TLDR Summary;
The current established systems for conducting commerce online have their limitations.
These systems have not yet evolved to service the global and borderless nature of the internet, which is why there is a need for a global internet native currency.A global internet native currency, based on a cryptocurrency, would offer low transaction fees, a decentralized nature, and the ability to easily convert into different currencies.
Such a system could facilitate micropayments, cross-border payments, and offer banking facilities to unbanked and under-banked individuals.
It could also enable the Internet of Things (IoT) to easily and securely make financial transactions and also could provide a platform for decentralized finance (DeFi) platforms for lending, borrowing, and trading assets.
The use of cryptocurrency could help flip the advertising-centric model by paying creators and allowing micropayments to deliver rewards directly back to the content creators.
In the event a cryptocurrency protocol became a de facto internet standard, the most frequently traded asset would most likely be Stablecoins.
What will be the money protocol of the internet ?
Sometimes, for those of us who have been working in the blockchain and cryptocurrency world for some time it is easy to get lost in the detail.
Newcomers, sceptics or curious friends might ask about why they should take an interest in this area, but sometimes its hard to explain the basics.
So we made a short blog piece, by way of making it readable we used the format of a “pretend conversation” with a friend, who has barely any awareness of what cryptocurrency is, or why they should care.
What will be the Money of the internet?
Me: So what do you think will be the Money of the internet?
Friend: err the internet already has money? I don’t have any problem making payments on Amazon or buying the weekly groceries. I use Paypal, credit cards, bank transfers, venmo and there are a thousand other payment services providers compete to service my payments. The costs largely negligible and I don’t notice.
What makes you think the golden age of commerce on the internet isn’t already here?
Me: Do you think that’s it? The way I see it we recreated the high street online and made digital versions of the old analogue bank services.
Did you not think there could be more? Here’s a thought to mull over, every time you use a browser you see the familiar and reassuring lock icon in the browser bar right ? and when you see that, you know that indicates a site is secured by HTTPs, even if you are not sure of the detail behind the technology, you feel better protected as you as you navigate this site.
That icon came about when standard approaches to using cryptography were used to encrypt data in transit or “https”. This standard for securing traffic to and from an (http) website, is similar to how IMAP and POP became the standard for email traffic, FTP for file transfer and so on.
Friend: Ok, but surely then HTTPS already covers money transactions, by providing a secure exchange of data, isn’t that enough?
Me: You are correct, so far there has been no establishment of an internet standard for financial transactions, and the only way HTTPs helps is to encrypt data on behalf of trusted third parties, such as banks and financial service providers. The underlying ‘money’ is still cumbersome and not fit for a truly borderless and unleashed internet.
All that work banks do under the hood, managing balances, checking transactions, swapping currencies, using messaging to process international payments, swift, clearing, central bank issuance. That is all done by software maintained and controlled ‘offline’ in firewalled institutions. There is no bank protocol layer that sits on top of the open internet. These things are logically and functionally separate.
But, say a cryptocurrency protocol became successful as a settlement layer for internet commerce, it could replace or at least offer a practical alternative to the legacy financial system.
It would be operated independently of institutions; it would operate natively on the open internet.
It may become so seamless that the protocols logo could one day feature in the internet browser bar indicating “secured by xx” in the same way https websites show a ‘lock’ symbol. But that is certainly some way off.
Friend: ok, I can see what that might be ‘exciting’ particularly if there were some ways that someone like me could make money based on that vision. But honestly, how realistic is that, where are we now and what stands in the way?
Me: For an open source protocol to become widely adopted as the settlement layer for internet commerce, it would need years of stress testing to ‘prove’ it is a sound financial protocol that is secure and trustworthy.
Right now, there are protocols such as the popular Ethereum network which has been running since 2015 and steadily gaining trust within the industry. Ethereum is built on technology which is seen as being inherently secure and resistant to fraud and hacking. Transactions made using Ethereum may already be even more secure than those made using traditional payment methods.
Friend: Why do you mention Ethereum, I thought Bitcoin was the leader in the crypto world?
