The Breakdown - Bitcoin bank-ification / Do airdrops work? / Apple, Amazon & crypto

Episode Date: September 10, 2019

A new product from Gemini which allows custody customers to trade without moving their coins out of cold storage has sparked discussions about bankification that go all the way back to the beginnings of bitcoin. Meanwhile, Stellar announces a ~$120m airdrop to Keybase users prompting the question: do airdrops work? Have they ever worked? And if so, for what? Finally, on the occasion of Apple's most recent product event, what do we know about their crypto strategy?  Watch: https://www.youtube.com/nathanielwhittemorecrypto

Welcome back to another crypto daily three at three. All right, guys, happy Tuesday. It is Tuesday, September 10th, and we're going to be looking at three things. First, we're going to be looking at airdrops, specific airdrop with the Stellar Foundation, and then the idea of air drops more broadly. Second, we're going to be looking at the bankification of Bitcoin in the context of some recent news from Gemini. And third, we're going to be looking at Apple's ambitions in the crypto space or lack thereof. Apple just had its big product event most recently today.

So the question is whether there was going to be anything about crypto based on some recent rumbling. So let's dive in. First we're going to talk about Airdrop. So the Stellar Foundation is set to Airdrop something like $120 million worth of XLM tokens to users of the chat app keybase. Keybase is not a native crypto app. It's sort of a privacy encryption focused chat app competing with Slack. and WhatsApp and Telegram and everything else. And basically the Stellar Foundation is going to be air dropping

a big chunk of their token over the course of the next 20 months. Users of Keybase are able to get up to $500 worth of XLM. And this is not the first time that Stellar has done this before. So Stellar partnered with blockchain, the blockchain wallet, that sort of, or specifically, and Airdropped 125 million worth of XLM on that set of users. They've worked with Coinbase's Earn, blah, blah, blah, blah. And so for Stellar, obviously, the idea here is to get their token in the hands of a network of users, right? In a lot of ways, air drops in this context almost become a different form of advertising,

where instead of paying a third-party advertiser, you're giving the money that you would have spent directly on or on that advertising directly to the end users whose attention you're hoping to grab. And in that sense, it really is about attention, right? You are buying someone to look over at your thing for a minute and seeing what they'll do. Now, an airdrop of this size and scope obviously brings up the question of the utility of, the efficacy of air drops in general, right? So yesterday after this news, Jameson Lopp said, why are crypto airdrops still a thing? Has there been any research or evidence that giving people free tokens actually results in a non-negligible number of recipients becoming long-term adopters?

Gabor piled on. He said, my question regarding air drops, how is it permissible okay to dilute shareholder or utility token value without the permission of everyone in the network? In my view, airdrop dilution would almost never happen in a truly decentralized permissionless network, basically saying that if holders have X and then a whole bunch more get distributed, it's likely to, you know, it expands the supply, so it increases the, or decreases the price. That's, that's his estimation. So I kind of ask the same question as well, a little bit less cynically, but I do think that it's interesting to really think about, right? So if you go back and look at just how airdrops have played out in this space, they have kind of an interesting history,

right? So theoretically, they were designed in the same way that ICOs were designed to seed and kickstart a network of users to do something, right? And this is the conceit or the concept of utility tokens where tokens give some number of people access to participate in the network in a certain way. The idea of an AirDrop or an ICO even was to get that in from or get those tokens in people's hands who could actually do that. Practically speaking, they just became free money distribution, right? They were just a way for people to, you know, get a little bit of money or in the form of these tokens that maybe they could exchange really quickly and kind of come away with profit, right? So they were just free money. And I think that these two different sides have

obviously really different impact, right? Like the idea of getting people to participate in something is one thing. Free money is kind of just that. It's just free money. And it's hard to see really strong patterns of where that sort of free money distribution has actually had people come into that network and be really interested and excited. So, but that's what I was asking. and I got a few interesting responses. So John Lister here said many people actually gave out Bitcoin for free in the early days. There were faucets, airdrops at events and meetups. Imagine it would be a small percentage of total supply.

