Emergence of The Crypto Economy

Opinion 10.12.2020

Emergence of The Crypto Economy

Author, Alex Mann

This is part 1 of a 2 part series offering the Concentric perspective on the state of the ill-understood, much maligned but potential laden Crypto ecosystem


  • The Crypto Economy is native to the internet. Like the internet, it is global, accessible to all, decentralised and unstoppable. Bitcoin, not the US Dollar, is the reserve currency of The Crypto Economy
  • Crypto itself can be thought of as programmable money. It allows for the rapid iteration of incentive structures and therefore new forms of organisation, like DAOs (decentralised autonomous organisations) as well as entirely new business models
  • Having gone unnoticed by the mainstream, a parallel financial system has been built by the crypto community over the last 10 years. It works, is in many ways superior to the traditional financial rails and is seeing increasing adoption
  • Use cases are no longer limited to speculation and trading. Crypto can be earnt, spent with merchants, used for cross border payments, prediction markets and as a store of value amongst many others
  • DeFi or Open Finance, if allowed to reach it’s full potential by regulators, promises compounding financial innovation, akin to what we’ve seen in the open software space over the last 20 years
  • These financial models and products may end up augmenting traditional business models and businesses
  • Technological risks remain widespread, but soluble


Our journey through the Wild West of The Crypto Economy started 2 years ago when we invested in CoinDirect (now WireDirect). CoinDirect aspired to be the Coinbase for Africa. The investment thesis wrote itself. A seasoned team building infrastructure that allowed downtrodden African citizens emancipation from their corrupt and unstable political and economic governance structures. A whole continent was about to be given access to crypto, which promised to bank the unbanked and legally circumvent capital controls in some of the most despised regimes on the planet. Through partnerships with Opera (the most used web browser in Africa) amongst others, our exchange would be front and centre in leading a financial services revolution and turbocharging growth in a Continent still lagging behind.

However the practical realities, as they are so often do, got in the way. The economics just didn’t quite stack up. Disposable incomes were still far too low across the continent and so the transaction fees relative to the support costs were unworkable.

We were right, just a little early. Timing is everything in venture!

And so CoinDirect became WireDirect. Identifying an opportunity in facilitating the flow of value between international currency corridors, we realised large institutions looking to move capital across borders often have no easy solutions. Using the traditional financial rails, especially from emerging markets is expensive, time-consuming and compliance intensive. Through Bitcoin, but more commonly in fact through Stablecoins, Crypto offers the perfect panacea. Stablecoins are currencies pegged to another asset, usually the USD, and have the advantage of being far less volatile than Bitcoin.

The traditional banking system requires banks in multiple geographies to have relationships with one another, such that they will be able to agree on settlement. This is a complex integration (of SQL databases no less) and so when moving money from one emerging market to another, an unbroken chain of banks is needed to move value from A to B. Crypto renders this intermediate process redundant. Instant settlement without third-party dependencies is also on offer as no infrastructure is required to possess the value of the crypto (like cash you don’t need a bank account). Further, no compliance processes are circumvented. For the crypto to be moved into fiat currency (USD, EUR, GBP… etc), the exchange carrying out the transaction is obligated to perform AML/KYC checks as normal.

Traditionally minded folk may think that not having a bank account in the 21st century is an absurdity. Africa shows that’s just not the case. Mobile money accounts (issued by Telco operators) are outside the traditional banking system but allow for much of the same functionality. They are now more popular than bank accounts, owing to their flexibility and the ease with which they can be set up. Crypto accounts are similar, all you need is a smartphone.

Cross border payments then have become a clear use case for crypto and at Concentric we have been at the forefront of the revolution.


DeFi also known as open finance is the hottest topic in crypto. It describes a new financial system, built from the bottom up and with the principles of accessibility to all, automation, privacy and minimal fees in mind. Core to it are smart contract platforms, like Ethereum or Cardano, which allow DeFi applications to layer on top of one another like a lego set thereby creating combinations of financial products hitherto unknown. The hope is that innovation in the financial sphere will soon explode as teams experiment in a sandbox like environment with financial products, the same way they have been able to in traditional software. Owing to the dearth of middlemen in DeFi and the rampant automation through smart contracts, costs should be lower whilst throughput and speed significantly higher.

Why should accessibility to the financial system be a prominent concern? Well, countries with the highest economic freedom tend to be associated with a host of positive secondary effects. They are more likely to treat the environment better, launch fewer wars, achieve better income equality, have higher self-reported happiness of their citizens and achieve lower infant mortality rates and so on.

