Where's The Beef?

Non-Speculative Web3 Use Cases

By: Peter Johnson

For close to nine years, I have been investing in the crypto/Web3 space, inspired by the promise that true digital ownership and open network value transfer would be the most transformative technological innovations in my lifetime. Over those nine years, I have recurringly been asked, "what is the 'real-world' use case?" I.e., Is it all just speculative trading, or is crypto solving any problems and providing any real value? Or, to quote the famous 1980's Wendy's tagline, "Where's The Beef?"

It is true that the primary use case for Web3 technology has been, and currently is, speculative trading. However, with new technologies and new markets, this is not unusual. In the 1840s, the action in railroads was not in moving freight but in selling railway shares; In the late 1990s, money was made not in sustainable internet business models but in selling dot-com stocks. However, in both cases, and with many other new technologies, speculation provided the capital needed for the technology to be developed, deployed, and eventually change the world.

So, where are we on our journey for Web3 to move from the financial speculation phase to the world-changing technological deployment phase? At Brevan Howard Digital, we believe we are at this transition point right now. We are seeing significant deployment of Web3 technologies for non-speculative use cases, including in some unexpected places.

Below, we lay out three areas of non-speculative Web3 use cases that are gaining traction and that we are excited about right now. A fourth area we are deeply enthusiastic about is Web3 gaming – which is not included here as my colleague Colleen Sullivan will publish a more thorough piece on that space.

1) NFTs Creating a New Category of Luxury Goods, Fashion, and Art

NFTs are tokens on blockchains that represent ownership of a unique digital item. Currently, this is most often some sort of graphic – ranging from pixelated CryptoPunks, to beautiful artwork, to digital representations of sneakers, and many other variations. Recently, we have seen a significant shift in this market as major luxury and fashion brands have entered the space. For years, the crypto industry has been saying, "the institutions are coming." Now, the institutions are here, but some are not the institutions we expected. Instead of J.P. Morgan fully embracing Web3, it is Nike, Dolce & Gabbana, Tiffany, and Gucci jumping in. Some of these companies are starting to earn nontrivial revenue from NFTs, with Nike generating over $184mm in NFT revenue to date. More important than this burgeoning revenue is the massive opportunity brands see in the space and the increasing pace they are running towards it, even during a market downturn.

Major Brands NFT Revenue:

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

Brands are excited about NFTs because they see that consumers are starting to purchase NFTs for the same reasons they buy physical luxury goods, fashion items, and art – to be part of a community, to stand out from the crowd, to demonstrate status, and because the item's aesthetics resonate with them. The buyers of both physical and digital fashion, luxury, and art often hope their items will increase in value. However, this speculative demand is only a part of the value proposition in both the physical and digital worlds. I have spent thousands of dollars on pictures of cartoon animals twice in my life – buying Hermes ties a decade ago as a banker at Morgan Stanley and recently buying NFTs. When I think about the underlying psychology of these purchases, it is strikingly similar.

Brands are also seeing the massive size of this potential market – NFT trading volumes are down ~90% from their highs but are still at ~$2bn in annualized volume. The potential for hundreds of billions of dollars in future transactions on extremely high-margin digital goods, to a global audience, without distribution and shipping challenges is an opportunity brands will not ignore.

Regardless of the future price movement of fungible crypto tokens, we expect sales of NFTs by existing brands and artists to grow exponentially as this new product category emerges. We are also excited to see the continued rise of new crypto-native brands and artists who establish themselves in this new medium and take full advantage of the global open network properties of Web3 to directly reach their audiences and monetize their work.

2) Stablecoins Emerging as a New Global Value Transfer Rail

For years, we have believed that stablecoins are a killer application for Web3, as they represent the first digital open network for dollars – enabling billions of people worldwide to hold and transact in the world's reserve currency. There is an insatiable demand for US dollars across the world, and stablecoins are here to meet that demand.

The value of stablecoins outstanding grew exponentially from ~$3bn at the start of 2019 to over $182bn at its peak in March of 2022 before falling by ~$40bn to ~$142bn today, with close to $20bn of that decline due to the implosion of UST. Excluding UST, the value of stablecoins outstanding is down only ~12% from its peak, comparing well with the ~70% decline in the overall market cap of all crypto assets.

