#11 Hybrid Theory

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1 Concept 💡

If last week I zoomed all the way in on how to approach NFTs, this week I’m zooming all the way out by shamelessly borrowing from one of my favorite thinkers (Balaji) and his absolutely EPIC 4 hour podcast he did with Tim Ferris back in March (if you haven’t listened to it yet, I’m serious - stop reading this now and go listen to it. It’s that amazing!). Balaji’s mental model on how things inevitably progress from physical → digital fundamentally changed how I look at the world. In fact, it inspired me to come up with something I call the “Hybrid Theory”, which is a framework that predicts how all things will evolve. Let’s dive in — we’ll discuss:

  • Balaji on the physical → hybrid → digital evolution

  • What the “Hybrid Theory” is

  • How to use it (especially as an investor or entrepreneur) + future predictions

Physical → Hybrid → Digital
In the podcast, Balaji uses written communication as an example to describe the natural evolution of physical to digital:

  1. Back in the day, physical paper was the “operating system” (OS) for written communication. It underpinned how everything worked and all of our experiences (reading/writing/sharing) were predicated on top of it.

  2. Then, technology pushed us to a hybrid phase. We invented digital experiences that made reading/writing/sharing easier (e.g. Microsoft Word or scanning to a PDF), but paper still acted as the OS. It’s why every home & office had a printer.

  3. Finally, we land in a “native digital” state where the full experience is digital. Today, all written communication happens digitally, whether it’s email, sharing Google Docs, or chatting with friends.

Balaji’s meta point is that this evolution is inevitable across every facet of our life. Why? Let’s ask world-renowned expert Karthik Senthil 🤪:

“Hybrid Theory”
Balaji’s mental model stuck with me because it’s such a simple yet elegant way to look at how things evolve. In fact, I realized that if you zoom out from the physical → digital aspect, you actually end up with a framework for how all things evolve that I refer to as the “Hybrid Theory”.

To better understand, let’s first abstract how the world works to two layers:

  • “What is Possible” - you could call this the infrastructure or “operating system” layer. It defines the set of basic tools, rules and interactions that govern what is possible to be experienced.

  • “How We Experience” - This represents the experience layer which allows humans to build experiences on top within the constrains of what is possible.

Using transportation as an example: for hundreds of years pre-1900, riding a horse was the only way to travel large distances: horses defined what was possible. Humans built a variety of progressively richer experiences within those parameters, ranging from a saddle to chariots to buggy carriages. Because 99% of humans don’t directly interact with the “What’s Possible” layer, their mindset doesn’t think of a new possible: rather, they tend to assume that this the way it’s always gonna be and look to keep improving the experience. Henry Ford (founder of Ford Motors) has a legendary quote about this:

But technology is relentless. The electric motor and gasoline created a new possible. The initial experience with cars was far worse than horses - they would break down and need constant repairs. However, as experience improved, one could now achieve an order of magnitude further distance and faster speed. As Packy McCormick laid out in his terrific piece on interfaces, after this now wider possible layer or “interface” that humans shaped, it then shapes us. Humans built a broader set of experiences on top including different car sizes/speeds and electric-based conveniences like radio and air conditioning. And now, we are starting to see this repeat with electric batteries and machine learning technology: these technologies create a new possible that will enable experiences such as self-driving cars with carbon-free emissions to exist.

To me, a cycle of progress emerges that looks something like this:

  1. People create good experiences on what’s now possible.

  2. People build awesome “hybrid” experiences on top of what’s possible

  3. Technology expands what’s possible albeit with an initially subpar experience

  4. Repeat forever

If you’re a reader of this newsletter, you knew it was only a matter of time before I brought this back to crypto 📈! I believe crypto will act as the new “what’s possible” layer across several industries (just like the Internet did before it).

For example, in the banking/finance space, visiting a bank branch represents the left-most side of this framework. Over the past 10 years, we’ve seen a rise in “fin-tech” apps such as CashApp/Venmo/etc representing the hybrid phase: they made the banking experience much better although still sat on top of the same infrastructure (with the same issues). Crypto represents a completely new possible by enabling faster and cheaper transactions. Yes, the experience on the new possible isn’t great yet, but that will change — until one day, there’s a new possible.

How to Use It To + Future Predictions
I believe the smartest employees, investors, and entrepreneurs should look to either create new experiences or improve existing subpar experiences on this new layer powered by crypto. It turns out that this evolution actually maps pretty closely to what we discussed in edition #6 on adoption curves. The new possible with a bad experience represents where the early adopters live. The early majority onboards as the experience gets better and by the time the experience is awesome, everyone is using it. I’ll leave you with some predictions of where I see certain industries heading with crypto as the new “what’s possible” layer:

Banking/Credit/Insurance
Sure, there’s still a bit of upside working in fintech or insurtech, but the real upside is how to re-invent these offerings on top of crypto. For example, I believe there’s much more opportunity in building an insurance or credit product via an algorithm that calculates risk and pools money from peers together vs. working at an existing finance or insurance company.

Music/Art/Live Events
With crypto, it will be possible for artists to crowd-fund and share royalties with their fans (3LAU is working on this at Royal) or artists to generate art and earn royalties. And instead of StubHub and other aggregators operating ticketing for live events and taking a large fee, you’ll see artists use NFTs as a way to directly provide this to fans.

Healthcare
Healthcare is clearly in the hybrid phase with the amount of health-tech companies out there. To me, the opportunity lies in how healthcare will look like on top of crypto + blockchain tech. For example, I believe the days of electronic medical records (EMRs) that healthcare/insurance companies own are over. Instead, they will be owned directly by the patient and enable the patient to have + provide access to their entire medical history. This will be a game-changer in reducing friction and improving experience for both the patient and physician.

Education
This is the sector I’ve thought about the most so I’ll save more on this for a separate post but I believe crypto will enable students (and parents) to have more ownership and organize more effectively in their education instead of administrators.

Voting
I’d argue that voting still hasn’t reached the hybrid phase (to me, that’s when e-voting happens), but this sector may have the chance to skip over hybrid entirely and directly go to the new possible because blockchain solves the main concern that people have (fraud) via its technology: it represents a deterministic, transparent way to say who voted for whom with no way to alter it.

Gambling
Companies like DraftKings and FanDuel have recently moved gambling to the hybrid phase as the experience to place bets no longer requires traveling to the casino or using a bookie, even if the infrastructure is the same. While it’s still early days and plenty of upside remains, to me, the future is gambling on things we (as users) own like Zed Run is doing with digital horses vs. on teams that rich owners do.

OK, so now that you know where the future is going: please act accordingly.

Side note: My goal is to reach 500 subscribers by the end of October! If you love these, I’d appreciate it if you could share with atleast 1 other person who might like this!

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2 Things On Our Mind 🤔 

1. Loved this article on all the different potential use cases for NFTs. So excited!
2. The future is now…

Until next week, always be learning
Karthik