Original Author: Will Awang

Legal counsel for investment and financing, Digital Assets & Web3; independent researcher, tokenization & RWA & payments.

In early 2024, Cathie Wood, the most shining Wall Street investment manager in the technology sector, led her ARK team to release the 'Big Ideas 2024' report. The report aims to cover the field of 'disruptive innovation' globally and has high value. It is an important reference for global technology entrepreneurs and investors.

This article extracts content related to cryptocurrency and blockchain from two research reports in April 2023 and presents a perspective on viewing Crypto from the perspective of Wall Street funds.

In this, you can see the changes that public blockchain can bring to currency, finance, and the Internet, the solutions that smart contracts/DeFi provide for the real world, and the value growth brought about by the combination of digital wallets and crypto/blockchain payment capabilities.

The convergence of five major technologies leads the next generation revolution

ARK's research report believes that the convergence of disruptive innovative technologies will define the development of the next decade, and the current technological convergence may trigger macroeconomic changes more profound than the first and second industrial revolutions.

The five major technology platforms of AI, public blockchain, multi-group sequencing, energy storage, and robotics are integrating with each other, which will change global economic activities. The economic growth rate may accelerate from the average 3% over the past 125 years to 7% in the next 7 years.

The figure below shows the impact of previous technological revolutions such as steam engines, railways, and telegraphs, as well as the general technological revolution of electricity, telephones, and radios on the economy. Today, with the integration of five disruptive technologies, AI, public blockchain, multi-omics sequencing, energy storage, and robotics, the impact on the economy may surpass previous ones.

As one of the five major technologies, once the public blockchain is widely adopted, all currencies and contracts will be migrated to the public blockchain, supporting the verification of digital rights and proof of ownership. The financial ecosystem may be reconfigured to accommodate the rise of cryptocurrencies and decentralized finance (DeFi).

These technologies increase transparency, reduce the influence of capital and regulatory control, and lower contract execution costs. In such a world, as more and more assets are monetized/tokenized, businesses and consumers are gradually adapting to new financial infrastructure. As a result, digital wallets, which carry these assets, will become increasingly important. The governance structure of traditional corporate entities will also be challenged.

2. The changes that public blockchain can bring

The proposal for the public blockchain was mainly put forward in the 2023 research report. ARK stated that despite the major earthquake experienced by the cryptocurrency industry in 2022, the public blockchain continues to drive the transformation of currency, finance, and the Internet. The long-term opportunities for Bitcoin, DeFi, and Web3 are strengthening. In the next decade, the market value of cryptocurrencies and smart contracts may reach $200 trillion and $50 trillion, respectively.

2.1 The Money Revolution

Public blockchains can coordinate the transfer of value and ownership outside the control of governments and centralized institutions, thus promoting the transition of the monetary system from centralization to globalization, decentralization, and non-sovereignty.

Current issues: The centralized currency system is difficult to provide strong guarantees for the global economy:

1. 4 billion people live under authoritarian regimes;

2. More than 2 billion people suffer from double-digit inflation;

3. Over 1 billion people are unable to use traditional payment transfer applications;

4. More than 1 billion people rely on remittances.

The power of change mainly comes from cryptocurrencies represented by Bitcoin:

1. Bitcoin can ensure independent property rights, combined with encryption technology and self-custody, ensuring independent property rights;

2. Bitcoin is anti-inflationary. Its quantity is mathematically measured and predictable. Currently, the supply of Bitcoin is 19 million coins with a cap of 21 million coins;

3）Bitcoin is resistant to censorship, with a low threshold for trading, the only requirement being to own the private key;

4. Bitcoin is auditable and publicly transparent.

2.2 The Financial Revolution

Public blockchain can reconstruct a decentralized financial infrastructure (DeFi) outside the traditional financial system to meet numerous needs that the traditional financial system cannot meet, and solve many problems that the traditional financial system cannot solve.

Current Issues:

1. Over 2 billion people are unable to access basic banking services, including account management and credit.

2. The opacity of the financial system has led to multiple financial crises;

3）The risk of traditional financial institutions as counterparties easily leads to single point of failure in the system, and centralized decision-making leads to rampant rent-seeking.

The power of change mainly comes from the newly constructed decentralized financial infrastructure (DeFi):

1. DeFi eliminates traditional intermediaries, and automatic smart contracts ensure execution without the need for trusted entities;

2. DeFi is global, and financial services deployed on open protocols allow anyone with internet access to access custody, trading, and lending facilities;

3. DeFi is interoperable, financial services are open source and interoperable, allowing for rapid innovation and experimentation;

4. DeFi is auditable and transparent, users manage risks on their own, and collaterals and fund flows are recorded on the ledger and open to review.

2.3 The Internet Revolution

Public blockchains can help individuals achieve sovereignty over their identities, reputations, and data, outside of traditional conglomerates and large tech companies, and facilitate the transition of ownership from corporate sovereignty to individual sovereignty.

