Mapping Markets: Evaluating Blockchain’s Mass Adoption Potential

This blog post has been co-authored with Lindsey Li (Bessemer Venture Partners).

Investing from First Principles

Though data-driven investing is a frequent mantra among investors, the difficult fact of early-stage venture capital is that the key data often does not yet exist. The more nascent the industry and the further its core technologies are from large-scale commercialization, the more an investor must rely on long-range theses, deep technical diligence, and simple fundamental conviction in team and market potential.

So it is with crypto, which, despite precipitous swings in overall activity, remains not only small in a global context but also isolated from the broader economy. Nonetheless, the desire for a “quantamental” lens remains: How can we examine its long-range prospects in a principled way, integrating basic thematic convictions with real and currently obtainable data?

In this post, we propose a geographically-oriented framework, which we call “Pueyo Maps” (inspired by Tomas Pueyo’s geo-history), as a way of evaluating the long-term suitability of blockchain-based solutions to regional and national markets.

We approach this challenge in three stages. First, we address the failure of crypto thus far to reach mass adoption and consider the necessary prerequisites for its eventual success. We then examine the costs and benefits of blockchain and use these qualities to design a framework to compare the potential net benefits of blockchain-based systems across different emerging markets. Finally, we apply our framework to construct a Blockchain Attractiveness Index (BAI) and discuss the result in the context of both previous trends and future mass adoption potential.

Although this piece is a mix of high-level abstraction, long-term forecasting, and concrete quantitative analysis, we aim for these aspects to complement each other. Our overall goal is first to establish a general process and then show the results of a particular implementation. Readers who wish to start with the results may refer to “Putting It All Together” and “Scoping the Next Billion Users.”

Mass Adoption and Potential Barriers

Before examining the opportunities powered by blockchains, we must address a fundamental question: Why are we still talking about future potential? How has crypto “gone mainstream” at least twice, counting the bull markets of 2017-18 and 2021-22, yet still not found its way into our everyday lives?

Why Aren’t We There Yet?

The disappointment of crypto has always been the narrowness of its real-world use. The industry has produced a truly formidable wave of research breakthroughs in the 15 years since the creation of Bitcoin, leading to practical and scalable implementations of the following technologies, among many others:

• Distributed consensus for sequential, DAG-based, and resource-oriented blockchains
• Zero-knowledge attestations for identity
• Generic message relays for asset bridging
• Trustless oracles for price feeds and other relays
• Verifiable computation for off-chain software
• Rollups capable of guaranteeing economic (optimistic) or cryptographic (ZK) security

This embarrassment of riches could power an enormous range of practical use cases, so why hasn’t it? More pointedly, why is it that, even though Bitcoin, Ethereum, and the concepts of blockchains and cryptocurrency generally succeeded in permeating public consciousness during past bull markets, most people have never used any blockchain-based services in their daily lives?

Critics generally blame this failure on a lack of fundamental demand. Crypto has long had its share of dedicated skeptics, not only today but in previous market cycles, and indeed as far back as the invention of Bitcoin in 2008. Their concerns are often well-founded and deserve attention in light of the many high-profile failures that struck the industry in 2022. However, regardless of the particular issue, the central thesis is nearly always the same: that crypto is useless. Specifically, critics assert that crypto is either inherently ill-suited to non-speculative activity or unable to contain bad actors, hampering its ability to improve ordinary financial activity while restricting manipulative and illicit uses.

As long-term investors, we reject these assertions, but the tough questions behind them are worth asking. When is a blockchain-based solution truly superior to an API and a SQL database? (Call this the “Kai criterion”.) How can an open protocol facilitate its desired activity while restricting malicious actors, both technical and economic? Are there ways to incorporate financial incentives that are truly self-sustaining? Most importantly, why aren’t ordinary people using this stuff 15 years after the invention of Bitcoin?

To answer these questions, we must offer a credible alternative to the idea that cryptocurrencies and blockchains are useless, purely speculative, or self-contained to “metaverse” applications.

We explore this idea further below and later (“Scoping the Next Billion Users”) discuss why now is an opportune time to revisit the opportunity for crypto adoption in emerging markets.