Me: I used it as an example due to the current active developers, the amount of dollar value locked into the protocol, and its perceived advantages over Bitcoin due to it having a dedicated layer for smart contract processing, I’ll get to that in a minute.
Having said that, the technology and the market are still evolving, and it’s very possible that other cryptocurrencies or technologies could emerge to challenge Ethereum’s dominance. It’s also possible that other solutions such as blockchain-based platforms, digital wallets, and central bank digital currencies (CBDCs) may gain more traction than Ethereum or Bitcoin.
Friend: I still don’t get the reason you think this is better than the current financial system, what’s so great about ‘decentralised’ protocols.
Me: Ok, well, I’d start with getting back to the current state of things. Despite the internet being borderless and global by nature, it is still governed largely by the currencies of the nation states they originate and land in.
So far at least a currency or protocol has not emerged to unleash the potential of the internet. This great big borderless and inclusive international ‘bazaar’ still eludes us.
Friction exists in making payments and still many are locked out of using credit cards and bank accounts. The promise of inclusivity and onboarding billions to trade has not yet been realised.
Friend: Ok, well I can see a few valid points there, but its rather negative. What is this vision of an open internet ‘unleashed’ , what would be different ?
Me: Ok then, let’s look little deeper as to why ‘the internet’ might need its own native currency? and why can’t the existing system cater for it.
My first point would be “Micropayments are not viable on the old system”
Friend: please explain what you mean, what are micropayments ?
Me: Micropayments refer to small financial transactions, certainly less than a dollar and in many cases less than 1cent.
These types of payments are often too small to be processed by traditional financial systems, making it difficult for small businesses and creators to monetize their content and services.
Low transaction fees make crypto well-suited for facilitating micropayments, allowing for small transactions to be processed easily and efficiently.
Friend: how would micropayments change internet commerce?
Me: well, first we should understand that, for a variety of reasons, the internet emerged with an advertising-centric model of paying the creators of content.
Because of that, as consumers we are harvested for our data, mercilessly advertised ‘at’ and presented with information designed to get us to buy and consume.
A perfect internet money protocol could flip this model and allow micropayments to reward the content creators directly in peer-to-peer relationships with their consumers.
Friend: I don’t really get it, can you give some real examples ?
Me: ok, Micropayments made using cryptocurrency could be used for a variety of purposes. Think about Digital content creation. Micropayments can be used to purchase digital content, news websites or blog content, on a pay by view basis, instead of paying through subscriptions or advertising.
The ability to pay say $0.01 to view a webpage, processed automatically from a wallet you own and control in a browser or on your phone. And crucially, received directly by the creator, might make it more viable for creators to create. If it were quick and painless to tip content creators on social media then we might do it more readily, the same applies to donations to charitable organizations.
Friend: ok I can see that could be interesting, at least as an economic experiment, but maybe the legacy systems will find out a way to do that, what’s so important about open source or decentralised?
Me: ok, firstly, a cryptocurrency protocol would allow for direct ‘peer-to-peer’ transactions. No middle men, just a protocol. There is significant advantages in doing that such everyday people buying and selling goods and services to one another.
But perhaps more interesting is how it might enable the rise of the ‘Internet of Things’ (IoT)
Friend: I have heard of that, please can you explain what it is and why crypto would be better than traditional payments for that use?
Me: The IoT refers to interconnected of everyday devices, such as smart appliances and sensors, through the internet.
A global internet native protocol/currency would make it possible for these devices to easily and securely make financial transactions, such as paying for data or access to services. This would greatly expand the potential uses and applications of the IoT. IoT devices could use micropayments in cryptocurrency to pay for their usage or access to a particular service.
We have moved beyond it just being humans that need payment facilities. Machine will need means of payment and receipt for services. For example, imagine a vending machine that can reorder its own stock, or the prospect of driverless cars refuelling themselves or paying for services. In the traditional world, a human would need to sit behind the account and they are hard to operate programmatically. But not so with smart contracts and crypto payments.
Friend: you mentioned ‘unleashing’ the internet and borderless trade, how would crypto do this?
Me: The case for cheaper and easier cross-border payments is compelling and crypto is already being used in this area. Financial transactions that involve different countries and currencies can be costly and time-consuming due to currency conversion fees and the need for intermediaries.
