Coinbase Burns Its Boats
Before being exposed as a fraud, Sam Bankman-Fried lobbied Congress to have decentralized finance tightly regulated, to the benefit of his centralized exchange.
Brian Armstrong runs a centralized exchange, too, but he's going in the other direction: By launching a public blockchain, Coinbase is taking a first step in transitioning its business from centralized to decentralized finance.
The news was received rapturously by crypto natives, of course.
Many management gurus and venture capitalists will be equally enthused, as well: By going all-in on DeFi, Coinbase appears to be deliberately disrupting its successful CeFi business.
Clay Christensen would approve: The Harvard business professor's thesis of disruptive innovation posited that large companies, constrained by their success, are doomed to be disrupted by nimble upstarts.
By voluntarily disrupting itself, Coinbase will provide an out-of-sample test of that popular thesis, much to the delight of business professors everywhere.
And after some initial ambivalence, Coinbase shareholders seem pretty delighted, too: The stock was up as much as 14% today.
Disrupting the disruptors
The "innovator's dilemma," according to Professor Christensen, is that "doing the right thing is the wrong thing."
The right thing for Coinbase's existing business would be to follow SBF's lead in lobbying Congress to make DeFi inaccessible to most, ensuring that most US crypto trading continues to happen on centralized exchanges.
But the right thing for your existing business is often the wrong thing for your future business — and you can't do both: "Two models for how to make money cannot peacefully coexist within a single organization," according to Christensen.
If your model is to make money for your existing business, you'll miss out on making money from new, potentially much bigger businesses.
Coinbase, however, was never going to miss out on the new business of DeFi: Brian Armstrong announced his intention to embrace decentralized finance as early as 2016, with the publication of his four-phase Secret Master Plan.
With last week's launch of the layer-2 blockchain Base, Armstrong is transitioning Coinbase from phase three (100 million centralized users) to phase four (a billion decentralized users).
He's admirably early.
In Christensen's theory of market disruption, incumbent companies ignore demand for new technologies that don't serve the needs of their existing customers at the cost of missing out on a much larger market of new customers.
Christensen's canonical case study is Seagate, which missed out on a booming market for the low-cost hard drives used in laptops because it was too busy serving the biggest maker of desktops, IBM.
In this case, however, the new offering, DeFi, does not have many customers as of yet — which means that Coinbase is pivoting to a market that doesn't really exist.
That, too, is part of the plan: Armstrong intends to invent the mainstream market for decentralized finance.
This is a crypto newsletter, so I of course expect he'll do it.
If so, the Base blockchain could become a DeFi version of Apple's App Store, where Coinbase takes a cut of every transaction that occurs.
It'll be a very small cut — nothing like the 30% that Apple takes — but if the retail- and institutional-friendly apps Coinbase plans to build catch on, the fees could quickly add up.
And whatever they add up to, they're likely to be greater than the centralized fees Coinbase is leaving behind: Exchange fees trend toward zero over time (trading bitcoin on Binance is already free).
Longer term, Coinbase hopes Base will make DeFi invitingly safe for both novice retail users and regulated institutional users — which would open much larger markets for them: Like intermediating mortgages between, say, MakerDAO lenders and Coinbase borrowers.
But it's a long road. And being first to travel it does not guarantee success.
Kodak was first to OLEDs and lost to Samsung.
Xerox was first to GUIs and lost to Microsoft.
Blackberry was first to smartphones and lost to Apple.
MySpace was first to social media and lost to Facebook.
Coinbase could be first to DeFi and still wind up losing to, say, JP Morgan.
Or a crypto-native bank that's yet to be invented.
Or Coinbase may be building a public good: With the open nature of permissionless blockchains, fees could be competed away, leaving Base and all the apps that Coinbase builds on it freely accessible to any exchange, bank, or customer that chooses to connect.
Armstrong's mission statement for Coinbase — to increase economic freedom in the world — suggests he'd be happy with that outcome.
The DeFi community certainly would be: Mainstreaming decentralized finance might even vaunt Armstrong into the pantheon of crypto heroes alongside Satoshi and Vitalik.
And, whatever the outcome, the many acolytes of Clay Christensen will have a new hero: Success or failure, Armstrong will be lauded for proactively disrupting his own business.
Whether Coinbase shareholders join in the hero worship will remain to be seen.
No comments:
Post a Comment