Author: Will 阿望

At the beginning of 2024, Cathie Wood, the most prominent Wall Street investment manager in tech stocks, led her ARK team to release the "Big Ideas 2024" report. This report aims to cover the global field of "disruptive innovation" and is highly valuable, serving as an important reference for tech entrepreneurs and investors worldwide.

This article extracts content related to cryptocurrencies and blockchain from two research reports in April 2023 to present a perspective on Crypto from Wall Street funds.

Within this, we can see the transformations that public blockchains can bring to currency, finance, and the internet, the solutions provided by smart contracts/DeFi for the real world, and the value acceleration brought about by the combination of digital wallets with crypto/blockchain payments.

I. The Integration of Five Major Technologies Leading the Next Revolution

ARK's research report believes that the integration of disruptive innovation technologies will define the development of the next decade, and the current technological convergence may trigger macroeconomic changes more profound than the first and second industrial revolutions.

AI, public blockchain, multi-omics sequencing, energy storage, and robotics are five major technological platforms that are merging and will change global economic activities, with economic growth potentially accelerating from an average of 3% over the past 125 years to 7% over the next seven years.

The following chart shows the impact of previous technological revolutions such as the steam engine, railroads, and telegraphs, as well as the effects of general technological revolutions like electricity, telephones, and radio on the economy. Today, with the integration of the five disruptive technologies—AI, public blockchain, multi-omics sequencing, energy storage, and robotics—the economic impact may surpass that of previous revolutions.

As one of the five technologies, public blockchain, once widely adopted, will see all currencies and contracts migrate to public blockchains, supporting the verification of digital rights and proof of ownership. The financial ecosystem may be reconfigured to accommodate the rise of cryptocurrencies and smart contracts/decentralized finance (DeFi).

These technologies enhance transparency, reduce the influence of capital and regulatory controls, and lower the costs of contract execution. In such a world, as more assets are monetized/tokenized, businesses and consumers will gradually adapt to the new financial infrastructure. Thus, digital wallets, which carry these assets, will become increasingly important. The traditional corporate governance structure will also be challenged.

II. The Transformations Brought by Public Blockchain

The proposal of public blockchain was mainly highlighted in the 2023 research report, where ARK stated that despite the major earthquake in the crypto industry in 2022, public blockchain continues to drive transformations in currency, finance, and the internet. The long-term opportunities of Bitcoin, DeFi, and Web3 are strengthening. In the next decade, the market capitalization of cryptocurrencies and smart contracts may reach $20 trillion and $5 trillion, respectively.

2.1 The Money Revolution

Public blockchain can coordinate the transfer of value and ownership outside the top-down control of governments and centralized institutions, thus promoting the transition of the monetary system from centralized to global, decentralized, and non-sovereign.

Existing problems: The centralized monetary system struggles to provide strong guarantees for the global economy:

1) 4 billion people live under authoritarian regimes;

2) Over 2 billion people suffer from double-digit inflation;

3) Over 1 billion people cannot access traditional payment transfer applications;

4) Over 1 billion people rely on remittances.

The power of transformation mainly comes from cryptocurrencies represented by Bitcoin:

1) Bitcoin ensures independent property rights, combining cryptographic technology and self-custody to guarantee independent ownership;

2) Bitcoin is anti-inflationary. Its supply is mathematically measured and predictable. Currently, the supply of Bitcoin is 19 million, with a cap of 21 million;

3) Bitcoin is censorship-resistant, with a low barrier to transactions; the only requirement is to have a private key;

4) Bitcoin is auditable and publicly transparent.

2.2 The Financial Revolution

Public blockchain can reconstruct a decentralized financial technology infrastructure (DeFi) outside the traditional financial system to meet numerous demands that the traditional financial system cannot satisfy and solve many problems that the traditional financial system struggles with.

Existing problems:

1) Over 2 billion people cannot access basic banking services, including account management and credit;

2) The opacity of the financial system has led to multiple financial crises;

3) The risks posed by traditional financial institutions as counterparties can easily lead to systemic single points of failure, and centralized decision-making leads to rampant rent-seeking.

The power of transformation mainly comes from the newly constructed decentralized financial infrastructure (DeFi):

1) DeFi eliminates traditional intermediaries, with automated smart contracts ensuring execution without the need for trusted parties;

2) DeFi is global, with financial services deployed on open protocols allowing anyone with internet access to access custody, trading, and lending facilities;

3) DeFi is interoperable, with financial services being open-source and interoperable, allowing for rapid innovation and experimentation;

4) DeFi is auditable and transparent, with users managing risks themselves, and collateral and fund flows recorded on the ledger for open scrutiny.

2.3 The Internet Revolution

Public blockchain can help achieve personal sovereign identity, reputation, and data outside traditional conglomerates and large tech companies, transitioning property rights from corporate sovereignty to personal sovereignty.

Existing problems:

1) The development of current internet tech giants relies on utilizing, owning, and monetizing user data;

2) Digital identities and reputations cannot interoperate across platforms;

3) Centralized decision-makers determine the discovery of information, subjectively regulating content and communication.

