Insights

Coinbase S-1 and the Cryptoeconomy

By Yossi Hasson, Co-founder of The Runway Fund. Ex Managing Director of @Techstars Blockchain. Co-founder @WeThinkCode & @SYNAQ (exited to @DimensionData)

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The current financial system is rife with high fees, delays, unequal access and barriers to innovation. In many countries, citizens don’t have access to sound money, a functional credit system, or even basic property rights. If the world economy ran on a common set of standards, that could not be manipulated by any country or company, the world would be a more fair and free place, and human progress would accelerate.

These are Brian Armstrong’s (CEO) opening remarks in the founders letter included as part of the Coinbase S-1 filing. The SEC have given Coinbase the stamp of approval to go ahead with their direct listing on the NASDAQ, giving us insights into the biggest US cryptocurrency exchange. You can read the filing here.

In the filing, Armstrong goes on to further explain how we have moved from cryptocurrencies to the cryptoeconomy.

Trading and speculation were the first major use case to take off in cryprtocurrency, just like people rushed to buy domain names in the early days of the internet. But now we’re seeing cryptocurrency evolve into something much more important. People are using cryptocurrency to earn, spend, save, stake, borrow, lend, vote and perform many other types of economic activity. Companies are getting funded, getting all customers, and eventually will be going public, all on the blockchain. The cryptoeconomy is just getting started. It is not intended to replace the traditional economy, but instead complement to it, much like email was to paper mail. The cryptoeconomy offers a more global, free, and fair alternative to traditional economies.

Those words have been carefully chosen. What Armstrong is portraying is that the cryptoeconomy isn’t just about the buying and selling of some arbitrary tokens. It isn’t about speculators trying to get rich quick. It’s about a completely new financial infrastructure that is global, open, free and fair, and being built for the internet. And, it’s still early.

Now many in the crypto world may find Armstrong’s remarks slightly disingenuous. Coinbase is a centralized exchange and in many ways goes against the ethos that many in the community subscribe to, namely: self-sovereigntydecentralization and privacy. Whereas Coinbase takes custody of your assets, is centralized and requires full KYC (Know Your Customer).

Nonetheless, as the largest cryptocurrency exchange in the US, Coinbase’s listing further legitimizes the crypto industry and will result in further acceleration of crypto adoption across the globe. I see it as bullish for bitcoin and crypto as a whole.

One area where I disagree with Armstrong, is that the cryptoeconomy is not here to complement the traditional economy. It’s here to replace it. And replace it, it will.

I wrote in a previous post about the concept of the infrastructure inversion and this is exactly what will play out with crypto. The traditional economy as we know it, will merely become a series of smart contracts running on a blockchain. Big lending departments in traditional banks will eventually cease to exist and the requirement for SWIFT as a global settlement layer will disappear. Central banks will start to mint their own digital currencies on open decentralized protocols and startups will be able to access capital from a pool of liquidity, provided by a global base of lenders, looking to earn yields on their assets. Property ownership will be fractionalized and land titles held in NFTs. The future cryptoeconomy will just be called, the economy.

There are some other interesting things in the S-1 filing worth highlighting:

  • Coinbase has 43 million registered retail users of which 2.8m transact monthly
  • 7,000 institutions as clients
  • The firm holds $90 billion in assets and has traded $456 in total volume to date
  • 96% of Coinbase’s revenue comes from transaction fees, generating a whopping $3.4b since inception
  • Coinbase sees its addressable market as anyone with a smartphone (3.5b people today)
  • Revenue in 2020 increased 2.5x from $480m to $1.14b

Also of note, Coinbase holds $180m of bitcoin as treasury on its balance sheet and $23.8m in ethereum. Once listed, this will make Coinbase the first Nasdaq company to have ETH on their treasury and I expect we’ll see many other firms following the MicroStrategy bitcoin playbook and follow suit adding ethereum.

Most interesting for me out of the entire prospectus was one line in the risks section:

  • “We compete against a growing number of decentralized exchanges and noncustodial platforms and out business may be adversely affected if we fail to compete effectively against them.”

Coinbase are acknowledging the challenge of competing against truly open, decentralized and noncustodial platforms. I akin this to the battle between Microsoft (closed) and Linux (open).

We’re seeing this battle play out with decentralized exchanges rapidly gaining in popularity. Take decentralized exchange, Uniswap.

Uniswap’s all time volume is $102b (vs Coinbase $420b), trades $1.2b a day (vs Coinbase’s $4.2b) and has 32m active traders on the platform. The biggest difference, Uniswap started in November 2018 (vs Coinbase 2012) and is a team of just 20 people.

Uniswap’s market cap today is at $7.8b ($25b fully diluted). As of today, we’re seeing Pre-IPO market valuation of Coinbase at over $100b. Depending where you stand on the open vs closed and centralized vs decentralized debate, looking at $UNI and $SUSHI may be a very interesting bet.

I know where I’ll be placing my chips, err I mean, tokens.

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