Market Cap of Major Stablecoins vs. Total Crypto Market Cap

Sources: Coin Metrics and CoinMarketcap
Sources: Coin Metrics and CoinMarketcap

Despite this growth and resilience, one criticism of stablecoins is that they are just "casino chips" used in the "crypto casino" and have minimal real-world usage outside trading. To assess this claim, we can look at where stablecoins are held, specifically looking at the amounts:

  1. On exchanges

  2. Locked in smart contracts (primarily for earning yield from either lending protocols or providing liquidity into decentralized exchanges)

  3. In wallets outside of exchanges and smart contracts

USDC Source: Liao, Gordon Y. “Macroprudential Considerations for Tokenized Cash,” 23 September 2022. USDT Source: Brevan Howard Digital analysis of Ethereum blockchain
USDC Source: Liao, Gordon Y. “Macroprudential Considerations for Tokenized Cash,” 23 September 2022. USDT Source: Brevan Howard Digital analysis of Ethereum blockchain

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

Additionally, as highlighted by Gordon Liao at Circle, of the around 2 million wallets holding USDC on Ethereum-compatible chains, approximately 75% (or 1.5 million) of these hold less than $100.

Based on this data, we conclude that stablecoins are not held because they are "casino chips" but because they are a superior form of dollars that are more useful and accessible than dollars held in the traditional financial system. We increasingly see stablecoins used to send money internationally, to store value in countries with unstable currencies, and for peer-to-peer transactions. In the coming years, we expect to see these, and other use cases continue to accelerate, and eventually, for trillions of dollars of stablecoins to be outstanding.

3) DeFi Shining as Open and Resilient Financial Infrastructure

Decentralized Finance, or DeFi, refers to permissionless financial products built on public blockchains. While DeFi volumes have declined massively due to the decrease in speculative trading, the value of open, transparent, and composable financial primitives have been demonstrated through the market turmoil in multiple ways. Two of these are highlighted below.

The first is that DeFi has demonstrated open systems' technological and operational resiliency. Following the collapse of Luna/UST and Three Arrows Capital, several centralized lending platforms sustained massive losses, pushing some into bankruptcy, and some centralized crypto exchanges went offline due to heightened volumes. During this time, decentralized lending platforms and exchanges such as Aave, Compound, and Uniswap operated as programmed and without any downtime or loss of customer funds.

The second is that DeFi has started to succeed in broadening 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 DeFi broadening access to financial services is collateralized lending (aka borrowing against assets), which is typically superior to uncollateralized borrowing due to lower rates and potential tax benefits. Using decentralized protocols such as Aave and Compound, anyone with crypto assets can easily borrow against these assets in minutes. This contrasts with the traditional finance world, where, according to Cerulli & Associates, only around 7% of Registered Investment Advisors (RIAs) offer the ability to borrow against securities portfolios – and of those that do, 40% take more than a week to fund a loan.

In summary, there is a lot of beef. We are seeing substantial deployment of Web3 technologies for non-speculative use cases, specifically in NFTs creating a new category of luxury goods/fashion/art, stablecoins emerging as a global value transfer rail, and DeFi shining as open and resilient financial infrastructure. We believe we are entering a pivotal time where these and other non-speculative use cases will overtake financial speculation as the primary ways that Web3 technology is utilized, and we have never been more excited to back founders pursuing this vision.

The commentary contained in this document does not constitute investment research and should not be viewed as independent from the trading interests of the Brevan Howard funds. The views expressed in the document are not intended to be and should not be viewed as investment advice. This document is provided for information purposes only and does not constitute an invitation, recommendation, solicitation or offer to subscribe for or purchase any securities, investments, products or services, or any investment fund managed by Brevan Howard or any of their affiliates. Unless expressly stated otherwise, the opinions are expressed as at the date published and are subject to change. No obligation is undertaken to update any information, data or material contained herein.

Opening image source: ‘Where’s the Beef’ Board Game, Milton Bradley

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