Current Issues:

1. The development of current Internet technology giants relies on the utilization and monetization of user data;

2. The digital identities and reputations of different platforms cannot be interoperable;

3. The central decision-maker determines the discovery of information and subjectively regulates content and communication.

The power of transformation comes mainly from the value-based economy of Web3:

1. Web3 emphasizes individual sovereignty, introducing the concept of personal digital property rights;

2. Web3 relies on protocols, not platforms. Decentralized protocols support the management and open access of distributed data, limiting the control of central aggregators;

3. Web3 brings new profit models by embedding economic systems into ecosystems, enabling users to monetize and participate in network development;

4. Web3 realizes the integration of consumption and investment. With the digitization of the economy, consumer behavior is also changing, giving rise to new business models for purchasing, owning, and using.

This combination of Bitcoin/cryptocurrency networks, DeFi, Web3 public blockchains will further redefine traditional assets, with a projected market value of $25 trillion by 2030 (including $20 trillion in cryptocurrency asset value and $5 trillion in smart contract/DeFi protocol value).

3. Smart Contracts - Driving Financial and Internet Revolution

After the catastrophic failure of centralized crypto institutions in 22/23, smart contracts deployed on public blockchains provide a global, automated, and auditable decentralized financial infrastructure (DeFi) as an alternative to traditional financial systems.

It has been proven that decentralization is more important for maintaining the original value proposition of public blockchain infrastructure.

According to ARK's research, with the gradual attention to tokenized financial assets (such as stablecoins, tokenized US Treasuries, etc.), the volume of on-chain assets has grown significantly. It is expected that the market value related to decentralized applications will grow at a rate of 32% per year, increasing from $775 billion in 2023 to $52 trillion in 2030.

The main points are as follows:

3.1 Smart contract is the foundation of the value-based internet financial system.

Currently still in its early stages, smart contracts are powering a new native financial system for the Internet. With the support of the largest smart contract blockchain, Ethereum, multiple networks are supporting on-chain activities and competing for market share.

3.2 Stablecoin highlights the value proposition of smart contracts

Given the malignant inflation in emerging markets and the exacerbation of global instability, the demand for stablecoins providing a USD digital channel is soaring. Over the past three years, the number of daily active stablecoin addresses globally has grown at a rate of 93% per year, increasing from 171,000 to 1.2 million. In 2023, stablecoin transaction volume surpassed Mastercard.

3.3 Traditional Financial Assets Transferred Onto the Blockchain

Tokenization enables asset management to be implemented on public blockchains, making it easier to verify, track, trade, and leverage funds compared to traditional financial markets. In 2023, the tokenized sovereign bond fund grew by more than 7 times, reaching 8.5 billion US dollars. The early funds were launched on the Stellar blockchain, but Ethereum became the largest tokenized sovereign bond market in 2023.

3.4 Developers improved the protocol during the bear market

In the face of the crisis and its consequences in 2022, core developers have proposed a technical roadmap and strengthened protocols to support the next bull market. Ethereum has successfully implemented Proof of Stake (PoS) consensus, and Solana has also set a new record for continuous uptime.

3.5 Layer 2 extends transactions in the Ethereum ecosystem

Since the beginning of 2021, more than 20 Layer 2 projects have been launched, enabling Ethereum to expand its average daily transaction volume by 4 times at a lower cost. Despite early success, most Layer 2 solutions are still centralized, bringing complex experiences to users and developers.

3.6 Lower costs promote on-chain user stickiness

With the decrease in transaction costs, the on-chain participation (measured by the ratio of daily active addresses DAU to monthly active addresses MAU) has increased.

3.7 Single-chain solutions like Solana provide another option for vertical scaling

There is a trade-off in the design of smart contract networks. By prioritizing underlying decentralization, the Ethereum ecosystem has become more complex as it scales. By prioritizing single-layer scalability, Solana has maintained a simple architecture for users and application developers, and achieved phased success.

3.8 Smart contracts can reduce the cost of financial services

The global value of financial assets has surged from $140 trillion in 2000 to $510 trillion in 2020, which is the result of the combined effects of global economic growth, increased financialization, and expanded stock multiples. The operational costs of the global financial system have increased with the growth of financial asset value. The annual total revenue of the financial services industry is $20 trillion, accounting for 3.3% of the total value of all financial assets. Smart contracts can significantly reduce this drag on the global economy.

By 2030, the smart contract network will generate $4.5 trillion in service fees

Smart contracts can facilitate the creation, ownership, and management of on-chain assets at a significantly lower cost than traditional finance. If tokenized assets migrate to blockchain infrastructure at a speed similar to that of the internet and DeFi-related service fees are one-third of traditional financial services, smart contracts can generate over $450 billion in service fees annually, creating a market value of over $50 trillion, growing at compounded annual growth rates of 78% and 32% respectively by 2030.