Cryptocurrency however, can be easily converted into different currencies and its low transaction fees make it well-suited for facilitating cross-border payments, allowing for faster and more cost-effective transactions.
There is no reason to still be taking 3-5 days and $30 to send funds across borders. Instant payments with negligible transaction fees are the way of the future.
Friend: But how does it help people do that ?
Me: Well, firstly it provides an alternative ‘banking’ facility to unbanked and under-banked individuals. These groups often have limited access to traditional banking services, making it difficult for them to participate in the global economy. The decentralized nature of crypto and its ability to be easily accessed through a mobile device would allow for greater financial inclusion, giving unbanked and under-banked individuals access to new economic opportunities.
Friend: Any other use cases for global payments ?
Me: consider Payment facilities where critical infrastructure is not working. For example, in war torn countries such as Ukraine, businesses and people can continue to operate despite legacy payment mechanisms being unavailable (banks, ATMs)
Friend: I keep hearing people talk about “NFT’s”, is there something revolutionary there or is that just people making money from hype?
Me: Cryptocurrencycan be used to create and trade non-fungible tokens (NFTs). They are essentially digital assets that represent ownership of a unique item, such as a piece of digital art.
NFTs can be bought and sold on blockchain marketplaces, and can also be used to establish ownership of other types of digital assets.
Other examples of NFT use cases is “fan tokens,” which are digital assets that represent a stake in a sports team, music artist, or other type of entity. These tokens can be used to give fans a way to show support for their favourite teams or artists, and can also be used to vote on certain decisions or to access exclusive content.
Concert tickets have been created as NFTs, allowing the bearer of such a token to show it at the door for entry.
At the other end of the spectrum, people have found ways to use the same digital ownership principal to link to higher value items. Often referred to as “security tokens,” these digital assets can represent ownership in a company, property or other type of investment.
Security tokens can be used to raise capital, to give investors a way to trade shares in a company, and to facilitate other types of financial transactions.
This could revolutionise markets, think for example about ‘fractional’ ownership of assets, say a 0.1% share in the Mona Lisa for example, that could be traded.
Friend: Sounds like a legal minefield, but admittedly its interesting. I also heard mention about DeFi, can you elaborate on what that is?
Me: DeFi is ‘Decentralised Finance’, a general term covering the way this tech can disrupt traditional approaches to operating financial Markets.
For example, trading and investing. It can be used to facilitate trading and investing in cryptocurrencies themselves or trading ‘synthetic’ versions of traditional assets such as stocks and commodities.
Also, with lending and borrowing markets, cryptocurrency can be used to facilitate lending and borrowing markets, allowing individuals and institutions to lend and borrow digital assets. These marketplaces can be decentralized and can offer a more efficient and cost-effective way of lending and borrowing, compared to traditional financial institutions.
Friend: I don’t really use those financial services, but it sounds impressive, is there anything crypto could affect that I might make more use of
Me: Well, there is also the potential for a big impact on gaming. For example, cryptocurrency could make for faster and smoother in-game transactions and purchases, allowing players to buy and sell virtual items and currency
This can create new revenue streams for game developers and enable players to earn money from their in-game activities. Players can use cryptocurrency to buy in-game items, such as skins, weapons, or virtual currency.
There is also ‘decentralized gaming’, entire platforms where players have complete control over their in-game assets and can trade them on a peer-to-peer basis. This can create new opportunities for players to earn money and create a more engaging gaming experience. This would create gaming communities where players can come together to trade and interact with one another, creating a more social and engaging experience.
And also eSports, Cryptocurrency can be used to facilitate the betting, trading and trading of in-game items and virtual currencies in eSports, creating new revenue streams and opportunities for players and developers.
Friend: Ok well you’ve made quite a strong case for possible widespread disruption. Who would you say are the current favourites in the race to be the dominant protocols?
Me: Well, what have you heard about, any cryptocurrency protocols you are aware of?
Friend: Certainly, Bitcoin and I heard the name Ethereum, but I don’t know anything about it
Me: Yes, they are the two top protocols by current market capitalisation. But there are many others, although outside the world of crypto there is not much brand recognition currently.
