From digital shopping malls to on-chain economies: How does capital flow reshape the crypto world?

For early-stage founders, knowing how to strike a balance between value capture and velocity is the secret to survival.

Original: Money Moves

By Joel John

Compiled by: Luffy, Foresight News

Cover: Photo by Jigar Panchal on Unsplash

Some might call it an addiction, but I often find myself wondering, “How much coffee is too much?” At some point, the amount of caffeine in your bloodstream may reach a point where the payoff from consuming more coffee is less than simply drinking more water. The brain thinks it needs more of this anxiety-inducing coffee, but the body is actually better suited to the simplest, most basic liquid known to man: water.

Markets are similar. We tend to think that more of a good thing leads to better outcomes. But returning to a new normal may be the priority. When tariffs stabilize at predictable levels, industries will adapt and readjust to the new normal; when venture capital slows, weaker companies will be eliminated, creating more stability for those that remain. Why do I say this? Just like drinking coffee, we have reached a local peak in cash flow velocity and fee extraction . The most important thing for the industry to do now is to figure out how to improve both sustainably.

Markets manifest this fatigue in some strange ways. Venture capitalists will argue that we don’t need more infrastructure; marketers will say we should focus on consumers; analysts will suggest we need products with economic fundamentals; and traders will wish for more volatility. As with many things in life, the truth is hidden in the motivations that drive people to think the way they do.

To put it in perspective, we can look at blockchains not only from a scale or throughput perspective, but also from a per-transaction fee perspective. At their core, blockchains are networks that facilitate the movement of money. They are thriving transaction ecosystems that operate in real time around the world. Bitcoin performs this function well and has earned hard currency status, but what about other applications?

In other words, what happens to the digital economy when money flows at the speed of information on the Internet? When the transfer of funds becomes as easy as a click, how will the formation and allocation of capital evolve? In today's article, I try to find the answers to these questions.

Digital shopping malls and smoke bombs

The Internet is a trading system, you just don’t realize you’re trading. In 2001, Google’s ad revenue was $70 million, or about $1.07 per user. By 2019, that number had ballooned to $133 billion, or $36 per user. In 2004, the year of its IPO, 99% of its revenue came from ads. In many ways, the story of the web is the story of how an ad network grew the value it extracted from each user 40x in 25 years.

You might not think it’s a big deal, but every time you scroll, search for content, or post a message, you’re creating a commodity: human attention. At any given moment, you can only focus on one thing at a time, maybe two or three at most. The attention economy aims to monetize this limited resource in two key ways:

• First, by optimizing the collection of information about individuals. On social media, this is easy to do because users provide feedback to platforms (such as X, Instagram, or TikTok) based on the type of content they spend time on.
• Second, by optimizing user engagement time. Netflix isn’t kidding when it says sleep is their competitor. By 2024, the average person will spend 2 hours a day on the platform, with 18 minutes of that spent deciding what to watch.

In short, you are not the customer, you are the product.

In any given year, you spend the equivalent of four days scrolling through media apps just to pick out what to watch. I can’t even begin to calculate how much time people spend on dating apps. The internet is interesting because we’ve figured out how to extract value by getting users to stay longer and share more of their information. The reason the average person doesn’t know how this works is because they don’t need to know.

Think of internet platforms as giant digital marketplaces. When you spend time on an app like X or Meta, the business pays the marketplace owner (Musk or Zuckerberg) in exchange for the chance that you might eventually make a purchase. In these digital marketplaces, attention is equivalent to foot traffic. Why does this matter? Because in the early 2000s, those more “primitive” marketplaces had a problem: users didn’t have debit cards, and businesses couldn’t accept direct digital payments. The trust and infrastructure were missing. So, instead of charging users, platforms monetized indirectly through advertising.

Advertising became a workaround for an internet that wasn’t ready for seamless payments at the time. In turn, it created a new economy that operated in a digital environment.