The power of transformation mainly comes from the value economy of Web3:

1) Web3 emphasizes personal sovereignty, introducing the concept of personal digital property rights;

2) Web3 relies on protocols rather than platforms. Decentralized protocols support the management and open access to distributed data, limiting the control of central aggregators;

3) Web3 brings new profit models, embedding economic systems into ecosystems, allowing users to monetize and participate in network development;

4) Web3 achieves the integration of consumption and investment. As the economy digitizes, consumer behavior is also changing, giving rise to new business models of purchasing, owning, and using.

This combination of Bitcoin/cryptocurrency networks, DeFi, and Web3 public blockchain will further redefine traditional assets, potentially achieving a total market value of $25 trillion by 2030 (including $20 trillion in crypto asset value and $5 trillion in smart contract/DeFi protocol value).

III. Smart Contracts—Driving the Financial and Internet Revolution

Following the catastrophic failures of centralized crypto institutions in 2022/23, smart contracts deployed on public blockchains provide a global, automated, and auditable decentralized financial infrastructure (DeFi) alternative to the traditional financial system.

It has been proven that decentralization is more crucial for maintaining the original value proposition of public blockchain infrastructure.

According to ARK's research, as tokenized financial assets gradually gain attention (such as stablecoins, tokenized U.S. Treasuries, etc.), the on-chain asset volume has seen significant growth, and the market value related to decentralized applications is expected to grow at an annual rate of 32%, increasing from $775 billion in 2023 to $5.2 trillion by 2030.

Here are the main points:

3.1 Smart Contracts as the Foundation of the Value Internet Financial System

Still in its infancy, smart contracts are powering a new financial system native to the internet. Driven by Ethereum, the largest smart contract blockchain, multiple networks are supporting on-chain activities and competing for market share.

3.2 Stablecoins Highlight the Value Proposition of Smart Contracts

Given the rampant inflation in emerging markets and increasing global instability, the demand for stablecoins providing a digital channel in dollars is skyrocketing. Over the past three years, the number of globally active stablecoin addresses has grown at an annual rate of 93%, from 171,000 to 1.2 million. In 2023, the trading volume of stablecoins surpassed that of Mastercard.

3.3 Traditional Financial Assets are Moving On-Chain

Tokenization enables asset management to be realized on public blockchains, making it easier to verify tracking, trading, and utilizing funds compared to traditional financial markets. In 2023, tokenized treasury funds grew more than sevenfold to $850 million. Early funds were launched on the Stellar blockchain, but Ethereum became the largest tokenized treasury market in 2023.

3.4 Developers Improved Protocols During the Bear Market

In response to the crisis of 2022 and its aftermath, core developers proposed technical roadmaps and strengthened protocols to support the next bull market. Ethereum successfully transitioned to proof-of-stake (PoS) consensus, and Solana also set new records for continuous uptime.

3.5 Layer 2 Expands Transaction Capacity in the Ethereum Ecosystem

Since early 2021, over 20 Layer 2 projects have been launched, allowing Ethereum to expand its average daily transaction volume fourfold at lower costs. Despite early successes, most Layer 2 solutions are centrally controlled. The surge of Layer 2 has created a complex experience for users and developers.

3.6 Lower Costs Promote On-Chain User Retention

As transaction costs decrease, on-chain participation (measured by the ratio of daily active addresses (DAU) to monthly active addresses (MAU)) has increased.

3.7 Single-Chains like Solana Provide Another Option for Vertical Scaling

The functionalities of smart contract networks are designed with trade-offs. By prioritizing underlying decentralization, the Ethereum ecosystem has become more complex as it scales. In contrast, by prioritizing single-layer scalability, Solana maintains a simple architecture for users and application developers, achieving phased success.

3.8 Smart Contracts Can Reduce Financial Service Costs

The global value of financial assets surged from $140 trillion in 2000 to $510 trillion in 2020, driven by global economic growth, increased financialization, and expanded stock multiples. The operational costs of the global financial system have increased alongside the value of financial assets. The annual total revenue of the financial services industry is $20 trillion, accounting for 3.3% of the total value of all financial assets. Smart contracts can significantly reduce this burden on the global economy.

3.9 By 2030, Smart Contract Networks Will Generate $450 Billion in Service Fees

Smart contracts can facilitate the creation, ownership, and management of on-chain assets at a cost far lower than traditional finance. If tokenized assets migrate to blockchain infrastructure at a rate similar to internet adoption, and if the service fee rates associated with DeFi are one-third of traditional financial services, smart contracts could generate over $450 billion in service fees annually, creating over $5 trillion in market value, growing at compound annual growth rates of 78% and 32% by 2030.

IV. Digital Wallets—Eliminating Traditional Financial Intermediaries

As ARK mentioned in the 2023 research report, public blockchain can transform existing systems at three levels: currency, finance, and the internet, with one of the solutions being smart contracts/DeFi. So, who will carry these tokenized assets on public blockchains? This inevitably leads to the mention of digital wallets.

Interestingly, the digital wallets in ARK's report are not equivalent to crypto wallets based on public blockchains, although some of the growth points mentioned in the digital wallets below can certainly be achieved through crypto/blockchain payment methods.

