Core Thesis #1: Web3 will have the greatest impact in emerging markets
This blogpost explains why Hashed Emergent believes that web3 will be particularly impactful in emerging markets
Web3 will have the greatest impact in emerging markets because blockchains can start a flywheel of economic activity and growth in these trust-deficient regions by generating trust and enabling value transfer in a digital and trustless manner.
Hashed Emergent was set up in late 2021 with the goal of incubating the web3 ecosystem in emerging markets. We believe that decentralisation and the protocol economy will bring the next historically big wave of change and that the greatest impact of this change will be felt in emerging market countries. As such, our core investment thesis is to look for founders from these regions who are building web3 solutions for emerging markets and the globe. Our focus regions are: Africa, Middle East, Central Asia, South Asia and South East Asia (defined as ‘emerging markets’ for the purposes of this post).
Our thesis is based on one fundamental insight: massive gains in economic growth can be unlocked in emerging markets by introducing blockchain-based trust. As such, we are looking for founders who have a deep understanding of local problems and a passion to leverage blockchains to build localised solutions for these problems.
Emerging Markets suffer from a deficit of trust
In the late 19th century, society in America was faced with a significant erosion of trust. Large amounts of immigration, internal migration and the coming of the Second Industrial Revolution was causing traditional (i.e. local) forms of generating trust to break down. Modern corporate-led economic activities were putting a strain on economic relations. Weary of the same, the Americans started a sequence of institution building so that trust could be produced institutionally and recreated in a manner that was appropriate for modern economic relations. The development of these institutions has stood the test of time and has served the American economy well.
Today, emerging market countries stand at a similar crossroads and are facing an erosion of trust. Survey results show that trust in these regions is low and on a downward trajectory.
This low level of trust in emerging market countries is a significant impediment to their economic growth.
Economic research has conclusively demonstrated that there is a strong causal link between the level of trust in a society and the growth of its economy. This is because trust has a positive impact on various economic interactions through which it translates directly into economic activity and eventually growth.
It is useful to think of trust as a ‘lubricant’ created by institutions that helps people abandon any frictions caused by doubt and engage confidently in economic relations with one another. Trust-fuelled economies reduce traditional expenses associated with oversight and monitoring in terms of writing and enforcing contracts, monitoring counterparties, and implementing security measures. Greater trust increases the rate of investments and thereby innovation, starting a flywheel of economic activity and growth.
Thus, much like America in the early 20th century, we believe emerging markets today need a solution that can generate trust and spark economic activity and growth. Our experience studying and investing in the web3 space makes us confident that the solution lies in blockchain technology.
Blockchains are trust machines
The OECD defines trust as ‘a person’s belief that another person or institution will act consistently with their expectations of positive behaviour’. A good shorthand to think of the concept of trust is to think of it as a combination of competence and intent. Someone or something is trustworthy if they have the competence or ability to deliver on their representations; and they combine this competence with a bona fide intent. Traditionally, societies have generated trust by building institutions and giving them the competence to impose sanctions on offenders and trusting the people who run these institutions to exercise their authority with bona fide intent. This, however, is a costly exercise - both in terms of time and money. It is also prone to failure.
Blockchains are a paradigm shift in this context since instead of relying solely on human agents to run institutions appropriately, institutions can now be designed in a manner where unimpeachable digital networks are used to share the responsibility of creating and maintaining trust.
The technical design of blockchains is such that they enable immutable (and public) storage of information and compute. This allows for the creation of novel financial and legal primitives in the form of blockchain-based assets/tokens which can represent value and whose behaviour can be made dependent on different programming conditions. This gives rise to the possibility of creating ‘programmable trust’ and shifts the core basis of trust in economic relations from ‘will not cheat’ to ‘cannot cheat’. The trust generated thus is anti-fragile, resilient, programmable and universal.
This possibility of engaging in economic relations where institutional intermediaries are supplemented with code-based trust reduces the collective cost of trust production and frees up human energy to focus on meaningful experiments for human progress. It also enables the ideation and creation of entirely new business models, which are based on hard-coded digitally generated trust. In a nutshell, blockchains enable the institutionalised production of (hard-coded) trust without complete reliance on the humans that run institutions.
Realising the impact of blockchains in emerging markets
The link between trust and economic growth is particularly strong in low-trust countries. Research shows that trust has a greater impact on economic growth in emerging markets than in the developed world.
“Income per capita in 2000 would have been 546% higher in Africa if, all else being equal, the level of inherited trust had been the same as inherited trust from Sweden.” (Source)
This is a particularly relevant insight for us as a venture capital firm and a significant determinant of our decision to focus our attention on the web3 space in emerging markets. It tells us that equivalent efforts (building blockchain-enabled businesses) in emerging markets and the developed world will result in significantly better pay-offs in emerging markets.