Brand recognition could well play a vital role in the race to be the money protocol of the internet. Bitcoin clearly has a headstart there. But the technology is not as flexible and it may be that bitcoin plays some other role as time goes on.
For more advanced protocols, although there are many more candidates, Ethereum has a significant first-mover advantage, like TCP/IP it may emerge as a standard that the industry can get behind. The momentum and developer support and mind share is significant.
Ethereum is more advanced than Bitcoin in that it is more than just a digital currency for value transfer or perhaps ‘digital gold’. Ethereum is also a decentralized platform for building and running applications, which can include everything from online marketplaces to prediction markets to games.
Friend: you said earlier you would explain a bit more about Smart contracts, what does that term actually mean ?
Me: One of the key reasons why Ethereum is well-suited to the role of internet money protocol base layer is its ability to support smart contracts. Smart contracts are self-executing contracts with the terms of the agreement written directly into code. This means that they can automatically enforce the rules and penalties of an agreement without the need for a middleman. It is also the reason is supports many of the earlier mentioned features, NFTs, DeFi, Gaming etc.
This feature of smart contracts makes it possible for Ethereum to be used as a settlement layer for internet commerce. It allows for the creation of decentralized marketplaces and platforms, where buyers and sellers can interact directly with each other without the need for intermediaries. This can lead to lower transaction fees, increased security, and greater privacy.
Another important aspect of Ethereum is its ability to support ‘tokens’, based on formats such as ERC20 or ERC721, they allow for a world of possibilities.
Tokens can represent anything from company shares to in-game items, and they can be traded on decentralized exchanges. This allows for the creation of new types of financial instruments and opens up new possibilities for fundraising and investment.
Friend: so what is stopping progress, why aren’t I seeing this impact daily life already?
Me: protocols like Ethereum are still scaling up to be the right tool for the job. Currently, Ethereum is ‘rate-limited’ by a rather paltry 15 Transactions per second. The scaling solution for this protocol is ‘Layer 2’ systems.
Friend: what on earth is a Layer 2? This is sounding a bit out of my depth..
Me: perhaps you don’t need to think about Layer 2, as it may well become as irrelevant to a user as understanding the flow of authorisations and traffic that make up a simple visa transaction. But the reason to mention it is that this innovation is creating a ‘quickening’ where the future potential is quickly becoming a reality. Let me explain a moment;
Layer 2 systems are built on top of existing blockchain networks and aim to address some of the scalability issues that can limit the number of transactions that can be processed per second. They do this by moving some of the processing and validation of transactions off of the main blockchain and onto a separate “layer.” This can greatly increase the number of transactions that can be processed per second, making it possible for more people to conduct commerce online.
Layer 2 systems like zkSync, Starkware, Arbitrum, and Optimism, can greatly increase the number of transactions that can be processed per second and make it possible for more people to conduct commerce online. They can also offer additional features like privacy, security and cost efficiency.
Friend: ok, but there is no way I am going to buy all these currencies, let alone use them if the price is moving about as crazily as I have seen, how is this problem going to get solved ?
Me: In my opinion, the answer is “StableCoins”. Due to the volatile nature of protocol level tokens such as Ethereum, it is highly likely the denomination for spending tokens will be dollar, euro or other global currency.
Stablecoins, which are digital assets pegged to the value of a traditional currency, are already being used to transform global commerce. On Ethereum they are prevalent on Layer 1 and 2 and already massively scalable.
Because Stablecoins are pegged to the value of a traditional currency, they are not subject to the same volatility as other cryptocurrencies.
Friend: Ok but can you provide some examples where they are already being used for trade?
Me: There are highly active online decentralized marketplaces such as OpenSea, Rarible, and SuperRare that are using stablecoins to facilitate buying and selling of digital items, such as art and collectibles. These marketplaces allow for peer-to-peer transactions, without the need for intermediaries, and use stablecoins to ensure that prices remain stable and predictable.
Friend: Ok how else are they being used currently?