From ARK's perspective, digital wallets are a way to transform the traditional payment system (both internally and externally) using blockchain, thereby achieving cost reduction and efficiency improvement (closed-loop payment ecosystem), and leveraging the significant consumer/merchant dividends already accumulated by digital wallets to reflect value back to the parent company of the digital wallet.

4.1 Overview of the Current State of Digital Wallets

Digital wallets have attracted billions of consumers and millions of merchants, currently boasting 3.2 billion users, covering 40% of the global population. As consumers and merchants gradually adopt digital wallets, the usage rates of traditional checking accounts, credit cards, debit cards, and direct merchant accounts will decline.

Digital wallets can fundamentally change the nature of traditional payment transactions—eliminating financial intermediaries.

Digital wallets can provide closed-loop solutions for over 50% of payment transactions, saving the market nearly $50 billion in costs. By 2030, the value of digital wallet companies could increase by an additional $450 billion from the current $1 trillion. ARK's research indicates that the number of digital wallet users will grow at an annual rate of 8%, covering 65% of the global population by 2030.

Vertical software applications are tailored solutions for specific industry needs, such as Block, Shopify, and Toast. Currently, leading vertical software applications are rapidly expanding into financial services for both consumers and merchants. Through a two-sided network, this software can facilitate closed-loop transactions from consumers to merchants, merchants to employees, and employees to merchants.

ARK believes that digital wallets on these applications will create a fully closed payment ecosystem. According to ARK's research, in the next seven years, revenues from closed-loop consumer payments, commercial banking, and employee wages/payments will grow at an annual rate of 22%-33%, increasing from $7 billion in 2023 to $27-50 billion by 2030.

Here are the main points:

4.2 Consolidating Commercial Financial Services and Expanding User Consumption Services

Block, Shopify, and Toast are highly attractive platforms that are likely to position digital wallets as the core connecting consumers, merchants, and employees in the ecosystem. In addition to supporting core business operations, they center around digital wallets, collaborating with partner banks and fintech companies, or activating their own banking licenses, thereby eliminating the inefficient services of traditional financial institutions in interactions with countless merchants.

At the same time, vertical software applications can not only achieve a vast backend commercial network but also build a frontend consumer network through digital wallets. By simultaneously expanding both commercial and consumer networks, vertical software applications are closing the loop, becoming the operating systems of these bilateral networks.

4.3 Closed-Loop Payment Ecosystem

The closed-loop payment ecosystem combines the transfer of funds within the network in three ways: from consumers to merchants, from merchants to employees, and from employees and consumers to merchants. To build these payment ecosystems, platforms must have: 1) a large and active bilateral network; 2) end-to-end visibility into merchant operations and finances; and 3) vertical industry expertise.

Transactions using digital wallet balances bypass banks and card networks, saving transaction fees for payment service providers, merchants, and consumers. In ARK's view, vertical software platforms with scaled consumer and merchant ecosystems can effectively leverage digital wallets to facilitate closed-loop transactions and maximize returns.

In 2022, Block paid about 60% of customer transaction fees to third parties for exchange, assessment, processing, and bank settlement fees. If Block's consumer-facing application Cash App allows users to transact with their balances with Block merchants, Block's net fee rate could more than double.

Closed-loop payment ecosystems are commonplace in mainland China, eliminating the role of third-party intermediaries, saving nearly $50 billion in costs for digital wallet platforms, consumers, and/or merchants outside mainland China. By 2030, the total enterprise value of digital wallet platforms could increase by $450 billion.

Additionally, in the 2024 report, ARK specifically included financial services for merchants and wage/payment services for merchant employees in the closed-loop payment ecosystem.

According to ARK's research, in the next seven years, the core revenues of Block Square, Shopify, and Toast will grow at an annual rate of 22%, increasing from $7 billion in 2023 to $27 billion by 2030. By 2030, closed-loop payment businesses such as consumer payments, merchant financial services, and employee wages/payments will generate an additional $23 billion in revenue, raising the annual growth rate from 22% to 33%.

V. Conclusion

Although the public blockchain industry may not have an "iPhone moment" like AI, its impact on transforming traditional architectures (especially traditional financial architectures) will be profound, even though this is a long-term transformation path.

This path will first begin with financial payments, where the most direct or most realizable value capture is for payment companies.

From the perspective of Wall Street funds, the digital wallet companies with huge consumer/merchant bases on both ends, after integrating the capabilities of crypto/blockchain payments, whether through stablecoins or internal settlement networks to transform the traditional payment system, can bring significant value growth to the company, which will be reflected in the company's stock price.

This is the most direct value capture for Wall Street funds and the path through which crypto can achieve mass adoption leveraging the off-chain world, as evidenced by PayPal's strategy of launching stablecoins on Solana.

Reference: [1] ARK, Big Ideas 2023 https://research.ark-invest.com/hubfs/1DownloadFilesARK-Invest/BigIdeas/ARK%20InvestPresentationBig%20Ideas%202023FINALV2.pdf [2] ARK, Big Ideas 2024 https://www.ark-invest.com/big-ideas-2024