Core Infrastructure: The Plumbing Hypothesis

What conditions need to be fulfilled for blockchain-based systems to be useful and adopted at scale? While the exact prerequisites may vary by market and application, we contend that the industry must successfully combine core infrastructure, financial and regulatory integration, and sources of large-scale commercial activity to drive mainstream adoption of crypto for real-world use cases.

As a simple real-world illustration of how comprehensive and well-integrated backend infrastructure can be a prerequisite to adoption, consider indoor plumbing. What needs to happen in order for a building to have access to running water?

1. There must be internal plumbing that connects the building to the water source. Besides providing a mere physical connection, these “pipes” must ensure fast, reliable transmission of clean and uncontaminated water from a known source.
2. There must be a fixture, such as a sink or a shower, that handles the interface between “internal” and “external” in a simple yet versatile way. Fine-grained controls such as temperature and pressure are handled at this stage.
3. There must be water, typically provided by a utility company, that measures usage and charges accordingly. The water, in turn, comes from a large natural source such as a reservoir or river.

In a business context, the core infrastructure provides the plumbing, while financial, regulatory, and technical integration (among other connections) serve as the fixtures. Customers and capital are the water, motivating and sustaining the effort required to transport economic activity from source to sink.

We rarely consider these prerequisites in a traditional business context because the “plumbing” already exists. Even startup founders, whose raison d’être is creative disruption, typically focus on fixing one broken system or satisfying a single unmet need. The greatest obstacle to the success of real-world crypto, as with the early internet, is that all major components must be built from the ground up.

Though one might ask how much of this overhaul is truly necessary and not reinventing the wheel, we generally find that the unique crypto-native functionality unlocked by blockchain technology—that is, the credibility, coordination, and composability properties described below— are incompatible with status quo systems and require new infrastructure. Running a startup is often likened to rebuilding a car while driving it, in which case running a crypto startup is akin to rebuilding the car while driving and redesigning the parts.

While we may explore these prerequisites more deeply in a future piece, for the moment we note that this hypothesis, if valid, largely suffices to explain the lack of mass adoption. So long as the nature of financial and regulatory integration remains an open question and the integration of traditional businesses with crypto merely experimental, we cannot expect to find the average consumer using blockchain-based solutions of their own accord. Mainstream adopters decide principally based on present utility and convenience, and switch only if the new solution justifies the costs. With crypto businesses, as with all others, the vast majority will choose whichever solution offers the strongest immediate value proposition.

For the rest of the piece, we adopt the stance that no market is currently mature enough to support most real-world use cases. However, once the required elements are in place, different environments will vary significantly in their suitability for large-scale adoption. Path-dependent events (such as changes in political power) or local factors may bolster adoption in some areas and hinder it in others, but we can at least aim to highlight the candidate regions where long-term prospects are most favorable.

Pueyo Analysis: Finding the Invariants

Rather than starting with the usual top-down approach based on industries and applications, we will examine the question from a geographic perspective. We take the stance that any blockchain business must eventually be evaluated on the basis of its net value proposition, and the costs and benefits underlying that value proposition vary dramatically by market. Therefore, rather than taking the software-like perspective of “build once, apply everywhere,” we will look for the type of market environment most suitable for blockchain-based solutions.

Comparing opportunities at a global scale is a daunting task, and it can be difficult to know where to begin, but fortunately, we have a framework to direct our efforts: Pueyo maps, inspired by Tomas Pueyo’s Uncharted Territories newsletter. Pueyo, who originally gained widespread recognition for his article “Coronavirus: The Hammer and the Dance,” approaches historical development from a perspective of geographical first principles. In "Geography is the Chessboard of History,” he illustrates how history is guided and shaped by geographical constraints, which inform both the initial and the future states of the map.

Pueyo’s thesis is that while physical geography is by no means fate, it exerts a powerful influence on the relative success of cities, states, and nations, much as the rules of a board game shape the conflict without determining its outcome. In each domain, certain principles nearly always hold, which skilled players recognize and strive to exploit. For instance, while no two cities or regions are exactly alike, most historical population centers share certain key features: navigable rivers with access to rich natural resources, flat plains for agriculture, surrounding mountains that provide defense, and sea or ocean access to facilitate international trade. These features play such an important role that even once the power dynamics or core industries of an area have completely shifted, we still observe cities and countries following the structure of the geographical “chessboard” established centuries before.

