Digital wallets - full of NFTs - will replace physical wallets.
Hey friends -
Every once in a while I read an article that changes how I think. In retrospect, I oftentimes find that many of the puzzle pieces were there floating around in my thoughts, but I couldn't see the whole picture. The article serves as much to solidify the image as it does to open my eyes to a new way of thinking.
Alex Danco's interview with Packy McCormick on Not Boring is one of those articles.
Alex heads up the blockchain team at Shopify. They're building the infrastructure for Tokengated Commerce - exclusive access to goods and experiences only available to specific token holders. Hence, token gated commerce. These tokens are NFTs - non-fungible tokens - but please remove from your mind images of poorly drawn apes and multicolored squiggles. That's a popularized version of how the technology is being used today. NFTs, and what they unlock, are so much greater.
In fact, NFTs will probably replace your entire wallet.
In this week's letter:
Total read time: 11 minutes, 22 seconds.
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The pandemic was weird. Especially in the beginning weeks when many of us (well, at least me) expected that the world would return to normal in just a few weeks. Little did I know that I wouldn't step foot in my newly rented office again until I returned to clear it out.
Early on, I discovered that I can remember to bring a maximum of three things with me when I leave my apartment. I can bring a wallet, keys, and a cell phone. Or I can bring a wallet, a cell phone, and a mask. Or a mask, wallet, and keys.
But I can't remember all four - wallet, cell phone, keys, and mask.
I solved the dilemma by finally adding my credit card to the wallet on my phone so I could tap-to-pay. Cell phone, keys, and mask it was. It was the beginning of an odd realization - I hate carrying my wallet.
It's clunky, disorganized, and prone to being left in rather odd places around my apartment. I can't ping it when I lose it, I can't encrypt any of the stuff it stores, and it definitely isn't password-protected. It's a relic of a bygone era that I look forward to leaving in the past.
Let's take apart my wallet.
A lot of space is taken up by physical cash (okay, not that much). It's a generally inconvenient way to pay for most goods. I'm always running out and when I do pay with crisp bills, I get a bunch of clanky metal coins in return. Cash does have the benefit of being an anonymous bearer asset for payments, so I can keep a burgeoning Insomnia Cookie habit off my joint credit card bill.
I carry around credit cards to solve my cash problem. My cards come with the added benefits of deferred payments and loyalty points, but I now carry around multiple cards as I optimize among cash-back, travel points, and other rewards. That takes up more room.
I inevitably have a mess of receipts shoved in my wallet next to my cash. They're proof of what I purchased, and from whom. By the time they make it out of my wallet, they're often illegible.
I have multiple ATM cards, one for each bank that I use. They're each an identity tool that, together with my PIN code, convince my bank that I'm really me. Once I've verified my identity, I can convert my deposits to cash or transfer my deposits to another account holder.
I also have two insurance cards, one for dental and another for health, that function as identity tools when I visit the doctor's office. Together with the insurer's sign-off, they convince the doctor that I have insurance and that the office can bill the insurance company.
Of course, I have a government-issued identity card as well - my license. It serves many purposes including convincing bars I'm old enough to drink and rental car companies that I'm authorized to operate a motor vehicle. It's also convinced me that my hairline is, in fact, receding.
There are key themes across the "stuff" in my wallet. Cash is a bearer asset - if someone steals my cash, it effectively becomes "theirs" and they can spend it at will. Credit cards and licenses are a degree removed - they are supposed to be validated with a signature and picture respectively, but the high rates of fraud for both demonstrate that those validation checks are poor.
ATM cards are yet another degree removed - they combine something you have (a card) with something you know (a PIN) to validate identity. Insurance is the furthest removed. It generally isn't accepted until the doctor's office verifies enrollment with the insurance company; it's not really a trusted identity at all.
Receipts are the oddball - they're proof of prior activity.
I'm not sure why any of these needs to be in my wallet. If I can put my credit card on my phone, why can't everything else live there too?
A digital wallet on your phone - full of NFTs - will replace your wallet.
It's a seemingly absurd premise but bear with me. We're not all that far away from this new reality. Let's go one by one through my wallet again.
Physical cash can be replaced with stablecoins and, eventually, central bank digital currencies. Those can live in a digital wallet on your phone. Look no further than the 50 million mobile money users across Africa making over 15 billion transactions per year on M-PESA to get a view into what this looks like. Or look to Sweden where just 9% of transactions are done using cash.
