One of the most captivating talks at this year’s European Blockchain Convention in Barcelona was given by Michael Lau. He studied Industrial Engineering at the University of Toronto and did a postgraduate diploma in strategy and innovation at the University of Oxford. This article contains the audio recording and the transcript of his talk. In the credits below, you’ll also find a link to the video recording.
Transcript
[00:00:08] It’s been great to be a part of this particular convention, particularly because of the amount of detail that we go into. And so today I kind of wanted to take kind of a little bit of a complimentary approach and maybe take a little bit of a higher level view and talk about this subject, about the innovation, you know, kind of trajectory of blockchain and crypto. So let me just check to see that this works. What I’m hoping you walk away with today is basically kind of a framework and a means of thinking about this subject, but also hopefully a little bit of that same excitement that I share about where we’re headed. But first, let me start with a story. So I started as an engineering student at the University of Toronto. I was one of those engineers who wasn’t particularly great at physics, biology or chemistry. So please don’t trust me if I ever build a bridge or if don’t ask me to fix your car. But I studied industrial engineering, which is a pretty niche discipline that looked at abstracting real world problems, putting it into a model, using these algorithms and math to solve that model and then translating it back. And I always thought that this idea of achieving optimization or this ability to, you know, achieve some kind of optimal outcome without any additional ingredients was like just truly fascinating. [00:01:24] It was particularly well understood discipline within at least the manufacturing sector, which is where I’m from. But at the same time, I thought, hey, wouldn’t it be cool if you were able to do the same thing in a non manufacturing setting? And then people, when they look inside and see that you’ve achieved this ultimate outcome without any additional, you know, ingredients to the system, just think, wow, it’s the magic of math, right? And so anyways, I spent a couple of internships working in manufacturing. Most notably, one of them was in Hong Kong, working at an aluminum factory where they melted metal. So you can imagine I’m Canadian. Hong Kong is hot. Aluminum factory where they melt metal, I melted every day, every moment. And so there was a point in kind of my my internship where I realized there were only three things I really wanted in my career. The first one was I wanted a justification to wear a nice clothes to work. And the second was an air conditioned office to wear them in. And the third one was then interesting problems that you could solve in innovative ways, which led me to about a decade of working in capital markets, especially to do that, trying to find new combinations of being able to produce optimal outcomes in slightly different ways. And so it kind of drove me towards the subject of innovation, which I just fell in love with. I spent every waking hour listening to podcasts, talking with people about this stuff, bugging a senior management to give me a shot, which led me back to the classroom this time around, doing some postgraduate studies at the side business school at the University of Oxford, studying the topic of strategy and innovation. [00:03:01] And I learned a bunch of really cool things over there. But there was this one particular concept that I thought just stuck with me throughout my career, and there’s a relevance to today’s topic. And it was from this book called The Evolution of New Markets by an author named Paul Geroski. And the theory goes like this. Effectively, there is constantly this demand between, well, this causes tension between supply and demand. And oftentimes people think about innovation as being a demand pull, that somehow the market is pulling out innovation. But the theory goes that it’s insufficient because oftentimes the market is not able to articulate exactly what it is that they need. Instead, a better way to approach it is to think about supply push. And oftentimes, it takes the form of some new technology. And in this situation, the idea is that there’s an exploration (?) or an understanding of a new technology that births forth a main trajectory. And this main trajectory would then have people researching, pouring in investments and effort, accumulating knowledge. And over time, what happens is it continues to build momentum, and these branches start to form either new applications or new kind of markets. [00:04:13] But the point here is that there was a mental map now to follow how new markets could form. And when I thought about this a little bit further and read into a little bit more, one particular quote from the book I thought was particularly interesting. And it was this one right here where it says Once the basic highway that the trajectory is going to follow becomes clear, then progress along it is likely to be pretty much self-sustaining, following its own logic at a speed determined, perhaps in large part by the nature of how scientists and engineers work. Skip ahead a little bit more. And I find myself kind of, you know, interesting point in my career where I’m looking for the next thing and I’m talking to a friend who just joined a blockchain company. And at the time, I said, tell me more about what we’re doing. And basically he was part of this 25 person team, 20 person team working on what would now become Bullish. And at the time, I said to him, hey, you know what? I’m really interested to know what’s going on. I really want to be involved in the innovation space. I want to try my hand and hand at this. And he said to me, Well, we’ve got a couple of product people, a couple of engineers, a couple of technologists. One day we’ll have customers. You want to be the customer guy? And I was like, Yeah, sure. Customer guy sounds pretty good. [00:05:23] I’ll be the customer guy. But at the time, we were still in stealth mode. And so when I spoke to my friends and my family and they were saying, Hey, what’s this new thing that you started jumping into? I said, I work for a blockchain company. It’s kind of as far as I could say. And they