As I sat down to write this week’s newsletter, my initial intention was to write a piece entitled “It’s Time for DeFi”, in reaction to the Central Bank of Nigeria’s decision to freeze the bank accounts of asset management fintech platforms. (I tweeted about it too.)

The draft began, “I told myself I wasn't going to write about the crypto economy so much, despite my personal interests and my belief in its merits for African markets...” I then proceeded to write about crypto.

This piece is still about the crypto economy, but it's not an entirely bullish take, as I had intended to write. Instead I wish to ask: does crypto win? And how?

To be sure, I think it's an inevitability. But I worry, in particular, about making a case for crypto and DeFi in reaction to unscrupulous regulation.

A wise person this week reminded me that crypto advocates cannot rely on antagonism towards regulators, even if decentralized application are inherently unregulatable. (I mean, wouldn't adoption be even more rapid if the on- and off-ramps were less frictionful?)

The thing is, in Nigeria the value proposition for investing in cryptocurrencies or DeFi protocols is readily apparent. Stock market crashes, consistent currency devaluation and unpredictable government policies have all pushed Nigerians towards crypto (as well as towards the very same asset management platforms that had their assets frozen by the CBN this week).

We've already seen a significant rise in peer-to-peer cryptocurrency trading in Nigeria both in spite of and in reaction to decisions by the CBN, including its edict to banks to shut down the accounts of crypto exchanges in February 2021. Nigeria became Paxful's second-biggest bitcoin market during that time and trading volume has grown steadily throughout the year.

But there's two points worth making here.

First, I do think that the African tech ecosystem does, at times, conflate the Nigerian experience with the African experience. Yes, it's easy to make the case for crypto in Nigeria - but what about in markets where there aren't overreaching regulators or long-lasting currency devaluation?

Which brings us to the second point. Trading and speculation and cross-border payments is barely scratching the surface of the opportunities within and created by the crypto economy. The use cases extend far and wide beyond the Nigerian experience.

And for the crypto economy to achieve wide(r) spread adoption, particularly against significant incumbent and governmental headwinds, perhaps we ought to shift the focus and discourse accordingly.

The Crypto Economy, Web3 & Web2.5

I'm using the term crypto economy intentionally here. Let's take a step back for a moment.

Back in 2004, Tim O'Reilly popularized the term Web2.0, as a distinct evolution in the web that was taking place at that time. Whereas consumers generally interacted with static webpages during Web1.0, Web2.0 was epitomized by social media and user-generated content, amongst other characteristics. And Web2 was turbocharged by key technological advances such as the mobile phone and cloud computing.

We are now entering an entirely new phase, Web3.0, made possible by decentralized protocols built on blockchain networks like Ethereum. While many crypto enthusiasts tout the decentralized nature of these networks - in the context of social media platform's banning users or governments' heavy-handed regulation, for example - an important benefit to decentralization is its impact on a given value chain.

Web3 and crypto-native applications - decentralized protocols in which smart contracts perform a given set of predefined actions on the blockchain - cut out the middleman. This is the crux of DeFi.

What you get are lending protocols like Aave, which allows individuals to lend and borrow without a centralized intermediary. Borrowers put up other crypto tokens as collateral, allowing them to receive a loan from other individuals, instead of centralized institutions like a bank.

This has huge implications in emerging markets, in particular, where there is such a high unbanked population and low access to finance.

And the use cases for smart contracts, in general, are innumerate, and especially relevant in environments of low trust and in areas such as land rights or home or vehicle financing.

However, participating in many DeFi applications today is not simple. It requires the user to possess cryptocurrencies - which they would have had to purchase on an exchange - to transfer those cryptocurrencies to a "non-custodial" wallet like Metamask, to link their wallet to the protocol's app, and to borrow select tokens from a given "lending pool"… not to mention to understand what all these coins are and what a lending pool is and what APYs are and all of the risks associated with all of this stuff. It's that simple!

Therefore, the big question for the crypto economy is how to make this stuff more approachable to drive further mainstream adoption. Or perhaps in other words, how do you get people into the crypto economy without them even realizing they are entering the crypto economy?

We are indeed seeing native Web3 applications making it easier to get into the crypto ecosystem. I am particularly intrigued by so-called Web2.5 platforms that are built on Web3 technology with a more user-friendly and familiar front end.

On the lending front, Goldfinch is a decentralized lending platform currently focused on emerging markets. Not only are they focused on building a protocol that does not require collateral, but they are partnering with reputable lending businesses in Nigeria and Mexico, which draw down from the protocol to deploy to their customers.

On the "the next big will start out looking like a toy" front, many people think NFTs, all the rage in the crypto and collector and digital art space, have the potential to be crypto's "killer app". While many NFT marketplaces only transact in cryptocurrencies (and via the multi-step process outlined above), there are also Web2.5 platforms that sell NFTs in fiat currencies.

The Winklevoss Twins' Nifty Gateway and NBA Topshot are two such examples.

In the African context, much like the traditional payments ecosystem is being built to support the nuances of the markets in which its builders are operating, so too may the local crypto ecosystem - or, rather, the local payments ecosystem's interaction with the global crypto ecosystem - require similar considerations.

(I, for one, would be very curious to see if the CBN would give Nigerian payments companies a hard time for transacting with a marketplace that sells "digital collectibles" in fiat.)

Another possible "killer app" are play-to-earn games like Axie Infinity, which I wrote about in TFN #63. In particular, the scholarship programs being built around the Axie ecosystem - in which players from low-income countries are leasing characters for a share of the play-to-earn revenues - sees these players earning crypto without having bought into the crypto economy previously.

Or, it's very likely that crypto's killer app will be something entirely different and yet-to-be imagined. That's what's exciting about this space!

And these applications aren't competitive with incumbents - they are market-creating innovations targeting nonconsumption. These are the use cases (amongst many others) that extend far beyond the Nigerian experience. And with continually improved user experiences, they will bring more and more of the general public into the crypto economy.

Which I believe is for the better.

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✌️ Justin

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