To apply this approach to blockchain-based applications, we can look to identify the abstract “mountains” and “rivers” of crypto. Like their geographical counterparts, these features should capture the starting conditions that most influence early success or failure: fundamental productive capacity and economic potential, internal connectivity and external access, and long-term defensibility.

Assessing Mass Adoption Potential

Inspired by Pueyo’s geo-history, we attempt to capture the key factors that influence the attractiveness of blockchain-based solutions. Our approach is as follows:

1. Outline the costs and benefits of blockchain-based solutions.
2. Use this cost-benefit analysis to identify factors that (a) influence blockchain viability, (b) vary widely between markets, and (c) are reasonably measurable.
3. Identify publicly available metrics to approximate each factor.
4. Combine the results into a single score and evaluate the resulting map.

This first-principles thesis-driven approach can complement primarily quantitative approaches such as a16z’s State of Crypto Index. Data-driven extrapolation works best when the future looks like the present writ large, but most of crypto’s key applications are not yet mature enough to provide meaningful data. Instead, our quantamental approach seeks to predict under which conditions blockchain-based solutions will thrive—and then quantify those conditions.

Cost-Benefit Analysis

The diffusion of innovations theory suggests that in the middle of the adoption curve, businesses and consumers are neither excessively motivated by novelty nor resistant to change, instead deciding whether to adopt a new product based on a combination of social factors and rational cost-benefit analysis. However, while we would characterize the social diffusion process as relatively similar in all markets, the costs and benefits of a product may be heavily influenced by local market characteristics. We further argue that inter-market variation is especially significant for blockchain-based systems.

A truly rigorous measurement of inter-market variation for blockchain-based products would require a more complicated analysis than the one performed here. For instance, we might identify core indicators of long-term viability, collect several representative metrics for each, construct weighted scores, and combine these indices into a final index. Each stage of the process would present a range of decision points, such as the relative importance and credibility of metrics. For now, we limit our degrees of freedom by using a single proxy metric for each core indicator. Indicators are then combined via simple average to create a Blockchain Attractiveness Index (BAI). The resulting scores will be far from definitive, but meaningful enough to serve as a basis for discussion and future work.

Trust Deficit, Latent Wealth, and Openness to Innovation

With the quantitative approach laid out, we must once again step back to answer a critical but highly abstract question: What is blockchain good at? Crypto is famously jargon-heavy, but the benefits most frequently touted—decentralization, permissionlessness, economic and cryptographic security, censorship resistance, Sybil resistance, credible neutrality, verifiable history, sovereign identity, etc.—are often self-referential and aimed either at researchers or industry professionals. From a purely external perspective, what can blockchain-based systems do that traditional ones cannot?

We claim that the primary benefits of blockchains, as they apply to real-world use cases with traditional parallels, can be captured under the headings of credibility, coordination, and composability.

• Credibility: The ability of agents to make verifiable, non-censorable promises about past or present state and/or future actions, backed by cryptographic or economic guarantees.
• Coordination: The ability to foster mutually beneficial cooperation between unaffiliated parties automatically and without dependence on a central authority.
• Composability: The ability to integrate subsystems flexibly, interchangeably, and reliably without bottlenecking on operators’ active involvement or manual approval.

Most familiar crypto concepts and terms map to one of these categories. For instance, economic security mechanisms and tokenized networks facilitate coordination; verifiable history and ZK-based applications rely on credibility; and any DeFi protocol that accommodates an ERC-20 (tokens) or ERC-1155 (NFTs) makes use of composability.

Higher-level use cases combine one or more of these key properties to differentiate the blockchain-based version from its traditional equivalent. For instance, in Vitalik’s list of exciting use cases for Ethereum, the identity ecosystem provides both credibility (authentication, proof of personhood, non-censorability) and composability (permissionless integration with protocols). The “hybrid” voting system, in turn, uses credibility via ZK proofs to improve the assurances of existing voting systems, which are, of course, large-scale coordination mechanisms.