IV. Digital Wallets - Eliminating Traditional Financial Intermediaries

As mentioned in the 2023 research report, ARK pointed out that public blockchains can revolutionize existing systems at three levels: currency, finance, and the Internet. One of the solutions is smart contracts/DeFi. So, who will carry these tokenized assets on public blockchains? It is inevitable to mention digital wallets.

Interestingly, the digital wallets mentioned in the ARK research report do not equate to crypto wallets based on public blockchains, although some of the growth points for the digital wallets mentioned later in the text can be achieved through crypto/blockchain payment.

From the perspective of ARK, a digital wallet is a way to transform the traditional payment system (both internally and externally) using blockchain technology in order to achieve cost reduction and efficiency enhancement (closed-loop payment ecosystem), combined with the huge dividends that digital wallets have already accumulated among consumers/merchants, thus reflecting the value to the main company of the digital wallet.

4.1 Overview of the current status of digital wallets

Digital wallets have attracted billions of consumers and millions of merchants, currently serving 3.2 billion users and covering 40% of the global population. As consumers and merchants gradually adopt digital wallets, the usage of traditional checking accounts, credit cards, debit cards, and direct merchant accounts will decline.

Digital wallets can fundamentally change the nature of traditional payment transactions - eliminating financial intermediaries.

Digital wallets can provide a closed loop for over 50% of payment transactions, saving the market nearly $50 billion in costs. By 2030, the value of digital wallet companies may increase by an additional $450 billion from the current $1 trillion. ARK research shows that the number of digital wallet users will grow at an annual rate of 8%, covering 65% of the global population by 2030.

While vertical software applications are customized solutions tailored to specific industry needs, such as Block, Shopify, and Toast. Leading vertical software applications are rapidly expanding financial services to both consumers and merchants. Through a two-way network, this software can facilitate closed-loop transactions from consumers to merchants, merchants to employees, and employees to merchants.

ARK believes that these digital wallets on these applications will realize a completely closed payment ecosystem. According to ARK's research, within the next seven years, closed-loop consumer payments, commercial banks, and employee wage/payment income will grow at a rate of 22%-33% per year, increasing from $7 billion in 2023 to $27-50 billion in 2030.

The main points are as follows:

4.2 Consolidate commercial financial services and expand user consumption services

Block, Shopify, and Toast are all attractive platforms that are likely to make digital wallets the core connecting consumers, merchants, and employee ecosystems. In addition to supporting core business operations, they collaborate with partner banks and fintech companies or activate their own banking licenses, thus eliminating the inefficient traditional financial institution services involved in countless merchant interactions.

At the same time, vertical software applications can not only realize a huge backend business network, but also build a frontend consumer network through digital wallets. By simultaneously expanding the business and consumer networks, vertical software applications are closing the loop and becoming the operating system of these two-sided networks.

4.3 Closed-loop Payment Ecosystem

The closed-loop payment ecosystem combines the transfer of funds within the network in three ways: from consumers to merchants, from merchants to employees, and from employees and consumers to merchants. To build these payment ecosystems, platforms must have: 1) a large and active bilateral network; 2) end-to-end visibility into merchant operations and finance; and 3) vertical industry expertise.

Transactions conducted using digital wallet balances bypass the banking and credit card networks, saving transaction fees for payment service providers, merchants, and consumers. In ARK's view, a vertically integrated software platform with a scalable consumer and merchant ecosystem can effectively leverage digital wallets to facilitate closed-loop transactions and maximize profits.

In 2022, Block paid about 60% of customer transaction fees to third-party payment providers for exchange, evaluation, processing, and bank settlement fees. If Block's consumer-facing application Cash App allows users to transact with Block merchants using their balances, Block's net fee rate could more than double.

In addition, in the 2024 report, ARK specifically added financial services for merchants and business employees' wages/payments in the closed-loop payment ecosystem.

According to ARK's research, over the next 7 years, the core revenue of Block Square, Shopify, and Toast will grow at an annual rate of 22%, increasing from $7 billion in 2023 to $27 billion in 2030. By 2030, closed-loop payment businesses such as consumer payments, merchant financial services, and employee wages/payments will generate an additional $23 billion in revenue, increasing the annual growth rate from 22% to 33%.

Five, finally

Although the public blockchain industry may not have an "iPhone" moment like AI, its impact on transforming traditional architectures, especially traditional financial architectures, will be profound, despite being a long-term path of change.

This path will start with financial payments, and the most direct or valuable capture will be payment companies.

From the perspective of Wall Street funds, digital wallet companies that have a large number of consumers/merchants at both ends can bring significant value growth to the company by combining the capabilities of crypto/blockchain payment, whether it is through stable coins or internal settlement networks to transform the traditional payment system, which will be reflected in the company's stock price.

This is the most direct value capture for Wall Street funds, and it is also the path that crypto can most leverage the off-chain world to achieve Mass Adoption. This can be seen from the strategy launched on Solana after Paypal introduced stablecoins.

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