said to me, Oh, look, there were kind of two camps. One camp said, Blockchain company, cool blockchain. I don’t only think about it. Sounds good. The other side, who did a little bit more reading, said Blockchain. What’s the use case of blockchain? This was again beginning February 2020. Not the obvious choice yet, not as much as excitement as it is today. So what’s the use case of blockchain? You know, 2017/18 there was all these managed consultants that said that there was going to be this complete disruption of the financial services industry. The supply chain world was going to be completely disrupted, but none of that really occurred in the same fashion that it seemed to be promised. And after kind of going through a number of debates, I kind of landed on this one particular use case that I thought was probably the least disputed at the time. And it was simply Bitcoin. Bitcoin was that use case for blockchain that had millions of customers using it market cap of several hundred million dollars by that point in time. It was an excellent example of adoption for the blockchain technology. [00:06:36] Fast forward a couple more months later and we end up in DeFi summer and all of a sudden this use case of smart contracts on the blockchain started to progress around a particular theme, which was a digitally native asset needed digitally native programmatic finance that was decentralized to provide a particular way of serving the users. And then you skip forward a little bit more and you end up like this next wave that came through, which was the NFTs. And to be honest with you, this one kind of stumped me a little bit because all along I thought this was really cool. Digitally native asset moving to digitally native financial solutions to this and I was kind of like not really sure what it is. Profile pictures $20 million or more. I wasn’t really sure. But as I kind of challenged myself a little bit, I thought to myself, Well, maybe I’m just thinking a little too superficially about it. Perhaps what this is signaling instead is that there are digitally native identities that are valuable, more valuable than the $20 million that you spend on an NFT. And as I thought about it a little bit further, what I also realized was that there was also digitally native communities. And it began to become this kind of really interesting observation that at the end of the day, there are few spheres in the world where technology, capital and culture converge in such a unique way. I mean, you think about culture and how it comes from community and where community forms. Community in the crypto space is strong, like hyper strong. [00:08:14] Like you think about all the tribalism that kind of emerged in early days and still exists today. That is a signal of just how strong these communities go. And so going back to this map of kind of this theory of kind of main trajectory, you start to see kind of how blockchain started pushing forward. And as these branches started emerging around digital assets and programmatic finance and DeFi, you know, these digital identities, digitally, native communities, all of that compounding the development towards the blockchain. The question is kind of where is it headed? I mean, when you start to map this out and I mean, I’ve left out a significant amount of detail that has been covered by so many of these sessions here during the convention. Doesn’t this kind of look a little bit like the ingredients of a digitally native universe? You know, perhaps it’s manifested in a Metaverse. But it’s important when you look at these kinds of frameworks and you’re thinking about these topics that you don’t look at it in silos. So you take a step back and you look at some of the bigger global macro themes that are happening. Let’s just say, for example, deglobalization. Do you think that if we establish that there’s a digitally native universe, that it’s going to be run by the company of a single country. [00:09:30] If you think that this digitally native universe requires a digitally native infrastructure, that it is also run by the company of a single country, do you think that when we get to this decentralized world and universe, do you think that the unit of value to transact in commerce is also going to come from a single country? And so it’s helpful to kind of use these types of tools to be able to think about where we’re likely headed. Even, for example, if there’s a lot of noise in the short term. Now, let’s think a little bit about the pace of movement. What is the pace of this trajectory and this movement going forward? One of the key things that was drilled into me when I was doing these studies was that invention does not necessarily equal innovation. Invention was this idea. You created something novel, new technology or whatever. It is novel. It was the commercial creation of value that actually made it innovation. And I think one of the key themes that we’ve been discussing here at this convention has been this idea of this crypto winter. And I think actually, if you were at the panel yesterday, the amount of positivity that came from the panel that I shared with my panelists about this crypto winter was effectively (?) This idea that the push for surviving this crypto winter is going to push people more towards understanding how to apply commerciality to their inventions as opposed to a rising tide that floats all boats and you can hide in that. And so I do think that actually it’s a quite positive signal that we’re going to move in an even faster pace because of the need to survive and the need to apply inventions in a commercial manner, which is what true innovation is about. [00:11:14] So going back to this map, let’s talk a little bit about where we think these branches are going to emerge. For those of you who are working in the innovation space, ‹re trying to understand how to build businesses. How are you going to think about this main trajectory that we’ve established is self-sustaining at this point in time, moving at a quick pace? Where are these branches going to emerge? And that’s where another really great theory comes into play by the famous Harvard professor named Clayton Christensen called «jobs to be done». The theory goes that if you were to follow traditional segmentation, to identify ways to be able to market or create