What does this framework tell us about the key traits that distinguish attractive markets? Firstly, note that all of the above qualities confer the greatest benefits in a low-trust environment. Bitcoin itself was conceived in the context of the Byzantine generals problem, a distributed computing problem that assumes any given message might fail and any given agent may lie.

The ideological essence of blockchains, accordingly, is how to foster algorithmic trust in lieu of social or authoritative guarantees. What kind of market would exhibit the strongest demand for such solutions? One in which simpler and more familiar alternatives have fallen short. What kind of government would be likeliest to embrace such a solution? One that needs to win its citizens’ trust—especially economic trust—in the wake of prior shocks to public confidence.

Secondly, while all new technologies must justify their switching costs, we have claimed that blockchain solutions face higher barriers to adoption as a matter of both technical literacy and large upfront infrastructural requirements. Making matters worse, operating decentralized services imposes coordination costs that economic incentives and consensus design can only partially mitigate. Each guarantee comes at a steep price. Consequently, initial adoption may not be a question of relative efficiency—the “10x better” tech investors frequently cite—but rather a binary question of access. In many cases, the blockchain version of a product must offer novel and fundamentally superior modes of interaction, similar to how ride-hailing apps such as Uber were made viable by the introduction of smartphones.

How might we measure the ability of a blockchain-based product to provide something new and different? The simplest case is when the traditional equivalent is either nonexistent or inaccessible. This distinction is clearest in financial applications, where various market failures in a given country may exclude the average target customer entirely. For instance, creditworthy local borrowers in emerging economies may lack access to international credit markets due to exchange rate risk, fragmentation of liquidity, and a simple lack of information.

Blockchains alone do not provide a complete solution, but if DeFi financial rails can be integrated with off-chain structures to ensure end-to-end compliance and surface-detailed, asset-level metadata, it may unlock fundamentally new sources of liquidity. Such solutions could potentially replace traditional systems bottlenecked by manual intermediation and bureaucracy, which often prevent smaller players from connecting across markets (e.g. lenders in Germany or France and borrowers in Colombia). Decentralized markets, in contrast, are designed from the ground up to accommodate heterogeneous supply and demand.

Regrettably, not all people can take for granted the right to use these innovative solutions. The purchase or use of cryptocurrency is currently banned in several countries worldwide, most notably China, and is either contentious or subject to regulatory uncertainty in others. The current map cannot be taken as a reliable indicator of future status: restrictions on cryptocurrency may vary from year to year, following a mix of politics and public sentiment. However, we can attempt to generalize by using proxy metrics for general openness to change and potentially disruptive solutions. We can also measure this in a negative sense, prioritizing markets with a minimum of “wasted energy” as measured by administrative burden and similar frictions.

In short, the ideal market for a blockchain product (a) does not have easy access to the benefits it provides (e.g. stable currencies or deep credit markets), but (b) does want them, and (c) could use them if available. Based on this three-pronged framework—trust deficit, latent wealth, and scope to operate—we will make a first attempt to quantify the long-term suitability of global markets for blockchain-based systems.

Finding Candidate Metrics

Having defined our indicators, we now select a single proxy metric for each and integrate the results into a composite index. Note again that there is no single “correct” map, as our general process creates optionality at many levels:

• Unit of comparison (city, state, country, region)
• Key qualities of the technology (e.g. blockchain) in question
• Target indicators based on key qualities
• Number and type of metrics to use for each target indicator
• Construction of each indicator and relative weighting of metrics
• Construction of final index and relative weighting of indicators

Rather than look for optimal choices, we simply aim for sensible defaults. Accordingly, our results should be taken as a basis for further discussion rather than an attempt to create a definitive ranking, and we welcome alternative approaches or more nuanced implementations.

That said, what are the “sensible defaults”? At the very least, good data should be public, credibly neutral, and reasonably comprehensive. For instance, public datasets maintained by the IMF, the World Bank, or Our World in Data are likely to meet these standards in quality, breadth of coverage, and variety of indicators. On this basis, we will select the following proxy metrics for our three target indicators, as well as subjectively determined optimal values for each (along with a note on our qualitative interpretation). Each metric has been linearly scaled to a 0-100 range, with 0 representing the minimum value in the data and 100 the maximum. Finally, the indicator value for country i is set to |mi - mt|, where mt is the optimal value, and all values are rescaled to a 0-100 range, with 100 representing the closest value to optimal within the dataset. These “optimal” values represent subjective choices, for which we include a brief rationale.

