By: Rikhil Bajaj and Darshan Patel
An Overview of Digital Asset Technology, “Web 2.5”
In the past 5 years, the digital asset economy has grown 10x+ to a $1T+ ecosystem. Unsurprisingly, FinTech has not kept up. In the leap from Web 2.0 to Web 3.0, we’ve skipped Web 2.5. In between lies a market we’re defining as “digital asset technology”. We use this term to encompass software and services vendors enabling web2 and web3 financial markets to operate. These vendors may provide traditional finance (TradFi) capabilities to the digital asset ecosystem (e.g., compliance/security, centralized trading, etc.). Or alternatively, they may provide digital asset capabilities to the TradFi ecosystem (e.g., access to DeFi products, stablecoin payment networks, etc.). Our underlying belief is, there needs to be interoperability between the web 2.0 and web 3.0 economies.
Why We Believe in the Digital Asset Economy
Given the spate of recent failures, including Three Arrows, FTX, Voyager Digital, etc., many question the digital asset economy’s continued existence. We believe there are many good justifications for why it should continue to exist, and more in-depth analyses than ours you can read. We’ll make three simple observations –
- Blockchain technology has value: A secure, transparent, programable ledger that eliminates intermediaries has real world applications e.g., improved liquidity of fiat assets, decentralized finance, digital property rights, etc.
- Our current financial system is imperfect: Centralized control has led to large oligopolies, underserved consumers and governments that have undermined asset values
- The digital asset economy offers some solutions: e.g., trustless decentralized financial institutions, access to stable currencies in highly inflationary economies, lower-cost marketplaces for digital goods
If you agree with these statements, then you likely agree that this $1T+ ecosystem accounting for ~20bps of global assets could potentially grow 5-10x before maturing.
The Potential of Digital Asset Technology
Below, we compare the TradFi ecosystem and the technologies serving it (what we’ve known thus far as FinTech) with the digital asset ecosystem and the technologies serving it. The billions of dollars of market cap in TradFi technology shows the potential of digital asset technology. Is it possible that market leaders such as Blackrock or Experian will one day have digital asset equivalents? We think so. TradFi capital markets technology is a ~$200B industry and compliance/security is a ~$180B industry. We like this analogy because it illustrates major market gaps, differences, and opportunities. For example, the digital asset economy is principally an asset marketplace, and its application to payments is in its infancy.
Where We’re Investing
Our approach is to invest behind large, underserved digital asset technology themes. We outline several of these areas below with example companies to illustrate what we mean. In Part II and Part III of this research series, we’ll share deep dives on “Compliance and Security” and “Institutional Trading Technology”.
Why Work with Tarsadia Investments?
Tarsadia Investments is a $2B+ firm that makes high-conviction investments in category-defining companies globally. We’ve invested across stages from idea to public ownership, with often a decade-plus investment horizon. We use our domain expertise in financial services and technology to support founders on growth, talent and M&A/capital raising.
Please reach out to us if you are:
- Building a digital asset technology company. We often engage with founders outside the fundraising cycle, sharing insights and introductions within our network. We invest in series A and beyond, writing checks from $5M – $75M.
- An experienced leader looking to advise or invest in digital asset technology companies.
- A financial institution, web 2.0 or web 3.0 business looking to work with digital asset technology companies.
Cold outreach welcome on LinkedIn.