This actually reminded me of a story of Coinbase back when they were going through Wycombinator in 2012, gave away tokens for, basically they put one Bitcoin in each wallet of the other founders in their class. I wonder how many of those founders. ever forgot and then found their wallet later. It's kind of a nice little incentive package, better than a T-shirt or something, right? But that brought up an interesting thought for me, which is that I think that that idea of a third party almost peer-to-peer distribution is kind of more interesting, right? Because then you have an additional layer in this, which is not just, hey, here's some free tokens, but hey, here's free tokens and here's the context of why I'm giving

them to you. It almost is an excuse to pull people into the network by giving them. them something but but with a Sherpa right with a guide so that's kind of interesting now a lot of the responses that I got were things like this from from Anthony Sasano I pretty much sold all my end drop air drops that were not worth more than the gas I had to pay to move them that brought up those conversation about how there was in fact at one point a an app to actually the token toilet to get rid of the old air drop tokens that were just crowding up people's wallets so I think it's really interesting right I think that on the

one hand, I'm intrigued by the idea of airdrops as a almost as an alternative to advertising, where you actually have the ability to give the end users whose attention you want the incentive to look over in your direction rather than a third-party intermediary like an advertiser. That seems promising and interesting to me, straight up as a replacement to advertising. On the flip side, I do think that the ability for, you know, just handing out free tokens to actually get people incentivized to participate in a network is pretty low, right? I am pretty skeptical of it. Now, all that said, a lot of folks from Decred join this thread and are arguing very vociferously

that that was a pathway in for a lot of people and that a lot of people immediately staked their tokens and that a lot of people then later got involved. And I don't know enough to know how true that is, but it's interesting that that's what's being reported by members of that community. So, you know, it's interesting to watch. Like I said, any time that someone's going to put out $120 million, theoretically worth of value to people just for doing what they normally do, it's worth taking note of.

But I think that the larger question to me is whether this is actually an interesting strategy in what context and what is the long-term future of AirDrops. But with that, let's move on to number two, the idea of Bitcoin banking. So this starts with a new product launch, from Gemini. And basically, this is a, as CoinDest described, an institutional grade, crypto custody solution. And the big thing that people were excited about are making note of is that effectively customers would be able to trade without taking their tokens out of, without taking their tokens out of cold storage, right? So as they say, a platform which would

enable clients to trade assets instantly by offering them credits. So basically, the tokens of the 18 tokens or something that they offer now, which includes REP tokens, basic attention tokens, dye, maker, mana tokens from Decentraland, Engine, Flexicoyne, Bitcoin, Bitcoin Cash, Ether, like all those that you would expect. People who want to trade them, but leave them in storage can through this kind of credit system. So the interesting comment that I thought came from Bitcoin Birch. He said, Gemini offering custody that allows users to trade instantly based on their cold storage or offline balances. I can almost guarantee you'll see this from Binance, Crack, and Bitrecks

within a year. It's great for security of funds, but kind of just sounds like a bank, to be honest. And then other people pointed out that this isn't new. Other people have been doing this for a while, that it's kind of becoming a part of the custody solution set. Now, for me, the interesting thing, and this is kind of what I retreated, was this idea of the bankification of Bitcoin, the bankification of crypto. And to me, the real question is, where are the lines, right? So there are going to be, it seems to me, products and services that are value at, right, that allow certain categories of users to participate in this ecosystem in ways that they wouldn't be comfortable otherwise.

I've talked a lot about how, you know, I've seen relatives who are really interested in being involved, but who genuinely do not want to self-custody. And it's not because they don't understand or they don't understand why or they haven't spend the time learning. It's because they trust themselves less than they trust another institution. And that's just the way it is for them. And maybe that's a product of the time that they were raised in or what they ever. But these aren't particularly trusting people in general, right?

