Where is the real value of cryptocurrencies? Non-speculative Web3 use cases

I have been investing in the cryptocurrency/Web3 space for almost 9 years, inspired by the promise that true digital ownership and value transfer over open networks will be the most transformative technological innovation of a lifetime. During these 9 years, I have been constantly asked, "What are the 'real world' use cases?" That is, are cryptocurrencies just speculation, or do they solve any problems and provide any real value? Or, to quote the famous Wendy's ad from the 1980s: "Where's the beef?" (What's the actual benefit/value?)

Indeed, the primary use case for Web3 technologies has been (and still is) speculative trading. However, this is not uncommon with the emergence of new technologies and markets. In the 1840s, the activity of the railroad industry was not moving goods, but selling railroad stocks; in the late 1990s, it was not sustainable Internet business models that made money, but selling shares in dot-com companies. Yet in both cases, and in many other new technologies, speculation provides the funding needed to develop, deploy, and ultimately change the world.

So, where are we as Web3 moves from a stage of financial speculation to a stage of deployment of a world-changing technology? We think we are now at an inflection point. We are seeing significant deployments of Web3 technologies in non-speculative use cases, including in some unexpected places.

Below, we list three non-speculative Web3 use case areas that are gaining traction and that we are excited about right now.

1) NFTs create new luxury, fashion and art categories

NFTs are tokens on the blockchain that represent ownership of unique digital items. Right now, NFTs are usually some kind of graphic — from pixelated CryptoPunks, to beautiful artwork, to digital representations of sneakers, and many other variations. Recently, we have seen a major shift in this market as major luxury and fashion brands have entered the space. For years, the crypto industry has been saying, “Institutions are coming.” Now, institutions are coming, but some of them are not what we expected. JPMorgan didn't fully embrace Web3, but Nike, Dolce & Gabbana, Tiffany and Gucci jumped in. Some of these companies are beginning to generate significant revenue from NFTs, with Nike making over $184 million in NFT revenue to date. Even more important than this burgeoning revenue is that brands see a huge opportunity in this space, and they are picking up the pace, even in the downturn.

Main brand NFT income:

Source: https://dune.com/kingjames23/nft-project-possible-data-to-use

Brands are excited about NFTs because they see consumers starting to buy NFTs for the same reasons they buy physical luxury goods, fashion, and art — to be part of a community, to stand out from the crowd, to show status, but also because of the product The aesthetics resonate with them. Buyers of physical and digital fashion, luxury goods and art often expect their items to appreciate in value. However, this speculative demand is only part of the real-world and digital-world value proposition. Twice in my life I have spent thousands of dollars on pictures of cartoon animals - 10 years ago for a Hermès tie and more recently for an NFT. When I think about the underlying psychology of these purchases, I find them strikingly similar.

Brands also see the huge size of this potential market - NFT transaction volume has dropped by about 90% from its high point, but the annualized transaction volume is still around $2 billion. In the future, with the potential for hundreds of billions of dollars in transactions of extremely profitable digital goods to a global audience without the challenges of distribution and shipping, this is an opportunity that brands won’t ignore.

Regardless of future price trends for non-fungible crypto tokens, we expect NFT sales from existing brands and artists to grow exponentially as this new product category emerges. We’re also excited to see the continued rise of new crypto-native brands and artists establishing a foothold in this new medium, taking full advantage of Web3’s global open web properties to directly reach their audiences and monetize their work.

2) Stablecoins are becoming a new global value transfer track

For years, we’ve considered stablecoins to be a killer app for Web3, as they represent the first digital open network for the U.S. dollar — enabling billions of people around the world to hold and trade the world’s reserve currency. There is an insatiable demand for dollars around the world, and stablecoins are here to fill that demand.

The value of stablecoins in circulation has grown exponentially from about $3 billion in early 2019 to a peak of over $182 billion in March 2022, then dropped by about $40 billion to about $142 billion today, of which nearly $20 billion The drop was due to the implosion of UST. Except for UST, the circulating value of stablecoins has only dropped by about 12% from the peak, while the total market value of all encrypted assets has dropped by about 70%.

Market Cap of Major Stablecoins vs. Cryptocurrencies

Source: Coin Metrics and CoinMarketcap

Despite this growth and resilience, stablecoins have come under criticism that they are merely “casino chips” used in “crypto casinos” with little real-world use outside of transactions. To assess this claim, we can look at where stablecoins are being held, looking specifically at the numbers:

• on the exchange
• Locked in smart contracts (mainly to earn income from lending agreements or provide liquidity to decentralized exchanges)
• In wallets outside of exchanges and smart contracts

USDC Source: " Macroprudential Considerations of Tokenized Cash " by Gordon Liao

USDT Source: Brevan Howard Digital Ethereum Blockchain Analysis

The graph above shows the distribution of USDC and USDT issued on the Ethereum blockchain. From this data, we see the fact that most stablecoins are held outside of trading venues.

Furthermore, as highlighted by Circle’s Gordon Liao, of the approximately 2 million wallets holding USDC on an Ethereum-compatible chain, approximately 75% (or 1.5 million) hold less than $100 in USDC.

Based on this data, we conclude that people are holding stablecoins not because they are “casino chips” but because they are a superior dollar that is more useful and accessible than dollars held in the traditional financial system form. We are increasingly seeing stablecoins being used for international remittances, storing value in countries with unstable currencies, and for peer-to-peer transactions. Over the next few years, we expect to see these and other use cases continue to accelerate and eventually bring trillions of dollars of stablecoins into circulation.

3) DeFi shines as an open and resilient financial infrastructure

Decentralized Finance (DeFi) refers to permissionless financial products built on public blockchains. Although DeFi trading volumes have dropped significantly due to a reduction in speculative trading, the value of open, transparent, and composable financial primitives has manifested itself in multiple ways amid market turmoil. Two of them are highlighted below.

First, DeFi demonstrates the technical and operational resilience of open systems. With the collapse of Luna/UST and Three Arrows Capital, some centralized lending platforms suffered huge losses, causing some platforms to go bankrupt, and some centralized cryptocurrency exchanges went offline due to increased trading volume. Decentralized lending platforms and exchanges such as Aave, Compound, and Uniswap functioned as programmed without any downtime or loss of client funds.

Second, DeFi has begun to successfully broaden access to financial services. This is shown in the success of various products, including stablecoins, yield products, and collateralized lending. An interesting case study in terms of DeFi expanding access to financial services is collateralized lending (aka asset-backed lending), which often outperforms unsecured lending due to lower interest rates and potential tax benefits. Using decentralized protocols like Aave and Compound, anyone who owns crypto assets can easily use those assets to lend and borrow within minutes. This is in stark contrast to the traditional financial sector. According to Cerulli & Associates, only about 7% of registered investment advisors (RIAs) in traditional finance offer loans collateralized by portfolios of securities, and of those that do, 40% take more than a week to settle. Fund the loan.

In conclusion, there is a lot of real value. We are seeing massive deployments of Web3 technology in non-speculative use cases and we believe we are entering a critical period where these and other non-speculative use cases will surpass financial speculation as the primary application of Web3 technology and we have never been more excited to support founders pursuing this vision.

This article does not constitute investment research, nor should the views expressed herein be considered investment advice. This article is for informational purposes only and does not constitute an invitation or recommendation to subscribe for or purchase any securities, investment, product or service, or any investment fund managed by Brevan Howard or any of its affiliates.