The key concept in DeFi is Composability. It illustrates how crypto assets and protocols can be freely remixed and interconnected in almost any way imaginable, permission-free. Every public blockchain, asset and smart contract is in effect an API that can be combined with any other, creating combinatorial possibilities for new products. Add to this programmable trust, scarcity and value as new building blocks and you have a movement perhaps more powerful than open source software.

Ethereum is the critical player in the DeFi movement and has the largest developer community building on top of ERC-20, the native Ethereum token. The ERC-20 token standard defines a set of rules that apply to all ERC-20 tokens allowing them to interact seamlessly with one another. This is where the characteristic of composability comes from.

Right now these protocols and tokens are being combined to create products like Maker Dao, Compound and Uniswap — more on which below. But the possibilities for new business models, not just technologies are just as exciting. It’s worth thinking about how innovation in business models is often just as impactful as those in technology. SaaS being one example.

For a business model innovation, think of a social network that awarded tokens to the early adopters. These tokens would hopefully appreciate in value over time as the network became more popular, allowing value to accrue to the community instead of just the founders or investors. Further, the social network could allow users to create their own tokens and monetise their following through a similar mechanism.

The overlap with embedded finance thus becomes clear. Embedded finance simply means plugging financial products into existing business models often in order to increase monetisation of a customer. DeFi projects will turbocharge embedded finance as token APIs allow, for example, a decentralised file sharing service to be introduced to a software tool with one line of code.

A critical innovation allowing the development of DeFi was the advent of Stablecoins. Bitcoin optimises for a specific use case. Namely, security at the expense of usability. It is not a payments rail for everyday purchases, it’s a store of value owing to it’s deflationary money creation profile and perhaps a payments rail for high-value transactions, but at the moment little else. It’s volatility, which is more down to the thin order book rather than anything else, meant that many DeFi applications needed a new type of token to make them a reality. Enter Stablecoins, built of course on ERC-20.

Stablecoins are engineered to remove volatility through pegging their value to approximately 1 unit of fiat currency or a basket of such currency. Equally can be pegged to any other commodity. The two most successful types to date are centralised fiat collateralised and decentralised crypto collateralised.

Centralised fiat collateralised Stablecoins

These are backed 1:1 by fiat in a bank account, in most cases at least. USDC issued by Circle is audited by Grant Thornton but a lack of trust persists over USDT (issued by Tether), despite it being by far and away the most popular Stablecoin by daily trading volume. The centralised nature of these projects gives users some recourse to a higher authority, but access is not democratised as the currencies are subject to federal regulations that often prohibit use by location or activity.

Decentralised crypto collateralised Stablecoins

These coins are truly open to all, thanks to the lack of a centralised authority or even a user agreement. As a consequence, more elaborate machinations are required to maintain the fiat peg as the crypto coin is collateralised by another crypto (or basket of). This crypto collateral (often Ethereum) is often high volatile.

By way of example, Maker Dao is the most popular DeFi project on Ethereum and is a decentralised crypto collateralised Stablecoin

They issue 2 tokens, DAI; the Stablecoin and MKR; the Governance Token

DAI looks to maintain a soft peg to the USD and is created when users deposit Ethereum, which is the collateral in this case.

As the price of Etherum varies and varies significantly due to volatility, the borrower must over collateralise. The user is permitted to withdraw up to 2/3 of the value of Ethereum that was locked up. DAI charge a stability fee of 0.5% (which is clearly much better than a bank lending fee), but this fee can vary. If the fee increases it encourages people to pay down their debt, which they pay in DAI, which then gets destroyed or ‘burned’ by Maker Dao. So restoring balance to the ecosystem.

What happens if there is an oversupply? That is if there is more DAI in the world than demanded? The price of DAI traded on exchanges drops causing the stability fee or interest rate to increase. This encourages users to pay down debt with their DAI, DAI is ‘burned’ in order to contract supply and force the price back up to parity with the dollar. The principal of any loan is repaid in DAI, but the interest accrued is paid in MKR, the governance token. MKR is destroyed as well as an incentive to the MKR community.

DAO stands for decentralised autonomous organisation. It takes advantage of the wisdom of the crowd to make the optimal choice for the governance of the token as decided by those with the MKR token. They decide on the interest rate, loan terms and other issues. The number of MKR tokens only decrease and hence in theory increase in value as they get burned when loan interest is repaid, thus incentivising holders to take decisions in the best interest of the Maker Dao community.

So given all that why would anyone use DAI? Well, for leverage. An individual can lock up $1000 worth of ETH as collateral to borrow c. $660 worth of DAI. This only works of course if you believe the price of ETH will not drop significantly, as otherwise, the Maker algorithm will seize and liquidate your collateral as soon as it dips below 150% of the loan value to ensure no money is lost.