Trust deficit

• Metric: Corruption Perceptions Index, Transparency International, 2022
• Optimal level: 30 (higher is less perceived corruption; 30 represents serious issues but not a crisis of legitimacy)

Latent wealth

• Metric: Domestic credit to the private sector (% of GDP), World Bank, 2019 (except where extrapolated from last reported value)
• Optimal level: 30 (low but still meaningful extension of credit, representing some proven demand that is struggling to find expression)

Scope to operate

• Metric: Ease of Doing Business, World Bank, 2019
• Optimal level: 80 (representing a few hurdles but a lack of major frictions)

Note: We recognize that the use of corruption perceptions as a proxy for trust deficit may invite the uncharitable interpretation that “blockchains are only good when things are bad.” On the contrary, we believe blockchains can improve any system that relies on trust, raising both absolute trustworthiness and relative efficiency by selectively replacing middlemen with smart contracts. Trust is core to the value of a blockchain-based system, so the value proposition is strongest in the face of a serious but addressable gap.

The “optimal” level for each metric is highly open to interpretation, but we believe it improves on a simple approach that targets one extreme. For instance, a complete lack of domestic credit may also imply a lack of disposable wealth, which would hinder blockchain and non-blockchain products alike. By the same token, greater ease of doing business may indicate greater scope to operate, but an extremely high score suggests a very well-integrated market that may be adequately served by existing solutions.

Putting It All Together

Having defined our target indicators and metrics, we can project them on the world map, comparing the raw values and derived indicators.

Trust Deficit
Raw values

Indicator

Latent Wealth
Raw values

Indicator

Scope to Operate
Raw values

Indicator

Finally, we combine the indicators via simple average to produce an initial projection of “blockchain geography,” which we refer to as the Blockchain Attractiveness Index.

The top 30 countries are as follows, while the full data is linked in the Appendix.

Discussion: Scoping the Next Billion Users

Pattern-Matching

As a first step, we compare the BAI to Chainalysis’ Global Crypto Adoption Index.

The top 20 entries are as follows:

At a glance, there is considerable overlap between existing adoption and estimated potential. Usage in Latin America and Southeast Asia is already significant, with countries such as Brazil, Colombia, Peru, India, Indonesia, and the Philippines placing highly on both lists. We also note a few major divergences: the United States and China have been among the largest adopters to date but score relatively low on the BAI. Conversely, other countries feature much more prominently on the 2022 index than their BAI score would indicate. We would suggest that outsized growth in countries with geopolitical instability may stem from the need to substitute for traditional banking services, while other countries have benefited from the network effects of sustained usage for remittances and peer-to-peer payments.

Particular countries, most notably Vietnam (due to Axie Infinity) but also Indonesia and the Philippines, have received a boost from idiosyncratic drivers such as play-to-earn gaming models, where rapid growth in one area dramatically accelerated overall uptake.

With that in mind, what surprises do we observe, and what areas of untapped potential might we highlight for further exploration? The following factors stand out:

• Latin America and Southeast Asia are already among the leading adopters, but insights from the most successful markets may be cross-applicable to neighbors with similar characteristics.
• While the United States and China both rank among the largest current adopters, this may be partially due to the effect of prior investments and crypto companies’ focus on large markets, not a fundamentally deeper need for blockchain-based solutions.
• Most of Eastern Europe has lagged in adoption despite relatively high attractiveness scores. This region may prove to be a large source of untapped demand.
• Nigeria, Kenya, and Morocco are currently the only African markets among the leading adopters, but other markets in southern and western Africa (Zambia or Egypt, perhaps) may be promising.
• Specific markets, most notably Turkey, are already among the leading adopters but may score even higher on long-term potential.

Why Now

We began this discussion with an acknowledgment of the crypto industry’s struggles to date in onboarding real-world users. While the first-principles approach speaks to an eventual turning point, we also highlight specific factors that speak to growing crypto usage today.