This is just for them, that is a function that they want to outsource. And I believe that that's going to be a necessary part of bringing some new set of people involved. However, there's a lot of space between things like third-party custody solutions and the full kind of leverage set of products that banks offer now. And already we're seeing lots of. of different banking style products, right, that are happening in this space. So Dan held for a while or a while ago posted about BlockFi and how why he put 10 BTC in BlockFi's interest account and what that meant and what the kind of it was as an alternative to hoddling, bringing up,

provoking a lot of conversation. There are a lot of people in the Bitcoin community who fundamentally disagreed with that. You have on kind of the other end of the spectrum, you have folks like Caitlin Long and Safene who are arguing really kind of vociferously that they're worried about things like fractional reserve banking in the context of Bitcoin. They're worried that that undermines the fundamental limits of the kind of 21 million coin system and changes the dynamics around scarcity. And that's a concern for them. And I think that that's a reasonable argument, something that at least has to be taking

seriously. And something that I think especially now is right now is the moment where traditional institutions are really figuring out how they're going to get involved. And so to some extent, if they aren't presented with new models, they're going to revert to whatever old models they have. And in some cases, that will be fine. But in other cases, that's kind of the opposite of what we're trying to go for. Now, one thing that I thought was really interesting, and we will end it on this note, is that this is not a new conversation. In fact, someone grabbed a clip from Bitcoin Talk in 2010, December 30th, 2010 from Hal Finney, where he gets into the specifics of Bitcoin banks.

So he says, actually, there is a very good reason for Bitcoin backed banks to exist. And forgive me for those of you who are watching. I'm going to read a little bit of this for the podcast listeners. There's a good reason for Bitcoin backed banks to exist, issuing their own digital cash currency redeemable for Bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included on the blockchain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purposes.

Purchases. Bitcoin-backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies. Some are aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin-backed. Interest rates may vary. Cash from some banks may trade a discount to that of the others. And so I believe this will be the ultimate fate of Bitcoin, he goes on, to be the high-powered money that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks to settle-knitransfors. Bitcoin transactions by private individuals will be as rare as well as Bitcoin-based purchases are

today. So this is 2010. This is the earliest days of Bitcoin. there's in fact, you know, Hal's opinion himself may have changed around this. I haven't dug in to see what else he wrote about this. But the interesting thing is, again, is to go back and look at how long this discussion has existed for, right? Since the very beginnings of Bitcoin, people have been asking this question as it related to the bankification of Bitcoin. And it's yet unresolved. And I, for one, am excited to at least see these new institutions.

like the blockfys, like the unchained capitals, like the Gemini's, figuring out their own versions of it. I think that having a new set of actors arise to try to compete with the old set rather than just seating this space is likely to lead to better net results for Bitcoin and for the world overall. And with that, let's go to another question of old world actors coming into this new world space. So today was Apple's iPhone event. That was the primary driver. They also announced a new Apple Watch. They announced a new iPad, iPad Generation 7, and some other things. But it was really about the iPhone.

And so Pomp earlier asked, will Apple discuss Bitcoin or cryptocurrencies at their event today? Now, the vast majority of people, even on this poll, said no, they wouldn't. And I think that that's how most people felt. But there was some reason to be at least discussing. it, right? So last week, and I think we talked about this here on 3 at 3, and one of the people who leads, Jennifer Bailey, the vice president of Apple Pay, said that they were watching cryptocurrency at a private CNN event. We think it's interesting. We think it has long-term potential. Those are her words. Now, folks like Neeraj over at Coin Center pointed out that that's literally about the safest

thing that she could say without giving any indication of what the company actually thinks or what it's building or where it wants to go. And other folks have kind of really pointed out how despite that, it doesn't seem like there's any real interest in crypto, at least on the part of Apple, right? So Jeff John Roberts over at Fortune wrote that basically in the world of Tim Cook's Apple, crypto is a bridge too far. It's too daring, right?