products, you would look at this particular demographic, what they kind of like and what they kind of produced. But it was all established based on this one core assumption, which is correlation. What he argues in this is shouldn’t we be looking at causation instead? Shouldn’t we be thinking about what are the things that people actually need to have done, that they’re willing to give money out of their pocket to pay for? And by doing so, you’ll be able to understand where these branches may form. [00:12:17] So I think the best way to give like an inside look at the case studies to talk about the company I’m a part of which is Bullish. When we started Bullish, there were two particular themes that we had noticed back in early 2020. The ideas were simple one this space was going to grow in an incredible rate and capital was going to be flowing. And so you needed more and more deeply liquid venues to absorb the introduction of a wave of significant capital. The second part of it was that this space was going to grow so large that there will be, without doubt, greater regulatory clarity and involvement into the future. And so we set out to build effectively a centralized, regulated exchange covering the hygienic factors of that second point, but wanted to make sure that when it came to being able to solve for the liquidity problem, that we found a way that was rooted in some core technology. And so we actually decided early on that we were going to build based on some of the things that we found, let’s say, in some of that branch territory around programmatic and and DeFi. We built this on liquidity pools and automated market makers. Just very, very high level a liquidity pool as a mechanism where you park two assets, let’s say bitcoin in USD and it automated market maker takes the assets that are in that liquidity pool and puts bids and offers. [00:13:37] In our situation we have an order book like you’d see in any of the other exchange, but there’s an aiming (?) behind it that’s constantly streaming bids and offers. Now I bring this up because you have a problem. You have this kind of technological solution. What are the UVPs (Unique Value Propositions)? Well, the first one is that every single dollar that’s in the liquidity pool is not a dollar anywhere else in the street, which means it’s truly unique source. The second is that the automated market maker only changes its price when it’s traded against. There’s no oracle. There’s no external data that’s being brought in to update the price. It only moves when someone buys ourselves on our exchange, independent price discovery. And the third one is if you park enough assets into these liquidity pools, you can be really, really deep. In fact, a couple of weeks ago, Bullish became the deepest Bitcoin exchange in the world based on the 2% amount of inventory on the order book, if you look at them in price. Just go to CoinMarketCap, look at Bullish, compare it for yourself. But going back to this idea of now you have these UVPs, what are the jobs to be done? Well, it’s pretty clear if you run a systematic strategy and you are looking for a way to generate alpha through connecting different endpoints, unique source of liquidity, independent price discovery, really deep markets. I mean, it’s pretty straightforward. On the other hand, if, for example, you’re looking to just execute this, whether you’re executing this for yourself to establish some kind of trading strategy as a fund or maybe you’re a broker looking to do this for your customer, I would argue the cost of execution is going to be so compelling based on the fact that it’s a unique source of liquidity, independent price discovery and really deep markets. [00:15:20] And so just thinking about that, I think that’s great theory is cool, Michael. That’s really nice. But for us, in the last seven months we’ve been able to achieve over $50 Billion traded volume in the first seven months of our operation. And I think to us, this is a signal that we’ve figured out kind of certain jobs to be done within that particular part of the, you know, the branches, if you will, that we’ve decided to build our business upon. And so. I mean, think about this whole thing. Inside look, on the innovation trajectory of blockchain and crypto, we’ve established this idea that, you know, there was this incredible amount of invention that happened early on with the creation of the blockchain. And all of a sudden you start to see that start to move and move and move and you started to see branches forming and you started to see things like digital assets and tokenization taking place and, you know, services to capture, you know, I guess, particular needs in the market based on the use of smart contracts and programmatic finance and DeFi. [00:16:23] And then you saw these digital identities formed based on, you know, the fact that you now have these tools to be able to express yourself. But also these communities that could be self governed, but also, you know, just tie in, again, this unique convergence of culture, technology and capital. Moving at this pace, that is only going to be, I think, a function largely of innovation as opposed to just pure invention, which given the current climate that we’re in, I think it’s only going to progress faster and faster. And as you’re thinking about these kind of branches that are emerging in particular, many of you here are building businesses in addition to building the products themselves. What are those jobs to be done? What are those things that people literally will say, I will give you a dollar to do this because I don’t want to do it myself. Or that this fulfills something that it’s way better than anything else that I found to the market. I think what you’ll find is that this is a really, really great kind of mental model mental map to be able to think about the bigger picture of where we’re headed, what’s going on as new things emerge, where does it fall into this grander scheme of how this technology progresses, how this business progress, and how this industry progresses? And I think it leads me to my final conclusion. I’m bullish. I hope you are, too. Thank you.
Credits
- Pictures courtesy of Nick Weisser and Daniel Lloyd Blunk-Fernández
- YouTube video of Michael’s presentation
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