Credit cards can likewise live in the digital wallet too. When you tap your phone, it sends an authorization to the card network and your bank authorizes the purchase. "Tap to authorize" works well for ATM cards, insurance cards, and licenses too.
Almost unbelievably given the speed at which government normally moves, digital licenses are already here. ISO already created a standard, Arizona already issues digital licenses on the iPhone, and the TSA is updating its systems to allow you to scan them at the airport.
Receipts can be sent to a digital wallet after a transaction. It's evidence of an event that took place between the two parties sometime in the past that doesn't need to be reauthorized the way a credit card payment does.
It's one digital wallet with all three different types of instruments:
But once you start there, why stop with just the stuff that's already in your wallet? Digital wallets don't have physical space limits. They can hold an infinite number of unique, identity-related proofs. Proofs that you, the wallet holder, own.
Digital wallets mean you own your identity. We think we own our identities today, but we don't. Certainly not all of it.
Validating prior employment is a standard part of screening for most jobs. You don't own that part of your identity. You're dependent on either a bureau that maintains such records or your prior employer who can validate your experience. The same goes for your college degree and any other certifications you might have.
Credit history can be particularly painful. A good friend recently applied for a mortgage, only to find that she had a less-than-stellar credit score due to a single unpaid $50 medical bill. The physician's office sent the bill to the wrong home address, never bothered to follow up, and tossed it to debt collectors rather than resolve the issue. An otherwise unblemished track record of paying her bills was tarnished by a lazy physician's office and a credit bureau that's not incentivized to fix the problem. We don't own the credit score aspect of our identity.
In theory, we own our medical identity, but reality isn't as kind. We're entitled to request our full medical history, but good luck actually getting a copy. I'm still waiting on my dental records from three years ago. We don't own our medical records.
So we own our identity... besides our employment history, educational degrees, credit score, and medical records. That's just the starter list. It's rather a big gap in what we actually own.
It leads to a strange dynamic - we struggle to prove who we are. We're hugely reliant on third parties validating our identity. Authorization is never transferred - prior employment is rechecked again and again at every new job. We don't have something we can carry with us that proves where we worked.
It's the same problem articulated by Alex Danco when discussing Tokengated Commerce - how do you prove that you're a Harley Davidson superfan? Today, you might go buy a leather jacket or get a tattoo.
Nothing against anyone who wants a Harley Davidson tattoo, but NFTs are a much more elegant solution.
NFTs reside on blockchains. With software, it's trivial to prove who issued a given NFT. That gives us authenticity.
Blockchains, because they are shared across many disparate parties, have built-in de facto standards. The original NFT standard on Ethereum is ERC-721. You can check it out here. A standard means anyone, anywhere knows how to interpret and interact with an NFT without needing to know its contents in advance. That facilitates the general use of NFTs.
It's all the makings of identity back in the control of the individual.
Rather than get a tattoo, I can get an NFT. It allows me to fit in with the Harley Davidson superfans. Mine might be a little different than the other Harley Davidson NFTs - it's dated to when I joined the club - which allows me to stand out among the superfans. Those are powerful social dynamics. Harley Davidson can harness them by giving me - the NFT holder - special access to exclusive biker rallies.
NFTs allow you to declare "I have, therefore I am." You can do the same with educational degrees - declare to your employer that you are an [insert college name here] graduate because you own an NFT irrefutably issued by the school. That NFT quite literally is an immutable degree, one that doesn't require the school to re-authenticate to prove validity. It's yours, forever.
These are two different modes of interaction. The Harley Davidson NFT is issued by the brand and then declared back to the brand. A college degree is issued by the college and then declared to an employer. Two parties versus three.
There's a third model - identity in aggregation. If I can demonstrate a successful history of always paying my rent and credit card bill on time, why does an underwriter need a credit score? In aggregation, that's exactly what receipt NFTs can do - they can offer time-series proof of successful on-time payments. If you bundle the receipts with NFT paystubs (which also validates employment), you start to create a novel source of valuable information for underwriting.
We can extend it to insurance underwriting too. I have a WiFi-enabled smoke detector in my apartment that sends our regular "heartbeat" pings to my network to make sure it's still online. Send a second ping that's an NFT. My home insurance company could give me a discount if I demonstrate that I'll instantly know if there's a fire regardless of if anyone's home. A time series of daily proofs that the smoke detector is online does exactly that.