How does this system work? Every time you buy something online, the merchant pays the platform (digital marketplace) a cut of the transaction. On platforms like Google, this cut is in the form of ad spend. In other words, it doesn't matter how the user pays for the product. What matters is that the platform gets the revenue from the merchant through bank transfers and debit cards. The merchant has employees to handle payments and logistics. What about the user? They're busy dodging malware from LimeWire. So this model works pretty well. The platform doesn't need to teach the user how to pay, they just need to make sure the merchant pays them.

Fast forward to 2020, and the internet is obsessed with a magical NFT called Bored BAYC. OpenSea is the new mall, Ethereum is the payment network, and users are flocking in. But no one has really figured out how to collect fees from these users without getting into the complexities of onboarding funds, on-chain fees, Ethereum price fluctuations, transaction signatures, private keys, and setting up MetaMask.

The crypto products that fueled market growth in the following years all had one thing in common: they lowered barriers to entry.

• Solana makes it possible to eliminate the need for multiple manual approvals of transactions
• Privy allows users to hold wallets without having to worry about private keys
• Pump.fun allows people to create Meme coins in minutes.

The market favors simple and easy-to-use products, which is vividly reflected in the rise of stablecoins.

Capital Velocity and Network Moat

In January 2019, the total stablecoin supply was just $500 million, which is about the same as the valuation of some meme coins in recent months. Today, that number is $220 billion. A 500x increase in six years is a growth rate rarely seen in a person's career. But it's not just the supply that has increased significantly, but also the profitability of stablecoins. In the past 24 hours alone, Tether and Circle have generated a total of $24 million in fees. For comparison: Solana's fees are $1.19 million, Ethereum's are $975,000, and Bitcoin's are $560,000.

This may seem like comparing different categories of things, as one is a financial product (stablecoins) and the other is a payment network. But it makes sense when you consider that these two stablecoin issuers generated nearly $7.5 billion in revenue last year alone. These numbers are even more impressive when you consider that $3.3 trillion in volume was moved through stablecoins across 5.4 billion transactions with 240 million active unique addresses.

However, the revenue generated by stablecoins does not come from users, but from the returns generated by a portfolio of U.S. Treasury bonds and money market funds. This does not include the revenue generated by minting and destroying stablecoins.

When users pay with stablecoins, the fees are independent of the amount. On Solana, whether you send $10, $1,000, or $10,000, the transaction cost is the same $0.05. This is different from paying with a Visa or Mastercard, where you can expect to incur a 0.5% to 1.5% transaction fee. Yet stablecoins remain one of the most profitable businesses in the cryptocurrency space. Why is this the case? They solve the complexity problem faced by users in three ways:

1. They allow people around the world to gain access to a very popular asset (the U.S. dollar).
2. Stablecoins have the highest circulation speed. Whether it is through Paypal, wise or bank transfer, stablecoins can facilitate faster cross-border transactions.
3. Products like Kast allow you to pay for real-life expenses with stablecoins, and the network effect means more users will feel comfortable using stablecoins to receive and pay.

I find that in an industry obsessed with decentralization, the most profitable part is to earn revenue by centrally holding US Treasuries and issuing dollars on the chain. But this is the nature of technology. Ordinary people don’t care as much about the degree of decentralization as they care about what the product can do; they don’t care as much about the purity test of L2 as they care about transaction costs. From these perspectives, stablecoins are simply a better dollar.

Its innovation is not just about issuing dollars on the chain, but also about abstracting the complexity of fees like we have seen in previous generations of advertising platforms. The real genius of stablecoins is to find a reason to deposit a large amount of dollars in US Treasuries and survive on the income generated by Treasuries.

Stablecoins appear to be the winners. But if you look at it from a velocity perspective, they are not superior to traditional payment networks. Compared to the $33 trillion that was moved on-chain via stablecoins, last year alone, $13.2 trillion was moved via Visa, and Mastercard processed $9.75 trillion in transactions. So, combined, they process nearly $22 trillion per year. Visa alone processed 233 billion transactions, compared to the 5.4 billion transactions completed by stablecoins last year. One might think that the amount of money moved on-chain should be much higher given the lower transaction costs, but traditional payment networks win in both volume and number of transactions.