He says he brings up the hiring history. So he says, if you want further evidence of Apple's lack of crypto ambitions, you can also look at its hiring history. It talks about how other companies like Facebook and Amazon, tons of people with the blockchain and crypto in their titles, and Apple doesn't have any of those titles. Now, it's possible that that's on the sly, he says, but it probably means it's more like they're really just playing that spectator role.

Now, Jeff laments this. He thinks that they're the tech giant that would be best poised in some ways to get involved with cryptocurrency. So I think it's really interesting. So one, I think when it comes to Apple, by the way, as of my viewing, I have not seen anything about cryptocurrency. I didn't think that they were going to say anything. And for one reason. One, I do think that they're probably sitting a little bit on the sidelines for now.

Two, I think that Apple does things all the way when they do them. When they do something, they want to win it entirely and unquestionably. And so I can't see them jumping into this space without more evidence of exactly what they want to take on. It feels very unlikely to me that they want to launch Apple coin as a cryptocurrency for themselves. I think it's much more likely that they do something in the hardware space eventually and that they look at it in the context of their broader positioning as the company in big tech that actually cares about your privacy and your security. Because Apple makes hardware that you pay a huge amount for, it has the privilege from a business model perspective to actually care about your privacy as a user and to not have. to sell third-party data and to make different types of decisions about just how it interacts with its users. And it has started very clearly to use that as a leverage point from a marketing

standpoint relative to companies like Facebook who, in their estimation, just simply don't care about user privacy. And again, this comes from the privilege of their business model, but it's still a thing. It would not surprise me if Apple's five to 10-year plans see a potential convergence between that positioning and that set of opportunities around personal privacy and things like cryptocurrency. Maybe it's a wallet. Maybe it's a dedicated phone like we're seeing start to come up from companies like Quibi, but they're certainly not going to dive into that at this stage.

I don't believe. But I do think it's an interesting question to ask. If for no other reason that we've seen this summer with the launch of Libra, just how big a deal it can be, for a giant tech company like a Facebook, like an Apple, to dive into this space, right? Libra and its billions of users have set off a starting gun for governments around the world to really, truly, genuinely figure out

just what the hell they're going to do as it relates to crypto. And I think it's dramatically ratcheted up the nature of the conversation around digital currencies around the world and around the conversation about just the future of money. I think that Apple getting involved would have a similar effect. But I do want to leave you with this kind

of fun pondering. To me, you know, for all of this chatter around Apple and Facebook, I think that the even bigger elephant in the room in some ways is Amazon, right? So I've helped a couple different companies who are in the e-commerce space and spent some time with Amazon because of that. And it's amazing how big this company really is. I mean, we know this, but really to get into the specifics, like there are 90 million prime members in the U.S. who spent on average $1,300 a year. The non-prime members, I think, spent on average something like $700 a year. That's a huge amount of money that is pretty consistent. It's pretty predictable.

People have come to trust the brand. It's incredibly convenient. I think that it plays into the mega trend of as people leave cities and go into different places, Amazon becomes even more important. I can certainly tell you having moved from San Francisco to two hours outside of New York in the Hudson Valley, that Amazon just is the grocery store now. It's the mall. It's basically everything.

And so, you know, to some extent, it feels to me like if there was ever a recipe for a company that wanted to pull off a payment token that was their own and natively, it would be with Amazon. And I don't think that there's no evidence that this would be successful. I think for a long time and maybe still now, Starbucks mobile app was the biggest mobile money app in the U.S., right? I think the average user has a balance of something like $25 or $30 on that, which basically means we are lending a huge. huge amount of billions of dollars to Starbucks for free because it's just money that sits on those cards and gets used, but a lot of it doesn't get used. So I don't know. I think it's interesting. I think it's always surprising to me that we don't talk more about Amazon and its crypto ambitions, but what it will be is yet to come. So anyways, just a fun little one to end today. That's all

from me. I hope you're having a good start of your week and I will see you tomorrow. Peace guys.