Going On-chain Will Someday Be as Much of a No-Brainer as Going Online
The recent Odd Lots interview with Vlad Tenev, and the question posed to him on why stocks need to be tokenized, got me thinking about my professional trading days (long ago) and the raging debate back then (circa early aughts) as to whether all trading should be electronic.
Story time:
Younger people might be surprised to learn this was ever a debate, but it was, one that pitted junior traders like me who grew up on platforms like Etrade and Interactive Brokers against grizzled veterans who made their bones in the open outcry pits of the futures markets or in front of the specialists at the NYSE. I was primarily a futures trader, and will never forget a friendly discussion (at the bar of Rothman’s steakhouse) with a grizzled floor trader from the silver pit in the old COMEX exchange.
I don’t remember his name, but recall his thick Staten Island accent, and the fact that his neck was thicker than my chest. He asked me a simple question when he learned I only traded on a computer: what happened if I made a mistake?
“You mean if I put in the wrong size, or hit buy instead of sell?” I asked. “Yeah” he said, “like what happens when the computer gets the wrong trade instructions?”
“Then I’m in trouble” I responded, “hopefully I catch the mistake and reverse it before the market moves.”
“See, that’s one thing you computer guys will never have over real trading” he said. “Cause if I make a mistake on the floor, then I grab that fokking broker by the neck and I yell ‘hey, I’ll buy you a beer. I’ll buy you a steak. But whatever you do, don’t you dare put that last trade in, cause it was a fokking mistake’. And you know what? Most of the time, he won’t put it in.”
I conceded he had a point.
Most markets were at least partially electronic by then, and some, like the NASDAQ, began that way. But the process still took decades, partially out of the legitimate fear of fat fingers and cascading selling like what happened during the 2010 flash crash. Today, almost everything is electronic, and perhaps more importantly, automated. That this was ever controversial seems quaint, to put it politely.
I suspect that someday worrying about people using seed phrases, or the perils of 24/7 markets, will seem just as comical (sorry Joe). The challenge is how, unlike trading, the core architecture of our financial system has not changed from 25 years ago.
It’s telling to me that the crowning achievement of Wall Street in the past five years was moving equity settlement to only T+1 — and I say this as someone who has deep respect for professionals at places like the SEC who worked on this sort of thing, one of whom is a dear friend. To me, their task was akin to building a skyscraper out of stone and mud, after steel and concrete had just been invented. It’s not a question of effort, but rather one of architecture.
Tokens are a superior form factor for any financial asset (dollars, stonks, etc) because a decentralized blockchain is a superior ledger than whatever Wall Street runs today. The easiest way to see how is to leave finance for a minute and think about how media worked before the internet.
Like Wall Street, the media landscape of yore consisted of a series of proprietary networks that moved different kinds of media and never talked to each other. Copper lines (owned by the telephone co) for voice, coax lines (owned by cable cos) for video, AM/FM waves (owned by radio companies) for audio, and the post office (run by the government) for text. There was virtually no interoperability, and the only innovation was when someone MacGyvered one network to handle a different media, like with faxes.
The internet blew all of that up, because the internet was a decentralized network for data, and all media (video, audio, text, etc) is just a different form factor for the same thing. It made sense to put everything on one network and have it interoperate from the start
Today, we take it for granted that we get all media and communication on a single network to a single device, but 30 years ago this but a fantasy. It was so far fetched that most people didn’t even realize that they wanted a fax machine that could also handle video conferencing.
Change took time. The earliest versions of VOIP and “radio on the internet” were pretty terrible, in the same way blockchains are still slow and expensive. There were bubbles and setbacks, and the omni-media world of today has clear drawbacks. But importantly, nobody longs for the way things used to be.
So why should stocks be tokenized? Because stocks, like all assets are just containers of value, and putting different containers on the same global, accessible, programmable, 24/7 network has magical — iPhone like — benefits.
Did you ever wonder why you can’t trade Apple stock directly for shares of Amazon? Or why you can’t pay people in t-bills? Why options have specific expiration days? Why Goldman doesn’t provide flash loans? Why there are no micropayments? Why nobody — not even Jamie Dimon — has any clue where a wire is? Why not everyone gets a bank account? Why FedWire doesn’t handle Euros? Why a subsidiary of DTCC owns every share of every public stock, in a ridiculous arrangement more befitting the Soviet Union than America? Why you can’t instantly transfer all your assets from Robinhood to Schwab? Why nobody really knows how credit cards work? Why the physical art market is ripe with forgeries? Why the CME doesn’t offer perps? Why there were no non-sovereign currencies that didn’t threaten to break your toes if you dropped them?
The answer is complicated, but it’s definitely not “because nobody wanted that”, in the same way that fax machines didn’t stream video for lack of demand.
These financial innovations don’t exist for the masses for two reasons. First, the old infrastructure wasn’t built to offer them. Second, the old intermediaries are primarily built to profit from the limitations of the old infrastructure. Banks make more money when payments are slow, brokers make more money when you can’t just leave, and the government has more power when it only needs to regulate a handful of banks and brokers.
All three hindrances can be overcome.
Lastly, the other question that gets asked often is “why do we need native cryptocurrencies like Bitcoin and Ether for this vision to happen.” Two responses to this question. The first, and most simple one, is because we need native coins to secure decentralized networks. (Centralized blockchains are just bad databases).
Second, and perhaps more importantly, why shouldn’t we have them?