Our thesis for web3 in emerging markets is that the introduction of new blockchain-based financial and legal primitives will be particularly impactful in these regions and can spark a flywheel of economic activity and growth. Increased levels of trust and the strengthening of property rights and contract enforcement in web3-enabled business models will provide new economic opportunities for people and enlarge the overall economic pie. We expect that this will kickstart a virtuous cycle of economic production and growth in emerging markets.
Blockchains will also expand the ‘radius of trust’ in emerging markets beyond friends and family and extend it to larger groupings of people and eventually to society at large. This will enable large-scale, collectively beneficial and coordinated economic activities - something that has erstwhile been less frequent in emerging markets. In time, we also expect to see the emergence of large, blockchain-based cross-border firms in regions with common business problems and solutions.
This new arena of economic activity, enabled by blockchain-based trust, will give rise to new tech giants. We believe local founders with local context will create new business models using blockchain technology to solve their own (but locally shared) problems. These founders are people who have spent significant portions of their lives interfacing with these regional problems and have the understanding, drive and determination to design appropriate solutions by leveraging the web3 tech stack. This is where we will find great investment opportunities; where product-market fit will be achieved by solving real problems; and where adoption will be sticky and explosive, driven by necessity, rather than luxury.
We have already seen such investment opportunities in emerging markets, and have backed some exemplary founders in all three of our focus sectors: Finance, Entertainment and Social.
Consider Nestcoin, which is leveraging blockchain technology to solve the problem of broken cross-border payment rails in Africa. Nestcoin leverages stablecoins and a smart-contract based escrow system to provide reliable payment rails for businesses in Africa so that they may conduct cross border operations without friction and with minimal fees. The trust and reliability generated by blockchains and smart contracts plays a central role in this business model. It is a classic example of the kinds of innovative businesses we expect to see in emerging markets, enabled by blockchain-based trust.
Another example is Axie Infinity, which gave genesis to a new business model in the gaming industry by leveraging blockchain technology. The Axie model converts in-game assets into NFTs which gives consumers self-sovereign ownership over elements in the game’s universe. The game also allows users to earn digital assets for the time they spend playing the game, giving birth to novel economic incentives between developers and gamers. The financialisation of gaming by Axie was a trailblazing event. The Axie model leveraged the trust generated by blockchains to realign economic incentives between developers and gamers, and gave gamers a way to earn an income while playing games. This model has left the door open for many similar businesses to emerge in the industry.
Afropolitan is another instance of an innovative business model made possible by blockchain-based programmable trust. Inspired by Balaji Srinivasan's concept of Network States, the company aims to create a blockchain-based digital nation for Africans. Afropolitan uses blockchain technology to issue digital identities to its pan-African community of citizens. These identities form the bedrock of the community upon which various beliefs, values and cultural and economic elements can be mapped in an organic manner. The key here is that this organic development of a digital ‘nation’ can proceed and mature without the need to invoke a centralised authority, since the blockchain can perform most of the functions that a traditional State performs. In this sense, Afropolitan takes the conception of a nation as a social construct based on shared beliefs and values and guided by a central authority, and flips it on its head; giving its member citizens a decentralised platform to interact, transact and tap into opportunities available on the internet.
A massive opportunity
It would be fair to say the emerging markets and blockchain technology are a great problem-solution fit. In addition to the above, emerging markets generally are also attractive investment destinations because of the highly favourable macro conditions, specifically: a growing body of indigenous tech talent, favourable macroeconomic projections and a large and growing addressable market.
In the past few years, emerging markets have shown a positive trend reversal where more and more children are going to (and staying in) school. This development has coincided with a more recent growth in tech talent in emerging markets.
In addition to the above, emerging markets’ share of global economic growth is expected to continue increasing in the coming years.
Furthermore, emerging markets also have favourable demographics, with a large and growing population. 90% of global population growth until 2050 is projected to come from the regions we focus on. Growth from emerging markets in the working age population is expected to offset de-growth from the rest of the world.
Overall, we believe that a combination of the factors mentioned above make emerging markets the ideal destination for venture investments in web3. A majority of successful solutions built for these regions will be must-have solutions, not good-to-have solutions. They will find strong and quick product-market fit, and their impact will be powerful and long lasting.
Hashed Emergent’s perspective and thesis is built on the fundamental insights and facts highlighted in this blog. With this in mind, we continue our efforts to find talented founders in these regions who share our vision and are building success stories of the blockchain-based future. We are all gonna make it, together!