From a pure velocity perspective, legacy payment networks do better. But this is not because their technology is inherently superior, but because they have deep-rooted network effects that have evolved over decades. You can show up at a matcha shop in Japan, a baguette bakery in France, or the best bike ride in Dubai, and pay with the same payment instrument, a debit or credit card.

Then try paying with stablecoins stored on Polygon or Arbitrum and let me know how it goes. (Note: I actually tried this and spent 20 minutes waiting for a cross-chain bridge transaction to complete.)

The reason I bring this up is that we in the industry often argue that stablecoins are inherently superior to fiat currency transactions in all use cases. But in reality, the fees charged by Visa or Mastercard are comparable to the fees charged by any off-ramp to convert on-chain stablecoins into real-life dollars. This is like arguing that digital media is superior to print newspapers in all use cases, which is not the case. If you live in a remote mountain area without access to computers and the internet, then print newspapers are the best way to get media information.

Likewise, if you don’t do a lot of on-chain activity, a debit card is the best way to pay. But if you frequently go online or do on-chain operations, the experience may be significantly better. For founders designing the digital economy in the coming years, knowing how to distinguish between on-chain and off-chain, and understanding the different forms in which value can be captured, may be key.

The relationship between flow speed and cost

So how should founders think about fee models and growing market share? Should we be obsessed with bringing people on-chain, or should we find a way to make these on-chain elements useful? There are two ways to think about it, and both have reasonable, meaningful arguments to back them up.

One view is that revenues in the crypto space may be seasonal, but capital velocity is extremely high. In traditional markets, one would think that increased fees would reduce capital velocity. However, some of the most speculative parts of crypto come with very high fees. During the NFT craze, OpenSea charged a 5% royalty share and Friend-Tech charged close to 50% revenue share. Where profit is the primary driver, individuals will pay higher transaction fees and simply view transaction costs as the cost of doing business.

Nowhere is this trend more evident than in Telegram trading bots. Products like Photon, GMGN, and Maestrobot have collectively made hundreds of millions of dollars over the past few quarters for three core reasons:

• The seasonality of meme coins means users have a new market (like the NFT market in 2020) to speculate and profit.
• Integrating the wallet into Telegram and making the chat-based trading interface easy to use are some of the user experience improvements that allow users to trade via their mobile devices.
• Lower transaction costs and faster speeds on Solana mean that users can trade back and forth multiple times in a short period of time, thereby compounding profits.

The innovation is not just in the assets themselves, but in the behavioral changes brought about by cheaper, faster transactions on Solana and the communication channels provided by Telegram. Seasonal applications often have difficulty maintaining user stickiness, but the capital flow velocity is so high that it doesn’t matter if the industry collapses in eight or nine months. Users will pay extremely high premiums, and people who sell shovels in the gold rush tend to do well. The chart below shows the situation of Photon.

One thing to note here is that charging high fees in the absence of competition and with high capital velocity is only feasible. If enough time passes, the market will generate enough competition to drive fees down. This is why fees on perpetual swap exchanges are trending down. For products oriented towards the Meme coin market, major players maintained higher fees before market competition fully arrived and the Meme coin trading market declined. Blur's impact on the OpenSea model is an example of fees falling when competition emerges.

Another view is that sticky sources of capital, like liquidity providers on Uniswap, or depositors seeking yield on Ethereum on Aave and Lido, are the ideal target market. The velocity of capital in these products tends to be much lower. Users deposit funds every few months and then leave them alone. As a result, the fees charged by these products tend to be higher. Aave charges 10% of the interest users earn, Lido charges 10% of staking rewards but gives half of it to node operators, and Jito also charges a 10% fee.

On the Internet, there is a conservative law about the velocity of capital and the fees that can be charged: the more times capital changes hands, the lower the implied transaction fees.

If the capital is idle, users may be charged 10% of their revenue as a fee. Seasonal markets, or high-velocity products (such as HyperLiquid or Binance) can generate hundreds of millions of dollars in revenue as users perform hundreds of repetitive trades in a single day.

