#69 | A web3 adventure
Conceptualising a fully decentralised crypto mobile money network for emerging economies...
Week by week (even as the crypto markets fall precipitously), it's clear that web3 is here to stay. Perhaps more than anything, web3 is decentralised and, therefore, hard to shut down.
In a hilarious episode of the American Office, Michael Scott (the boss) applies for a corporate job at the Dunder Mifflin Paper Company. If successful, he'll have to leave his role as Regional Manager in Scranton. With his typical dead-pan arrogance, Michael asks, "what happens to a chicken when you take its head away?"—it dies, he surmises. With Web3, because it's composable and decentralised, there is no chicken head, so even when China bans all Bitcoin mining, the network perseveres uninterrupted. It's a fantastic feat (more on this here, halfway down).
So, there's a backdrop of:
web3 being un-cancellable, and
a tonne of talent pouring into the space, and
the government's becoming increasingly laden with debt (see graph from the IMF), thereby undermining their economic authority…
…the potential of crypto taking a disruptive foothold is increasing. The IMF (for once) speaks of the benefits (my bolding): "…a new era that makes payments and other financial services cheaper, faster, more accessible, and allows them to flow across borders swiftly. Crypto … [has] potential as a tool for faster and cheaper cross-border payments. Bank deposits can be transformed to stablecoins that allow instant access to a vast array of financial products from digital platforms and allow instant currency conversion." Sounds great.
However, the change will be disruptive. The rise of crypto sounds a fall in government control over the currency markets. The same IMF paper writes of the risks associated with the "cryptoization" of emerging markets. They raise the alarm to governments: "Increased trading of crypto assets in these economies could lead to destabilising capital flows."
Innovation tends to happen at the edges. The adoption of Bitcoin as a national currency was always going to happen in El Salvador before the United States. Similarly, I expect the widespread adoption of crypto to happen sooner in emerging markets, not in developed ones. For this to happen, access to the ecosystem needs to (a) become seamless to adopt and (b) become safe to use.
As non-crypto evidence of this ‘innovation at the edges’ thesis, I point to mobile money. (The leading mobile money markets are in emerging economies. (I could also point to Claton Christensen, too). In Kenya, the M-Pesa mobile money solution enables Nokia brick phones (or similar) to send money instantly, with no internet, using USSD code. The LSE wrote:
"In practice, the [M-Pesa] service allows for branchless banking through SMS, effectively leapfrogging the need for internet connection or conventional banking infrastructure."
[Nb. A theme I keep returning to is this concept of leapfrogging. Most people have gone straight from cash to mobile money, skipping the messy bank-card stage in between. Similarly, most went from no phone to a mobile, skipping landlines. In emerging markets, what else will be leapfrogged?]
I joined Kernel a couple of weeks ago in the spirit of (techbro) exploration. Per Kernel's website, it's
"a custom web3 educational community. We are building an open, peer-to-peer, lifelong network of awesome humans, one block at a time."
Each block is a few hundred individuals and lasts for eight weeks. It's great. Each of us has an 'adventure' as we learn about crypto. My adventure is a research piece, and today I thought I'd walk through it with you—to get you insights. My views are sharpened on the whetstone of the hive-mind of subscribers. So, let me know if anything here jogs a thought or a memory or a connection or whatnot.
My adventure is: to research and conceptualise a fully decentralised crypto mobile money network for emerging economies. In doing so, we'll look at the main barriers to this happening.
While brilliant, M-Pesa (or similar mobile money) technologies have their drawbacks.
It's hard to send money abroad without incurring high international transfer fees. A primary use case for crypto is this benefit, and it's been extensively written about.
Predatory lending exists because of a lack of competition. Micro-loans (of $1+) are delivered through the M-Pesa platform at monthly interest rates of 30% - 60% in the case of Fuliza, 20% per month for Tala and Branch, and annualised loans of 100% - 500% APR in the case of M-Shwari and others. Consequently, 50% of borrowers pay their loans late.
M-Pesa is a monopoly. It "annually process the equivalent of 50% of its GDP … Over-reliance on such a platform could bring an economy grinding to a halt in the event of a hick-up." Consequently, costs can be high. According to Wikipedia, "a transfer of $1.50 cost $0.30 at the time [2013], while the same provider charged only a tenth of this in neighbouring Tanzania, where it was exposed to more competition." For small transactions, withdrawing money can cost up to 26.7 per cent, fo 50KSH or ~0.5USD transactions.
In the coming weeks, with Kernel, I'll be exploring:
Assessment of benefits of crypto to the user group: This study can look at the benefits of mobile money and compare its relative advantages with/without crypto. All too often, the crypto advantages are overblown (especially when considering instability and gas fees…).
Access challenges: How does an individual get a wallet, how is this attached to their identity, and how users withdraw/deposit funds. The proof on humanity question may arise here, as will the operational risks of seeding a new market and building a USSD (rather than phone-app) interface, which is accessible. The atomic network may be conceptualised here.
Stablecoin-specific issues, and regulation: Stablecoins have been instrumental to the growth of crypto in the last year—allowing investors to keep assets in crypto while being shielded from the infamous market volatility. The US dollar value of stablecoins has risen dramatically in the last 12 months. When building crypto products for emerging markets, where the loss of 40% value (as we saw during May 21) would be detrimental to livelihoods, the use of stablecoins is critical. Using algorithmic stablecoins, such as FEI, or DAI, has implications if individuals are paid in KES (Kenyan shilling). Research in the challenge of design, use, and potential regulatory risks concerning stablecoins and crypto generally. The regulators appear to be testing the water.
Market dynamics: Yellow Card is the market leader exchange, but it fails to solve the practical operational problem of a network of agents (it, itself, is centralised, akin to Coinbase). Would it be possible to build a decentralised organisation whether the hard side of the market (the agents) is rewarded for its participation?
Product: Ultimately, the solution to the list of problems with M-Pesa is a product, and it would be good to investigate what form that might take.
I doubt crypto is the solution today, however, it’s going to be interesting to assess what needs to happen for the crypto community to build a viable alternative. I'll share some of my findings here, as the course continues.
My week in books
Sprint by Jake Knapp is another book about product management, and how to test ideas fast (with a weekly cadence). It’s relevant to me now, so I enjoyed it, but you’d get just as much out of a long blog post as reading this. LINK
The Stranger in the Woods by Michael Finkel tells the true story of Christopher Knight, who spends 27 years living in the Maine woods, alone, as a hermit. In a quarter of a century, he says one word to one hiker, ‘hi’. He survives by stealing from holiday cabins close to his camp and is eventually caught and imprisoned (not a spoiler!). Two quotes: “Two of life’s greatest pleasures, by my reckoning, are camping and reading—most gloriously, both at once.” (YES!!) and, “I think that most of us feel like something is missing from our lives. And I wondered then if Knight's journey was to seek it. But life isn't about searching endlessly to find what's missing. It's about learning to live with the missing parts.” It’s a great book and will resonate with some of you.
LINK
Live well,
-Hector