So anyone with access to the internet can purchase Ethereum or a Stablecoin, acquire leverage through Maker Dao or achieve a return through platforms like Compound. Compound is a decentralised liquidity pool that offers interest and it’s own native token in exchange for locking your assets up on the platform. Once you have various forms of these tokens, what else can you do with them?

Yield Farming as the name implies simply means to generate returns on your crypto. For example; Put 100k Dai or USDT into Compound, to receive interest and a token in return called cUSDT. That cUSDT can itself be put into another service called Balancer, a self-balancing index crypto fund that earns through transaction fees. In this case, the user is getting interest on the money they have borrowed from Compound, but also from Balancer.

Liquidity mining is the act of getting a new token as well as the usual interest bearing return in exchange for the farmers liquidity. Crypto protocols as in the example of Maker Dao are now offering governance tokens to users who provide liquidity on the platform. A governance token allows owners to vote on protocol governance, just like shareholders in publicly traded companies. But they are also tradeable and so can be bought or sold.

It’s crucial to note that all these pursuits are achieved without a central authority to co-ordinate the process. Staking, acquiring leverage, achieving a return. All are completed with no oversight and without any participants so much as knowing one another, let alone their ‘creditworthiness’.

Esoteric pursuits for now perhaps, but the depth of the DeFi ecosystem is increasing every day as the following examples will illustrate.

B2B Cross Border Payments

McKinsey estimate the B2B cross border payment market to be around $133 trillion in annual volume. Much of this value is transferred using cheques and instant wire transfer and the costs involved can be substantial, regardless of the size of the transaction. Stablecoins like USDC and USDT, settled on the Ethereum blockchain, allow for settlement in a matter of seconds and for costs that are an order of magnitude lower.

With Visa having recently announced that USDC will be operable within their payment network, merchants are now able to accept payment in USDC should they choose the near instant form of alternative payment.

As noted above, WireDirect too use mostly USDT and Bitcoin to facilitate payment flows from Emerging Markets, bypassing the chain of intermediary banks but fulfilling compliance needs on either end.

It’s a continual surprise to non-specialists to find out just how poorly connected the global financial system is. Even for the tech giants, payments in and out of emerging markets is extremely tough. Think of Google trying to collect advertising fees from SMEs in South Africa or AmazonTurk paying their contractors in South East Asia. Collections are made difficult by Central Bank currency controls and compliance requirements, whilst payments out are often made with in-store credit as opposed to cold hard currency. Interestingly, shadow economies in Amazon store credit can be found across these developing markets so that people can buy food! It’s as if every company had its own private internet and to send an email cross-border you had to pay a tax. The Crypto economy is a fundamentally new financial system that has none of these constraints. It’s fast, cheap and global.

Another way of intuiting the same problem with the current financial stack is to look at the fees charged by the ‘modern’ payments players. They all happen to be around 3%. Merchant payout speeds are also almost identical at 3 days. It’s because these ‘modern’ tech companies are in fact built on the same antiquated systems and so none are able to offer a vastly improved experience, except through the tooling surrounding the core offering.

Decentralised lending

Centralised lending works through the creation of an order book that looks to match lenders and borrowers. Smart contracts replace the order book in this case and can be directly interacted with by the user. The user lends or borrows into the smart contract, which adjusts the interest rate based on supply and demand. As the smart contract is over-collateralised by the borrower, the risk is low and often the returns substantially higher than a traditional bank loan.

This is an important development because in many countries it’s difficult, if not impossible to get a lending license. These crypto protocols are global and given they are DAOs now impossible to shut down, even by the founders.

Decentralised exchanges

Centralised exchanges are in many ways antithetical to the world of cryptocurrency. A core purpose of crypto was to remove middlemen and oversight thereby eliminating cost, time and potential censorship of any given transaction.

Decentralised exchanges look to rectify that imbalance. Uniswap is now the most potent example of a peer-to-peer exchange for digital assets. It is an automated market maker (AMM) that makes markets between pairs of tokens, but in order to do so is thirsty for liquidity. To provide it algorithms allow users to pull liquidity from smart contracts directly and receive price quotes based on supply and demand. The result of doing away with order books and manual traders with the AMM is lower spreads, lower fees and improved audibility. But how does the AMM acquire access to smart contracts staked with crypto? Those who volunteer to lock their crypto up in these smart contracts are rewarded with trading fees proportional to the amount of crypto staked.

So in this case trades do not happen against a centralised party, but against a smart contract on the Eth network, with liquidity pooled from other users. Token holders who want to stake on Uniswap don’t even have to deposit funds, transactions happen directly from their crypto wallet and only Uniswap needs to be trusted as the counterparty. Uniswap itself has no centralised token, it’s code is open source and is available via API for anyone to build on top of or use as a source of liquidity. The creator cannot censor transactions or even shut down the exchange.


