🔳 Square is Now Block: What Does it Mean?
Prepare for Every FinTech Player to Enter DeFi
If you had to pick a single pandemic stock, Square might have been it. A relatively counter-intuitive pick given the primacy of its offline card reader business, Square gained about $80B in market cap between February 2020 and February 2021.
But where the rise is swift, so tends to be the fall. Square was no exception. It has lost about 35% of its enterprise value in the intervening 10 months:
Then, on Monday Jack Dorsey - founder and CEO of both Square and Twitter - declared he was stepping down as CEO from Twitter. By Wednesday, Square had rebranded to Block. The markets respond to actions more than words, and Square has continued its short-term downtrend.
But what does Square’s rebrand to Block mean for the future of the company? As the third most valuable fintech company globally, behind PayPal and Intuit, Square sets the tone for the industry. What does the rebrand mean for fintech broadly?
Jack is Doubling Down on Blockchain
Jack has long been a proponent of Bitcoin. And he has had a dramatic impact on its history. The Cash App has introduced millions of users to the currency. In addition, Square’s support of blockchain generally has helped legitimize the space.
This year, he was a keynote speaker at the Bitcoin conference. Here is the segment where he explains why Bitcoin changes everything, alongside Elon Musk and Cathie Wood:
But as CEO of Twitter, Jack was unable to focus on making Bitcoin more than an investment. And, as an investment, it is a questionable one to suggest for the Cash App user base, which is primarily low income and living paycheck to paycheck. Bitcoin has had a strong historical return, but it has also had substantial volatility along the way.
As Block, Jack’s Fintech company will be become more like Alphabet. Like Google is the cash cow driving Alphabet, Square will still be the cash cow driving Block. But, in the new structure, Block will be able to more clearly incubate and grow its constellation of “other bets,” which it calls “building blocks.” This might help it create interesting, new, innovative, and lucrative businesses like Alphabet has with Waymo and Home.
Specifically, Block will now become an umbrella technology company with bets across:
Square, the seller business
Cash App, the consumer financial products business
Afterpay, the BNPL solution it acquired
TIDAL, the music streaming service it bought from Jay-Z
Spiral, the company’s crypto initiative, including
TBD, a decentralized exchange
Block’s Decentralized Exchange: TBD
At the heart of Block’s plans lies TBD, a decentralized exchange. The company announced tbDex and published the white paper earlier this year. That white paper provides the clearest illustration of the company’s intentions. The goal of the project is:
A framework for creating on-ramps and off-ramps from systems of fiat to cryptocurrency, without the need for going through centralized exchanges
This is the same problem that all decentralized exchanges attempt to solve. Today, users of cryptocurrency have to go through a byzantine labyrinth of steps to convert fiat US dollars into bitcoin through a centralized exchange, like Cash App or Coinbase. Decentralized exchanges, of which Uniswap is the leading player, offer a peer to peer solution.
TBD has outlined a specific solution:
It looks complex, but is a fairly simple three step mechanism:
Alice, who wants to convert some USD into Bitcoin would start this process on her phone with an ask. That will be sent to Participating Financial Institutions (PFIs) for Bid/Ask processing.
A bid will be returned to Alice’s phone, where she is given options from the different PFIs.
She will choose a bid, after which value is exchanged on the settlement layer. The system will coordinate identity through a Decentralized Identifier (DID) network.
There is nothing particularly innovative here. The team has put names on groups and drawn a complex diagram. But once implemented, this business could turn out to be quite lucrative for Square. Uniswap’s 0.3% fee that is generated to liquidity providers is on a run rate for $22 billion in yearly revenue. Square did over $9 billion in revenue in 2020. While some of this revenue may come at the expense of Cash App’s bitcoin revenue, it represents an overall larger pie.
