[Meltem Demirors at The PayID Conference]
The concept of a single, global payment network might have seemed outlandish a few decades ago, but in 2021, it may be just around the corner. A universal payment identifier system, PayID vows to make cross-border payments as seamless as email. During the recent Ripple UBRI event, developers, CEOs, and analysts offered a persuasive introduction to the platform’s potential.
PayID’s disruptive concept is on par with a revolution that took place not so long ago: Paypal’s mobile expansion. In 2010, WIRED said Paypal was poised to become, "the virtual wallet you can’t leave home without." Promising blockchain safety and seamless transactions, independent from government authorities and banks, PayID is the new frontier.
Cross-currency blockchain protocols and biometric authentication will render SWIFT obsolete, creating the potential to break "the banking monopoly on global card-based payments," according to a recent CLSA report. "The potential here to facilitate automated seamless processes for consumers and users is substantial and would not be tied to legacy banking systems."
Ripple is the principal backer of PayID, launched by the Open Payments Coalition. A "free and open standard that allows for interoperability between payment networks," PayID allows for "organic growth where no single company can control or set the terms for joining," Ripple said.
PayID offers a simple identifying address, similar to email, but where the $ sign substitutes the @. It can be used to send and receive fiat and digital payments across any payment network. Wonder how to get a PayID? Check out this video by JamesRuleXRP.
According to Ripple, with PayID, "payments won’t run over fragmented networks using proprietary standards to complicated account numbers, but rather, will use a united network in which all payment companies participate and is built for today’s consumers and businesses."
During the recent PayID conferences, there were abundant opportunities to observe how PayID, the PayID sandbox, and the PayID-based XRP wallet Payburner work. While most of the presentations were focused on promoting the payment ID system, there was one that stood out during the second day of the conference offering a glimpse of the future and the challenges that await us in the rapidly transforming cryptosphere.
Titled "Securing Financial Networks: The Future of Finance, Compute, and Connectivity,"
Meltem Demirors' conference was both a profound exercise in historical analysis and an attempt at futurism.
Demirors, the Chief Strategy Officer of digital asset investment firm CoinShares, is a veteran in the digital asset space. She helped build Digital Currency Group after leaving behind the Oil & Gas industry, where she once worked in trading and M&A roles. Her new career seems to be going phenomenally well; Coinshares recently hit $1 billion in managed assets.
Meltem began her talk by reminiscing about her past in oil and gas and what she had learned about that industry's business model. "Power in our world is no longer the same as it was six months ago, a year ago, or 10 years ago," she said. She recalled that, unlike today, in 2009, the 10 largest companies in the world were companies that created physical things.
Now, the largest companies are purveyors of digital goods, which "control our ability to access the Internet." And the combined market cap of the top 10 companies today is four times what it was a decade ago.
In the shift from an economy dominated by energy industrials and banking to one dominated by Internet technology, Demirors sees the seeds of a new landscape where energy will continue to take center stage, but in a "radically different form."
The Future of Energy
As spending on compute and connectivity rises exponentially, there will be a need for massive physical infrastructure to secure data. Over the last decade, the digital economy went from a scenario where it contributed an insignificant amount of GDP to one where five digital overlords make up a quarter of the U.S. stock market.
Microsoft, Apple, Amazon, Facebook, and Google are ubiquitous in our everyday lives. So far, the interactions facilitated by these tech giants mainly involved personal data, but with the advent of digital finance, digital companies will also control all of our financial interactions.
As systems migrate to the cloud and governments spend insane amounts of money on protecting data from potential threats, the physical infrastructure required to sustain that growing digital world will become a crucial point.
Our country's lawmakers recently proposed a $23 billion bill to bring semiconductors back to the U.S., and a top Taiwanese chip factory has announced it will build a $12 billion plant on U.S. soil. Investors are pouring money into data centers at an unprecedented pace, and data centers are critical infrastructure for this new digital economy.
Infrastructure is political, according to Meltem. "We're in the eve of a new online digital economy, and the underlying infrastructure that's needed to support this online digital economy is also in its infancy."
The crypto investments consultant believes it is crucial to secure access to financial networks and keep user data safe. Demirors forecasts that the expansion of digital finance will thus lead to an era of investment in energy, compute, connectivity, and financial technology on an unprecedented scale. He also believes that cryptocurrencies will play the leading role.