DeFi hints at a future of exponentially compounding financial innovation, permissionless and open to all, instant, global and substantially lower cost. It’s a libertarians dream, empowering individuals to wrestle control of their destiny from the heavy hand of the state. A prominent technologist and PayPal alumnus famously mused that whilst AI was inherently communist, centralising the direction of resource allocation under the all-seeing gaze of the algorithm, Crypto was inherently libertarian in its desire to empower the individual to take control of her financial destiny. Regrettably for those among us to whom the latter dream appeals, this may not be the case. Enter Central Bank Digital Currencies.

Central Bank Digital Currencies (CBDCs)

Controlling the price and quantity of money is a vital arm of economy policy and an expression of sovereignty. It’s critical to how governments exert control. A monopoly on currency allows for a monopoly on violence (how else does the state pay for protection?), the foundational principal of any country. Therefore Central Banks are not willing to cede control over the money supply easily.

The ECB, The Swedish Riksbank and The Peoples Bank of China are exploring the creation of their own CBDC, allowing individuals to hold tokenised national currencies directly with the Central Bank of their country. The currency would be directly guaranteed by the Central Bank, exchangeable for physical cash as well as pegged to the national currency. Clearly, they are intended as a rival to Stablecoins whereby famously, in the case of Tether, it is not known if each unit of USDT is actually backed by $1 in reserve.

For Central Banks, CBDCs are a way for them to strengthen the role of sovereign currencies in a cashless world as a ‘risk free’ digital means of payment. It’s an attempt to prevent the move to private currencies, but is no threat to Bitcoin whose core philosophy of decentralisation and individual sovereignty is diametrically opposed to such concepts.

It is a threat to a variety of other financial institutions though, Commercial Banks being one. For why would a citizen leave deposits with them rather than directly with the central bank? The implications are more profound than even that however as CBDCs would allow far more direct control over monetary policy through allowing interaction with the private sector and setting interest rates for households and business precisely and with infinite discrimination, all without operating through Commercial Banks.

In a crisis, loans could be extended directly to targeted businesses or households or cash simply just given away directly. The use of behavioural economics will skyrocket to allow Governments to encourage the behaviours they deem desirable. Crypto, as programmable money allows for direct incentive manipulation after all and Governments won’t let such an opportunity go to waste. They may look to set incentives based on citizen groups, whereby over 60’s whom they want to encourage to spend their money may see a negative interest rate on their CBDC, whilst students may realise the opposite. It will also increase transaction transparency to the Government, every transaction will be monitored and taxes levied immediately. Ironically, widespread adoption of CBDCs may lead to no escape from Uncle Sam.


It’s early days for the ecosystem and substantial risks remain.

Volatility: Order books are still thin, even in the most widely traded assets like Bitcoin and so volatility is high. This volatility is a significant barrier to widespread DeFi adoption, as a price crash can cause the collateral staked in a borrowing protocol to be irreversibly seized and liquidated.

Scalability: Whilst most blockchains allow for enough transactions per second for applications like lending, where high transaction throughput is not required, for other use cases like gaming or micropayments throughput is not sufficient. The next generation of blockchains seek to solve the throughput problem, without compromising on decentralisation.

Decentralisation: Many crypto projects purport to be valuable because of the decentralised nature of their protocol. But why should we care ? Decentralisation is a means to an end, not an end in itself. The purpose in the case of Bitcoin was to make it immune to censorship, corruption or cyber attack but beyond the point at which this is achieved, yields diminishing returns. However, at the outset, if a protocol has not achieved enough decentralisation to not be censored, the efforts amount to little. The returns to decentralisation in other words, follow an S-Curve.

UX: Usability of the ecosystem is also still quite poor. Many applications are not user friendly, they appear to be have been built for machines rather than humans. Transferring Crypto from one address to another requires entering a random string of digits for example.

Bugs: Smart contracts undergird the DeFi system but like all technical products are vulnerable to cyber-attack and plain old code bugs. The system is interconnected in increasingly complex and intricate ways and so vulnerabilities in one protocol can quickly bleed over into others.

Governance: Regulation poses another threat, with national governments yo-yoing between acceptance and crackdown as they seek to understand how private currencies may threaten their own interests.

Part 2 of this series will focus on the specific investment themes we find compelling here at Concentric

Clearly not all problems are suitable to be tackled by Crypto. Cases where validation by a 3rd party is required or where dispute resolution is likely to be essential pose difficulties. Sometimes recourse to a higher authority will always be essential. This leads to a clear role for centralised institutions like governments and corporations.

How do you separate a project with a viable chance from one with no hope? Our next article on the topic will delve into this in some depth.

Original article