Assuming no profit and a 1% cost per trade, a user would only need to make 69 trades to end up with 50% of their initial capital. Assuming a 2% loss per trade, the user would need to make 23 trades. This partly explains why we are seeing a downward trend in transaction fees on platforms. Platforms like Lighter are already trending towards zero fees, as is Robinhood. If these trends continue, we will inevitably reach a tipping point where companies will have to find other ways to generate revenue while making transaction costs invisible to users, just like the US dollar stablecoin is today.

High velocity products monetize through compounding fees, low velocity products tend to monetize through trading channels. In other words, the less a protocol has access to the same dollar on any given day, the more it needs to earn on that dollar in order to remain sustainable.

Seasonal pricing errors driven by speculation can cause users to pay high fees for high velocity products. But what about non-seasonal products? What about products like on-chain stocks and commodities? I had the opportunity to sit down with the founder of one of our portfolio companies to discuss this question. Usman from Orogold has been working on building a gold-related business on-chain. The following content was inspired by a conversation I had with him over coffee.

On-chain commodities

People tend to think that tokenization unlocks massive liquidity for financial instruments. That’s why many venture capitalists with illiquid equity understandably believe that venture equity should be tokenized. But if the meme coin market has shown anything, it’s that in crypto, liquidity tends to be fragmented across millions of assets. And when that happens, there is little room for fair price discovery. As a founder, would you want to compete with Fartcoin on liquidity? I doubt it, at least not at the seed stage.

So why are exchanges like Coinbase and Robinhood rushing to bring stocks on-chain? The reason is simple, there are two forces at work. One, markets are global and operate 24/7. Assets like Bitcoin have become a macro hedge when stock markets are about to decline and liquid hedge funds want to hold an asset that will move in sync with them. Last year, Bitcoin's price fluctuated before the collapse of the yen carry trade, and it also reflected the market's pricing of Trump's tariffs in advance. The market needs a trading venue that can operate at any time and anywhere, and on-chain stocks can play this role.

Second, the total market value of cryptocurrencies has exceeded $2 trillion. These values ​​need a place to flow, and they cannot always exist in the form of US dollars, and of course they cannot always be in the form of real-world asset (RWA) loans, because their risk profiles are very different. Commodities and stocks on the chain provide a safe place for these funds. Of course, not all commodities and stocks are the same, and the market size of uranium is far less than that of gold.

That’s why we’ll (most likely) see a top-down approach where major assets and commodities are tokenized first. Which do you think is more likely to be adopted on-chain? The S&P 500 or an early-stage venture equity index? I’m leaning towards the former.

When it comes to commodities, some are more likely to find product-market fit (PMF) than others. Gold, due to its long history and the fact that it is hoarded by societies around the world, may be adopted faster than some of the more niche commodities. It also tends to be a good hedge against a depreciating dollar. But why would someone who could invest in a gold exchange-traded fund (ETF) or own physical gold jewelry buy gold on-chain?

Capital velocity is ultimately the killer use case for cryptocurrency.

Tokenized gold can be transferred between markets much faster than gold bars. They are composable, so it is much easier to borrow against them. If there is a lending market, it is also possible for traders to buy on-chain gold through leveraged cycles, as they do in DeFi.

Commodities like gold will also have a steady bid, though perhaps inefficiently in the early days, because there is a large enough traditional market to price it. This is different from tokenized real estate or startup equity, because gold is priced by consensus and does not rely on nuances of specific geographic or industry preferences. Usman explains how this works in Web3 with the image below. His core point is that any on-chain representation of gold must be better than its Web2-era counterpart to be relevant.

Remember when I mentioned there was a correlation between velocity and fees? In the context of gold, this becomes very interesting. If a platform (like Orogold) can charge a small basis point fee on each individual gold trade, they are effectively capturing a yield on gold. This could also be reflected in fees when gold tokens are minted and destroyed. In the traditional world, this doesn’t happen because the transaction fees of ETFs go to the issuer or exchange. Sure, you can lend gold to specific institutions for a yield, or your bank could offer such a service, but is that an opportunity available to individuals in emerging markets? I doubt it.

