Layer 2 solution, which has quickly gained significant TVL. They're also leveraging their extensive user base and KYC data to create an on-chain identity solution, potentially enabling a wide range of new applications. Additionally, their diversified business model, including trading and stablecoin services, helps them weather different market conditions.

Why are founders from non-elite backgrounds often more resilient in crypto?

Founders from non-elite backgrounds often show more resilience in crypto due to several factors. They are typically more accustomed to dealing with economic uncertainties and are willing to persevere through bear markets and periods of stagnation. Additionally, they often have a deeper understanding of local markets and user needs in emerging economies, where much of crypto's growth is happening. This combination of resilience and market understanding makes them well-suited to building successful crypto projects that address real-world problems.

What role does speculation play in the crypto ecosystem?

Speculation plays a crucial role in the crypto ecosystem, contrary to the common narrative that crypto needs to move beyond speculation to find true utility. Wang argues that speculation itself is a form of utility, providing both the potential for financial gain and a dopamine hit for users. It also serves as a bootstrap mechanism for new projects, particularly in areas like Decentralized Physical Infrastructure Networks (DePIN). The speculative nature of crypto helps to drive adoption, liquidity, and innovation in the space.

How is the concept of on-chain identity evolving in the crypto space?

On-chain identity is evolving not through dedicated identity startups, but through widely-used applications that incorporate identity as a side benefit. Coinbase's approach of leveraging its extensive KYC data from millions of users and connecting it to its Base L2 network is a prime example. This creates a powerful foundation for building compliant DeFi protocols and other applications that require KYC. The future of on-chain identity is likely to be built on top of platforms and applications that users already widely adopt and trust.

What advantages does Solana have in the current crypto landscape?

Solana has several advantages in the current crypto landscape. Its simplicity and single-chain architecture make it attractive to developers, especially those new to the space. Solana's ability to handle high transaction volumes at low costs positions it well for both speculative use cases and real-world applications, particularly in emerging markets where transaction fees can be a significant barrier to adoption. Additionally, Solana has shown resilience in maintaining developer interest even through market downturns, indicating a strong and committed ecosystem.

How might the competition between Solana and Ethereum play out in the future?

The competition between Solana and Ethereum is likely to drive innovation and improvement in both ecosystems. Ethereum's strong network effects and established position give it an advantage, but Solana's simplicity and performance could attract more developers and users over time. The outcome may depend on factors such as the success of Ethereum's scaling solutions, Solana's ability to maintain its performance advantages, and the specific needs of different types of applications and users. It's possible that both platforms will find success in different niches, with Ethereum dominating in certain areas while Solana excels in others, particularly in use cases that require high throughput and low fees.