Crypto Update: Ok maybe there's a real use now
I'm scared, maybe Crypto is real (Can actually outcompete TradFi interbank payment systems on cost)
Intro
I'm scared, maybe Crypto is real.
My fear is that Crypto is online messaging and inter-bank payments are like SMS.[1]
Crypto is now a way to send US Dollars that's cost competitive with inter-bank transfers, with the cost likely to drop further over time.
This turns into a monotonically increasing transaction volume growth for 20 years and things get weird along the way.
Relevant news
Some relevant headlines:
- Stripe bought bridge
- Stripe does USDC payouts via Polygon POS Network (an Ethereum Sidechain)
- Paypal has its own stablecoin PYUSD
Why the fear - It's cheap
The big news story (to me) comes from the fact that USDC transfers are now cheaper than a regular bank transfer and are effectively instant or at least near real-time.
- Polygon Network (Eth Sidechain): Sending USDC from one address to another costs betweeen $0.01USD/txn and $0.015USD/txn.
- Solana (L1 chain): Sending USDC or PYUSD from one address to another costs less than $0.003USD/txn, as per my Phantom wallet (tested on 24 Oct 2024)
This is cheaper than the wholesale sticker price of ~0.04AUD/txn for the NPP (Australia's real time inter-bank payments network).
ACH transfers in the US routinely cost consumers about $0.20USD/txn. Batch payments are cheaper, but there is a lot of cost reduction needed to get to a level competitive with crypto.
More than network fees - getting back to Tradfi
Traditionally, using sidechains/L2 chains was super annoying because withdrawals required using a bridge to get your money onto an L1 chain (expensive) and then you'd have to transfer it to an exchange before converting your money back into a bank account.
But it appears the Bridge step is gone, and transfers on the desired network can be done directly from a wallet to an exchange.
It appears that major exchanges are now supporting the economical chains. Based on my own digging:
- Coinbase supports Solana and Polygon POS (and will even cover the txn fee for USDC withdrawals)
- Binance supports Solana and Polygon POS
- Coinjar supports Solana
- Paypal supports Solana
- Coinspot supports neither
The last hurdle - Scaling Txn volume
The last hurdle is making sure the relevant network can handle the scaled volume of transactions.
Solana already scales. It has a maximum of 50k txns/second, which should be sufficient to scale to a global network.
Polygon is not quite there yet. Polygon is attempting to build a new L2 that allows for an arbitrary number of chains to join to its AggLayer, allowing it to scale to an arbitrarily large number of transactions per second.
Future Vision Work
Let's take a look at what this might mean for the future.
Capability
I think the world is going to get weird when anyone can unilaterally send and receive USD for $0.01USD/txn, and hold it indefinitely.
That's a low enough cost to meet every use case including:
- retail
- P2P
- balance transfer
Hostile currencies
My guess is that this process starts with countries where locals have an antagonistic relationship with their local currency (Argentina, Turkey etc.). John Collison mentions this in his appearance on the Money Stuff Podcast.
In terms of serious financial market impact, I'd guess nothing happens for a while, but the next edition of the Asian Financial Crisis is going to go very differently.
Domestic inter-bank systems vs global crypto networks
In the long run, there is a possibility that Crypto rails will turn out to be lower cost than a variety of domestic payments schemes. This happens particularly if the returns to scale in running a crypto network keeps going beyond the size of a medium-sized country.
If banks are permitted to switch to crypto for fund transfers, there is also a possibility that in the long run they switch to Crypto as a back end technology. This saves on cost and allows them to draw on a global pool of vendors/labour to manage their crypto interbank network.
The long run competition dynamic would therefore be subscale domestic payment networks, with idiosyncratic architectures competing against an oligopolistic set of global-scale crypto networks that provide settlement for an arbitrary number of currencies and have a correspondingly large collection of suppliers/labour for integration.
When smartphones first launched, I noted that International Whatsapp messages were somehow cheaper than Domestic SMS messages. And in the long run, it turns out (International) Whatsapp messages are superior to Domestic SMS on almost every dimension (spam protection, read receipts, multimedia etc.). ↩︎
Addendum 2024-10-25 1115
I just realised that international vs domestic transaction convergence is already happening for brokerage on share trading, which serves as an interesting illustration of the dynamics at play.
Specifically, for an Australian, trading shares on a US exchange is sometimes cheaper and better than trading shares on the ASX.
Pre-2023
Stake Investing started out by offering Australian consumers $0 brokerage on US trades, borrowing the business model of Robinhood. Up until ~2023, this made it cheaper for Australians to buy shares on US exchanges, as compared to Australian listed shares.
Post-2023
A new equilibrium seems to have evolved with:
- Discount brokerages charging for brokerage for US shares
- New, scaling brokerages offering $0 brokerage for either US shares, Australian shares or both[1]
There's now [a different set of brokerages]( offering $0 brokerage for trading shares
The thing to note however is that trading US-listed shares directly competes against trading domestic ASX-listed shares. In the long run, I'd wager that the excitement, liquidity, market structure innovation (think of specialised internalisers and payment for order flow) should compound in the US, making trades on the ASX less and less attractive over time.