The Cryptoshares executive's focus on infrastructure is informed by her years of work on building the Bitcoin ecosystem. When Demirors entered the business six years ago, the focus was on building networking facilities. Since then, she has been investing in companies "in the payments and transfer space, in the markets and infrastructure space, in the developer tooling space," and she believes the focus is now back on the networking space. "All of these layers of infrastructure are necessary for us to build a robust ecosystem for open global digital commerce."
The Bitcoin Value Chain
When you create a transaction, you typically use an app (an exchange, a wallet, etc.), a user interface. When you broadcast the transaction, the underlying hardware of what makes these networks work comes into play. When you broadcast a transaction, you're sending a message to all the nodes in a peer-to-peer network. But this is not an ethereal network, it has to be "physically instantiated," Demirors explains.
Bitcoin offers a prime example of a peer-to-peer telecommunications network that facilitates transactions on a global scale. According to Meltem, a resilient peer-to-peer payment system cannot be built on top of AWS; this is not the right path to guarantee maximum resilience. "It's just going to get you an AWS level service, and as we've experienced, sometimes AWS goes out, DDoS attacks occur," she says.
For these reasons, the physical instantiation of these networks is extremely important. When we validate a transaction, we typically rely on a wallet. And when we finally verify the transaction, we get to the most physically intensive and most compute-intensive part of this process, which is mining a block.
Bitcoin mining is not unlike oil and gas production
Bitcoin mining has to be cost-effective. Today, the majority of mining is co-located with cheap energy production. "The ability to operate a mining facility at scale and at low enough cost to make it economically viable," Meltem says, "resembles a lot of what I did in the energy industry. You would try to figure out, 'hey there's a huge pile of oil trapped in this place, in the Arctic, and we need to drill through two miles of sea ice to get to it, and then we need to build a robust supply chain to take that oil and get it to market."
In the energy industry, Demirors recalls, the goal was to extract the oil in a safe, economically viable and sustainable way over a period of 10 or 20 years, but now, "we're asking that same question but it's over a period of 100 to 150 years, so the stakes are very high," she says.
To people's naif idea that when you push a button on your phone, your transaction just goes into this 'magical ether' and magically gets processed, Meltem contraposed the physical infrastructure that we're actually depending on for those transactions to go through.
In the value chain of Bitcoin, the initial stages are very asset light, but they become increasingly asset heavy when you get to the validation and verification steps. Demirors compared this model to energy production, which works the other way around, from costly and asset heavy extraction to creating "asset light things like electricity."
Demirors' Core Thesis
Demirors envisions a future where firms and nations will compete to secure access to blockchain networks. "Bitcoin is three things at once," she said, "it's a store value, it's a payment rail, and a speculative asset." The crypto investment advisor kept referring to Bitcoin as the most salient example, emphasizing that other cryptocurrencies and blockchain protocols share many of its characteristics.
Meltem brought up the Modigliani-Miller theorem in order to predict where the digital economy will look for capital over the next decade. As the screen displayed the Nobel-prize winning economists' formula for the Weighted Average Cost of Capital, “WACC”, which focuses on the after-tax cost of capital, and the importance of debt, she said, "Silicon Valley has [been focused on] equity because equity is much more sustainable than debt, but in this new asset-heavy business model, we need new types of financing."
Acknowledging that digital payments and cryptocurrency startups have so far relied on funding from venture capitalists, Demirors advocated the need for a change "because equity is very expensive. Typically, a round of equity will cost you 20 to 40 percent." Today, she argues, debt is not as expensive, capital is highly available, and, "for the first time we have a growing market for asset-backed debt that is a game-changer for the way we build physical compute infrastructure."
Considering WACC is fundamental because none of the companies on the cutting edge of digital payment systems will be able to provide efficient services if the physical infrastructure to support blockchain payment networks is not available.
"It is very important to invest in finance computing connectivity and the energy complex," she says, "because it has profound implications for cybersecurity. At the end of the day, payments are a type of communication, and if you can control what is communicated, how it's communicated, and who it's communicated to, you can control the world."
While other thinkers devote their time and energy to considering the software and applications that will drive the new era of digital payments, Meltem wants us to shift our attention towards the resilience, security, and viability the underlying physical infrastructure will require.
Demirors' idea of the future is centered on data compute and connectivity. "In the future," she says, "maybe we'll build data centers on ships or in outer space, maybe outer space will just become a giant data center to support the intense amount of compute that is happening here on Earth."