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What is the Job of Crypto?
Hint: it starts with L
Every new disruptive product solves a basic human need in a new way, due to some underlying shift in either technology or society.
That’s the core premise behind the Jobs To Be Done framework, popularized by the immortal Clayton Christensen. We “hire” products that perform “jobs” that ultimately help us achieve more of our fundamental desires: money, time, fun, status, meaning, etc. Over time, as technologies change and human societies adapt, new ways to fulfill these basic needs become viable, so we switch from old products to new products.
So what is the “job” of crypto?
What basic human need does it solve for in some new way?
Let me tell you about my first job.
As mentioned in this newsletter’s first post, I started my career on a Wall Street trading floor like this one.
Everyone in this room had the same basic job: creating new tradeable securities. It was our job to shepherd every type of company through the process of issuing a new security across every possible asset class.
We helped corporations issue new stocks and bonds. We helped banks securitize mortgage loans, credit card loans, and auto loans. We helped asset managers create ETFs, mutual funds, and other investment vehicles. Anything the market desired, we could securitize for it.
Basically, we helped issuers convert an intangible financial good with unknown value, held by insiders, into an asset trading on the secondary market with observable price movements and organic trading activity, held by the public.
We helped them get liquidity.
Liquidity is the difference between a paper stock certificate and a Fortune 500 company, between a JPEG and an exclusive NFT, between a public asset and a private asset.
But Citigroup did not sell access to liquidity cheaply.
From idea generation (assembling hundred-page Powerpoint decks to pitch to various companies) to roadshows (2 weeks flying business with one day in each major financial hub) to listing (getting blessed by a cadre of lawyers, regulators, and rating agencies), the entire process of turning an illiquid asset into a liquid one took at least six months, required hundreds of highly-priced humans working full-time, and often cost millions in travel costs alone.
The worse part was after these assets started trading. Every morning, I had to hustle and beg our traders, bored assholes fond of jokes with vague racial undertones, to give me indicative buy and sell prices for each bond we had issued. These marks were the price guideposts that helped our salespeople conduct daily client conversations and researchers write weekly reports. Of course, traders hated giving marks because they were giving away free information, so they took it out on junior analysts like me.
This long, painful process was necessary to make any asset liquid, so Citigroup couldn’t even entertain working on a deals less than $500 million in size. Otherwise, our fees simply wouldn’t cover the people, process, time, and compliance costs entailed.
In fact, I think creating liquidity is the only job that Wall Street really performs. Wall Street is just a gigantic vampire squid that manufactures and spits out financial assets, slicking off fee tendrils every time its tentacles juggle them.
But this one mammoth creature blocks access to liquidity for everyone else.
Until very recently, IPO markets were only available to a lucky few venture-backed companies, discouraging founders from starting new ventures.
What if liquidity were free?
What if anyone could make anything liquid?
Make Anything Liquid was the kind of slogan you heard at crypto conferences during 2017 and 2018, those heady days when many of the early Ethereum-based decentralized exchanges (DEX) raised their initial rounds of seed capital.
But now it was 2019, the bleak, black days of crypto winter. For two miserable years, we had all been desperately searching for product-market fit. You can see the pressure in our slumped shoulders and anxious huddles.
Our success depended on their success, but none of the DEXs were even close to achieving their holy grail: a liquid, growing exchange that could challenge the large centralized exchanges. Quite the opposite, DEX volumes had actually fallen from 2018 to 2019 as the initial ICO buzz cooled off.
Skeptics doubted whether DEXs would ever become a reality:
If the long-run interest in DEXs continues to be for trading coins that aren’t available on centralized exchanges, the future is bleak. Anyone taking a sober look at the ICO landscape is likely to admit that the majority of offerings are little more than scams.
How successful have DEXs been and what can we expect going forward? Volume growth has stagnated for the few 0x relayers. EtherDelta seems to be running at lower volumes than it was earlier this year. Other DEXs are showing volume in the low millions with no major winners yet. This compares to USD billions in (daily) volume on centralized crypto exchanges.
— State of Decentralized Exchanges, June 2018
We didn’t realize it back then, but the problem was that all of those early DEXs used the order book model, copying Coinbase, Binance, and other centralized venues.
In hindsight, order books were a terrible match for the realities of L1 Ethereum, where block space is limited and each transaction is highly expensive. To accommodate, DEX order books had to be off-chain, just like centralized exchanges, so no one could atomically execute an Ethereum transaction to trade against a stale order or take advantage of an arbitrage opportunity.
Liquidity, the ability to buy and sell an asset for a specific price, was not yet available on the blockchain.
There did exist one exchange with on-chain liquidity, but I and many others pooh-poohed it as a simple toy after Uniswap launched in November 2018.
Uniswap was an Automatic Marker Maker (AMM) DEX. Conceptualized in a 2017 Reddit post by Vitalik Buterin, an AMM is just a pool of two assets locked in a smart contract that uses a constant product formula (x*y=k) to match buyers and sellers. According to the formula, any exchange between Asset A and Asset B must satisfy the constraint that the product of the asset quantities cannot change, both before and after the swap.
Effectively, an AMM creates a simple linear order book without requiring market makers to maintain and refresh orders.
AMMs provide the simplest possible experience for liquidity providers, since they just had to deposit two assets into the pool. No matter how market prices fluctuated afterwards, an AMM’s x*y=k constant product formula ensured that a price existed for any possible transaction. The catch, however, was that every liquidity provider in the pool had the exact same position and could only add/remove liquidity, which made professional market makers reluctant to participate.
But Uniswap’s programmatic nature meant that the existence of liquidity in any pool enabled potential arbitrage opportunities with any other market, and the first and only rule of markets remains that any and all arbitrage opportunities will eventually be closed.
Critically, one of Uniswap’s most impactful decisions was to tokenize Liquidity Provider (LP) positions, which enabled Yearn, Gelato, and other projects to apply leverage and boost yields for retail depositors.
Once degenerate yield famers could earn 100%+ annual yields, the DeFi flywheel started to accelerate in the summer of 2020, and began spinning faster and faster.
Today, DEXs are processing billions of dollars in trading volume every day. Access to liquidity has changed everything.1
Founders no longer have to hire an investment bank to take their company public. Instead, they can create a token and get instant liquidity for it on Uniswap.
Artists no longer have to hire an auction house to sell their artwork. Instead, they can create an NFT and get instant liquidity for it on OpenSea.
The trading floor is obsolete. Markets have replaced the need for middlemen.
Liquidity used to be the job of Wall Street, but now crypto can fulfill that basic human need 1000x cheaper, faster, and easier.
I am truly scared for what might come next, but I’m also excited for what’s possible.
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Note that this doesn’t preclude the need to establish market value for a tradeable asset. The process by which that occurs will be the the subject of a future post.