Me: There is a market for cross-border payments, with companies like Circle, Bitpay and Coinbase are using stablecoins to facilitate cross-border payments, enabling businesses and individuals to make international transactions quickly and at low cost. Famously, Iran made a $10m purchase order payment using stablecoins last summer.
Also, for individuals, remittances are popular. Companies like BitPesa, Wirex and Bitso are using stablecoins to facilitate remittances, allowing individuals to send money to family and friends across borders quickly and at low cost. This is particularly beneficial for people living in countries with unstable currencies or limited access to traditional banking services.
Friend: Any other use cases for Stablecoins ?
Me: as mentioned, Decentralized finance (DeFi) is a rapidly growing area of finance that uses blockchain technology to create new financial products and services. Stablecoins are a key component of DeFi, as they are used to collateralize loans, earn interest, and participate in other financial activities.
And there is also Supply Chain Management, with companies like ConsenSys, VeChain, and Provenance using stablecoins and smart contracts to create more efficient and transparent supply chains, allowing for the tracking of products from the manufacturer to the consumer.
Friend: This all sound too good to be true, surely there are things that might knock this idea of an open internet money protocol off its tracks ?
Me: Yes, absolutely there are many potential blockers. It’s possible that cryptocurrency may not gain the widespread traction needed to become a major player in internet commerce.
There are a few reasons why this could happen, Regulation, Lack of trust, Technical challenges, Alternative solutions;
Friend: can you expand on those points a little ?>
Me: ok, Governments around the world are still in the process of developing regulations for cryptocurrency, and some may choose to outright ban it. This could make it difficult for businesses and individuals to use cryptocurrency for commerce, and limit its adoption.
Cryptocurrency is still a relatively new and untested technology, and some people may be hesitant to trust it with their money. This lack of trust could limit its adoption, particularly among older generations who are less likely to be familiar with the technology.
Cryptocurrency can still be difficult for the average person to use, and there are many technical challenges that need to be overcome before it can be widely adopted..
Other technologies such as blockchain-based platforms, digital wallets, and central bank digital currencies (CBDCs) are being developed and could potentially replace the need for a cryptocurrency as a medium of exchange. These technologies could potentially offer many of the same benefits as cryptocurrency, such as lower transaction fees and increased security, without the volatility and regulatory challenges associated with cryptocurrency.
In the case of limited adoption of cryptocurrency, other solutions such as traditional payment methods and digital wallets may continue to dominate the market. Centralized payment providers like PayPal, Visa, Mastercard and bank transfers may continue to be the most widely used methods for online transactions.
Friend: ok so how would you summarise the ‘bull case’ for an open internet money protocol?
Me: While we currently have various forms of online payment methods such as PayPal and credit cards, the current system has its limitations. It has not yet evolved to service the global and borderless nature of the internet, which is why there is a need for a global internet native currency.
Cryptocurrency offers low transaction fees, a decentralized nature, and the ability to easily convert into different currencies.
A global internet native currency, such as Ethereum, could facilitate micropayments, cross-border payments, and offer banking facilities to unbanked and under-banked individuals. Additionally, it would enable the Internet of Things (IoT) to easily and securely make financial transactions and provide access to decentralized finance (DeFi) platforms for lending, borrowing, and trading assets. It could also be used for various purposes such as in-game purchases, digital content, and online services, and peer-to-peer transactions. The use of cryptocurrency can flip the advertising-centric model of paying creators and allow micropayments to reward the content creators. Additionally, it can be used for fan tokens, NFTs, security tokens, trading and investing, and lending and borrowing markets.
If a cryptocurrency protocol becomes widely adopted as the settlement layer for internet commerce, it could be indicated by its logo being displayed in the browser bar, similar to the way https websites show a ‘lock’ symbol, indicating security and trust. If you imagine a world where this is a reality, its hard not to get excited or at least interested in how one might be able to profit from that in the same way as there were many winners in the early internet era.
At the root, all of humanity’s achievements trace back to our ability for grand scale coordination. And this means basic, boring stuff like bookkeeping. What has been created with the advent of cryptocurrency protocols is a way of co-ordinating economic activity with tamper proof ledgers that are not owned by anyone and therefore are a shield against corruption.
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