Significant questions remain about the TBD’s vision. The current thought for the team is to build this Bitcoin native, as Mike Brock, the GM of TBD shared:
This would be a big departure from the other major DEXes, which are built on layer 1 smart contract protocols like Ethereum, Solana, and Cardano. Instead, it would use the RSK layer 2 solution. This technical design choice stems from the overall mission of Block’s blockchain initiatives, which brings us to the next section.
Making Bitcoin More Than an Investment: Spiral
To the chagrin of many web3 bros, Jack to date has represented a nearly Bitcoin maximalist perspective on blockchain. As a result, TBD is focused on building a DEX atop Bitcoin, just as Cash App has enabled investment only in Bitcoin. Indeed, the goal of Spiral is, “making bitcoin the planet’s preferred currency.”
Spiral is a continuation of Jack’s maximalism. In particular, the company intends to focus on making Bitcoin “more than an investment.” What this means, as of yet, is still in the air. The Spiral website provides the high-level direction it is heading, though.
First, and the area where there is more clarity, Spiral will be funding other open source efforts to improve Bitcoin. It has two programs: Crypto Grants for Everybody, focused on development, and Crypto Designer Grants, focused on design. Its first grant was $100K to the BTCPay Foundation in support of BTCPay Server. BTCPay server is a merchant checkout solution to allow checkout with Bitcoin with 0% fees & no third-party.
With respect to building, the initial focus is Bitcoin development. The Spiral team is hiring three engineers. Their focus will start with the Lightning Development Kit (LDK). The LDK aims to enable a new payments infrastructure atop Bitcoin by enabling pre-existing wallets to operate with Lightning capabilities, which are lower fees and faster transactions at higher scale.
This shows a clear roadmap for Spiral at the start: decentralized payments. While the DEX disrupts Cash App’s bitcoin onramp, the payments onramp disrupts one of Square’s primary cost centers: existing centralized financial rails. A skeptic might call this the Square seller business funding Bitcoin core development. But this is really reducing that seller business’ costs in the long term. It disrupts Mastercard and Visa, who exact a 1-2% tax on credit card rails today.
Square is one of the most valuable and fastest growing tech companies out there. That was solely on the back of its existing businesses. With the positive directions I expect TBD and Spiral to take Square, I reckon its announcement of a rebrand to Block represents a potential large positive change in the trajectory of its revenue and earnings growth.
Precipitating More FinTech web3 Investment
Stripe has been the trend setter in global FinTech:
Creating the first mass-market small merchant card reader
Being the first Super FinTech App in the US with Cash App
Being one of the first to add Bitcoin to its SuperApp
Now, every FinTech from PayPal to Revolut is adding Bitcoin as an investment option. The same can be expected with investment into decentralized finance.
Other big Fintech players are bound to follow Block’s foray into web3. It is now merely a matter of when, not if.
Life is Now a Game With Real-World Consequences
Of all the changes brought on by the Covid pandemic, perhaps the least appreciated is the impact on what it means to be an information worker.
Whereas the best tech talent migrated to the West Coast over the past four decades, that impetus has now been interminably kneecapped. In the past, the sheer inevitability of West Coast companies’ market caps meant that it was virtually impossible to have a long and prosperous career in tech without working at either a TMMAANG (Tesla, Microsoft, Meta, Apple, Alphabet, Netflix, Google) or “the next big thing,” from Airbnb and Uber to Slack and Coinbase.
The career advice dispensed by luminaries like self-made billionaire Chamath Palhipitaya was that the Bay Area simply had a higher ratio of successful companies. If you worked a few jobs in the area, you were bound to work for a successful company that could propel your career. It worked. From IIT in India and MIT in Boston to Stanford in the heart of it all, the brightest and most highly compensated tech talent lived and worked in the Bay Area.
That was already shifting since about the year of 2000, from which time we have seen the rise of Seattle, LA, and NYC. The three cities have been growing into legitimate tech super centers over the past two decades, spawning scores of public tech companies and tech millionaires.
In the last decade, we began to see the further broadening of tech opportunity. Recently, second tier tech ecosystems, like Austin, Salt Lake City, Boston, and the Triangle have begun to push their weight around. By 2019, large companies were relocating there. Others were going public from there.