First, we look at the recent inflation-linked rise in crypto ownership in specific countries, most notably Turkey and Argentina. In these countries, usage has risen quickly despite broader industry headwinds, indicating users’ willingness to overcome the hurdles of early adoption when the benefits are sufficiently concrete.

Other statistics also support the inflation-driver hypothesis, including a recent study from the Deel Lab that finds demand for crypto payments in Latin America reaching an all-time high of 64%. In this capacity, crypto-denominated payrolls not only shieldagainst depreciation but may also provide liquidity and access to global markets. Consumer sentiment towards crypto in Latin America has risen along with usage, with over half of respondents, including 68% of Colombians and 63% of Argentines (but only 38% of Americans),viewing crypto as likely to become a reliable form of payment.

While the volatility of Bitcoin and other cryptocurrencies makes them far from perfect as an inflation hedge, we believe the recent rise in adoption indicates that only one sufficiently compelling “killer app” is needed. Recalling our plumbing analogy, basic infrastructure may have a long lead time, but it only needs to be installed once. That time has not yet arrived for more complex blockchain-based systems, but in some markets the chasm for financial use cases has already been crossed.

Caveats and Predicting Future Adoption

What additional factors would we need to refine our framework? Most importantly, an awareness of local conditions, such as political and regulatory factors, and a recognition of local market idiosyncrasies and path dependencies. Crypto usage may take a different path in a given market depending on infrastructural maturity at the time of adoption, as well as prior successes in both that market and its neighbors. For instance, our discussions with partners and portfolio companies suggest the following may play a role:

• In developing economies, a significant fraction of activity takes place through peer-to-peer transactions not reflected on-chain. Consumer activity often occurs via cash-for-crypto trades or P2P activity over social media such as WhatsApp. While this does not reflect our vision of a mature blockchain-based market, where liquidity concentrates on-chain, it is nonetheless an important consideration in how transactions take place today. We expect the equilibrium to shift towards greater integration as (1) more diverse use cases emerge, (2) fiat off-ramps become more widely available, and (3) regulatory clarity improves.
• Early associations may affect how crypto is viewed and/or used by different customer bases.  Argentinian users may have been introduced to crypto as a currency debasement hedge, while those in Mexico may have started using it principally for remittances. Still others may have come upon crypto as a form of wealth diversification or simply as a speculative asset. Use cases vary by demographics, socioeconomic status, and level of financial access, but also due to path-dependent factors such as the growth of the Axie play-to-earn market in Vietnam. These factors may elevate particular use cases over others even if those others would have been likelier a priori to take root.

We also recognize the potential of prior failures to slow crypto adoption. A working paper from the International Monetary Fund (IMF) notes that anti-blockchain legislation in Latin America and other regions often stems from concerns about their impact on “financial stability, currency/asset substitution, tax evasion, corruption, and money laundering,” which is exactly the opposite of the intended trust benefits in our framework.

We believe there exists a middle ground that balances openness and decentralization with compliance, where the credibility properties of blockchain solutions shine through without facilitating or tolerating bad actors. Achieving this state goes beyond mere improvements in technical guarantees via decentralized and self-custodial solutions. It also requires changes in perception and outlook, where the most prominent players insist on prioritizing operational transparency. Regardless of the fundamental trust benefits blockchains can offer, shedding crypto’s wild-west reputation will take time, consistency, and a commitment to getting it right.

Conclusion: A Quantamental Approach to Blockchain Adoption

Rather than having to decide between thesis-driven intuition and data-driven extrapolation, we believe investors should aspire to integrate the two. We hope the framework outlined here will serve as both a supplement and a first-principles alternative to current approaches. Although the notion of blockchain market attractiveness developed here is necessarily imperfect, it can nonetheless serve as a starting point from which to investigate how adoption might progress.

Much as geography is the “chessboard of history” but the final outcome is determined by its players, blockchains represent a powerful solution framework—but it is up to entrepreneurs, businesses, and governments to realize that potential. Towards that end, we encourage all sides to look beyond present trends and consider not only what problems blockchain-based systems can address but also where the need is greatest, the costs justified, and the benefits superior both in quality and in kind.

We’d love to hear your thoughts and feedback. Please feel free to reach out to us on Twitter at @SansGravitas (Lucas) and @LindseyLi_ (Lindsey).