Putting commodities like gold on a blockchain also means that individuals in high-risk markets will have the option to hold a stake in the underlying financial instrument without losing control. It also means that a person can move these financial instruments around the world with the click of a button. This may sound far-fetched, but think about it, at any time today, a person can travel to a country and find someone to exchange their stablecoins for the local currency. The same thing could happen if gold was on a blockchain. Or the person could simply exchange their on-chain gold for a stablecoin.

Putting commodities (such as gold) on the chain is not just for asset allocation or trading, but also to unlock higher liquidity to generate returns. When fintech applications (such as Revolut or PayPal) provide these financial tools, we will form a new category on the chain. However, challenges still exist.

First, it remains to be seen whether the on-chain representation of gold can generate sufficient returns through trading or lending to meet user demand.

Second, there are currently no large digital commodity platforms that have been widely adopted by liquid hedge funds and exchanges, as stablecoins have been in the past few years.

All of this assumes that there is no risk in the custody and delivery of these financial instruments, which is often not the case.

But like most things in life, I am cautiously optimistic about this space. What about things like intellectual property, wine? Well, I don't know. Is there a market that would want to trade hundreds of times for wine on any given day? I think not. Even Taylor Swift probably doesn't want her music rights to be tokenized and traded on-chain. The reason is that you need to put a price on things that are best thought of as priceless. Sure, there may be analysts who can do a discounted cash flow analysis on Jay Z's album and come up with a number for the value of those songs. But it's not in the interest of the artists to start such a market.

The chart below should serve as a mental model of how the transaction frequency of on-chain assets will change depending on different situations.

For something like DeSci or any intellectual property on a chain, what matters is the ability for a system to verify and confirm ownership. That is, blockchain can be used to verify that a piece of art is licensed and share revenue with the original creator in real time. Imagine if Spotify paid artists at the end of the day based on how many plays they had that day. Or if our articles were translated into Chinese and paid us daily based on the traffic they attracted. Or a decentralized autonomous organization behind drug research that gets paid in proportion to how many drugs are sold that day.

Such goods can also charge high fees because it is complicated to verify that a business has the rights to conduct a transaction. This has not yet happened because the law takes time to develop. But in a world where content is generated by large language models and research is stagnant, it is likely that we will use basic elements on the chain to verify, reward and promote the co-creation of intellectual property.

In other words, cryptocurrencies as payment rails will do one of three things: move money faster (increase velocity); reward and identify users (validation); or, like stablecoins and on-chain gold, generate yield on idle assets. The best companies will almost always be able to crack two of these three elements, giving them an edge in Web3 revenue.

When Context Drives Trading

I explained the web at the beginning of the article as a giant digital mall where there was no means of transacting. Blockchain changes that. We are in a marketplace where there is a shared global ledger to facilitate transactions. Most of the time, meme assets are issued in response to news events. Polymarket has become the go-to way to perform predictive analysis on real-world situations. Imagine if someone thought that someone from India could be the next Pope? You could create a market for that and place bets on that market.

Historically, there has been no capital behind media, and most of our social interactions. At least not in the sense that you get compensated immediately for doing well. You do have social capital, which is the benefit of being seen as nice and friendly, and the opportunities that come with that. Social media has turned our existence into a performance that lasts forever. This is partly why on-chain media enthusiasts like to make everything mintable. So that people can sell digital assets (like NFTs) and make a profit.

But there could be a middle ground. As the cost and time required to transfer funds decreases, every interaction on the network becomes a transaction . Your likes, clicks, scrolls, and even messages (DMs) could be compensated in a token that has no value but is used to attract attention.

The development history of the Internet is a history of the evolution of the attention economy into a capital market and the subversion of the intermediate links.

Social media protocols like Farcaster have a role to play in this, as do faster networks like Monad and MegaETH. The chapters of this story are still being written. But one thing is clear: for early founders, knowing how to balance value capture and velocity is the secret to survival. There’s no point having a million users if you don’t know how to monetize them sustainably.

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