Then, in 2020, the Covid pandemic hit. It forever changed everything. Suddenly, every company from TMMAANG to the next big thing, and every startup in a rising hub, saw its workers working virtually. And the big surprise? It worked. Well, in fact. Much better than most executives had hoped.
It is hard to understate the importance of this demonstration. While select companies like GitLab and Automattic – techie to the core of their cultures – could effectively work remotely, the average tech executive did not have the same level of confidence in their companies. Cultures were built differently, so the story was told. The DNA of workers was different, did everyone argue. Executives felt like their talent would forever fumble with the switch to a Slack and Zoom world. It would be like the 50 year old fat fingering a Facetime closed.
But workers adapted. Certainly, the workers fumbled the first few weeks. We were all dealing with the emotional scars of being locked in our homes, after all. But eventually, the workers not only adapted, but they thrived. In the classic case of human adaptation, the vast majority of workers were able to increase their productivity.
That is not to say there were not traumatic road bumps along the way. Many struggled, and still struggle with, the haunting mental consequences of not having real human interaction at work. The dim future of interacting through a little green light on their webcam and a gallery of colleague’s faces on their monitor became increasingly dystopian.
And that is because life has now become a game. To be fair, life was always a game. But now, life is fairly indistinguishable from your 10 year-old’s Fortnite video game sessions. What does he do?
During breaks in the school day, he watches Fortnite TikToks and YouTube videos. He gets a push notification for last night’s cash cup and hears his favorite streamer got 2nd place, so he hops onto watch his Twitch stream. This is you reading work emails during the weekend, signing up for industry newsletters, and checking in with a successful friend from your network.
When he gets home from school, he grabs a gatorade and Clif bar, then jumps on to warm up. He is honing his skills to perform well in front of friends. This is you reading the industry newsletter with your breakfast in the morning and brewing your coffee pot for the day of Zooms.
He then hops onto a Discord with his core friend group. They discuss what they want to play that day – the new mode or more competitive grinding? This is you dropping into your daily standup or first meeting, creating your prioritized to-do list for the day.
He then rolls up his sleeves and gets to work, playing. The whole time, he is connected by audio and visual avatar with his friends. Who he plays with changes, and he has breaks in between. This is you going through the day’s Zoom calls. You have to quickly do great work in between hopping in and out of communication with people. Your son has to have a high kill to death ratio, by doing work on his unfortunate enemies.
At the end of the session, he hops into a chill, fun chat with his best friends. He gets feedback on his play from his good friend. This is your review process. Your manager gives you feedback on your work.
During breaks in between doing his homework after playing, your son reads about other good Fortnite players, and interacts with a few potential friends to play with over Reddit and Discord. This is you going on LinkedIn and browsing other jobs, expanding your network.
The modern life of a technology worker is the same as that of a moderately serious Fortnite player. Life now mirrors a video game.
While the consequences for your son are merely prestige and fun, though, the consequences of our real life game are very real. In fact, the best players of this game are amassing generational wealth. They are buying sports teams, revitalizing their communities, and changing the trajectory of human history.
And they are doing so not unlike the best Fortnite players. They have the same amount of time to play the game. They use the same high level strategies. But, they simply do it much better. They make better use of their time. They manipulate the keys on the keyboard, and what they say into the Zoom calls, so much more effectively that they rise to the top.
To be fair, top Fortnite players do net over a million dollars a year. But, the top real world game players – like the founders of IPOing tech companies – net over 10 billion dollars a year. The very real world consequences of how we manipulate keyboard input and speak into our computers have never been greater.
The world has forever changed, and astonishingly few people have understood this. How are you going to play the game differently than everyone else to get the results of those top few? Life is a video game, with no ceiling.
How would you be the best Fortnite player? Practice better? Show up in your Zooms better? Have a higher kill:death ratio? Perform at the world cup?