All of these NFTs are back in the control of the individual. They're issued at a point in time - when the transaction actually happened - to be reused at the holder's leisure without further dependencies on the issuer. The individual doesn't have to use them - I don't have to tell my insurance company that I'm a lower risk - but I can choose to. It puts identity back in the control of the individual.
An entire industry will emerge as the middlemen, translating user-declared NFTs into actionable decisions. That industry is embedded finance.
NFTs are embedded finance's next big opportunity.
It won't be the banks, the insurance companies, and the other heavily regulated companies that first learn to incorporate self-declared NFT identity into their underwriting decisions. It'll be the move fast and break things fintech startups.
You can imagine moving across the country for a new job, renting a new apartment, and financing it all through Safely Finance. Embedded within that experience is an optional add-on to purchase renter's insurance to protect your goods. The embedded experience will be delivered through an insurance startup, but the balance sheet that underwrites the policy will sit with a major insurance company.
You'll be able to check a box that says "share my smoke detector data to get a $50 per year discount." Buried deep in the terms of service, the insurance startup will notify you that they actually use a third party to read that data. There - right there - is our NFT middleman startup, parsing the novel smoke detector data to allow the insurance fintech to craft a better policy. It'll be as seamless as using Plaid to automagically connect your bank account to TurboTax.
Or maybe your first interaction will be with NFT loyalty rewards. You attend the opening night of Marvel's Thor: Love and Thunder and are gifted an NFT loyalty reward. When you tap-to-pay for your popcorn and Coke at the next movie showing, the NFT unlocks a free box of candy of your choosing. You don't have to download yet another proprietary app for custom rewards. It all just happens seamlessly, magically, between your digital wallet and the embedded loyalty service in the point of sale terminal.
How these NFT-powered offers are financed remains to be seen. Some startups will attempt to be technology-only, leaving the underwriting risk and coupon-funding obligations to their bigger partners. Other startups will take that balance sheet risk themselves, perhaps underwriting the smoke alarm discount in return for a slice of the insurance premium.
NFT startups facilitating loyalty rewards may go a different direction entirely and treat the free box of candy as a customer acquisition cost. Once they know you like Marvel and movies, they can sell you a whole variety of new services and experiences, monetizing their special insight into your preferences.
How will we know when this NFT future has arrived? When we stop bringing our physical wallets with us and start using the digital wallets on our phones instead. What they hold won't be called NFTs. They'll be called names far more familiar: digital driver's licenses, insurance discounts, and fan rewards. But underneath it all, powering this whole system, will be NFTs and blockchain-based wallets.
I'm not partial to what it gets called. I'll simply be happy once I can finally leave my wallet at home.
A wonderfully bitter cocktail that’ll keep you coming back for more.
0.75oz Rittenhouse Bonded Rye
0.75oz Aperol
0.75oz Averna Amaro
0.75oz Lemon Juice
2 dashes Angostura Bitters
Lemon Peel Garnish
Pour everything into a mixing glass. Add ice until it comes up over the top of the liquid. Stir for 20 seconds (~50 stirs) until the outside of the glass is frosted. Strain into a rocks glass. Squeeze the lemon peel over the glass to express the oils and drop it in. Enjoy! (Note: originally this is a shaken drink. I prefer the texture stirred but to each their own.)
Funders & Founders is already paying dividends! Guest Joe Hasselmann is a man of many talents, including cocktails! The Icarus Wing is an odd drink. I initially liked - but didn’t love - the deeply bitter flavors. Averna, Aperol, and lemon are all wonderfully back-of-the-mouth bitter, a sensation only barely mediated by the sweetness of Aperol. Citrus is predominant - orange permeates Averna and Aperol, and the lemon peel (which I mangled so it’s not in the picture) only ramps it up further.
I say I didn’t initially love it, but it grew on me in short order. Like that salty tin bowl of peanuts you absentmindedly consume at the bar, I found myself going back again and again to the glass. Paired with something spicy and fatty, this would’ve made the perfect complement, even better than a Negroni with a pepperoni pizza. Alone, the bitterness of each sip left me wanting another and another. Soon enough it was gone and I found myself making yet another.
Cheers,
Jared
