Writing

Networked Cash Flows

July 13, 2021 | 7 minute read

DeFi is the most useful application of blockchains. We spend a meaningful percentage of our time thinking about DeFi, and learning from the best DeFi entrepreneurs who are building the future of finance.

But when most people think about blockchains, they think about value transfer. Why? Because it’s just easier to understand. Superfluid, a new protocol we just invested in, represents the biggest step forwards in value transfer since the advent of Bitcoin.

Multicoin Capital led Superfluid’s $9M series seed alongside Semantic Ventures, who led the pre-seed round, DeFiance Capital, Delphi Digital, MetaCartel Ventures, Fabric Ventures, The LAO, DeFi Alliance, Divergence Ventures, and MMC Ventures. A few notable angels, including Balaji Srinivasan, Stani Kulechov, Do Kwon and Ryan Selkis, also participated.

Credit Card Fraud

Why is credit card fraud such a huge problem?

There are lots of answers to this question floating around on the Internet, and almost none of them actually address the root cause.

The root cause of credit card fraud, in crypto-speak, is that public keys and private keys are the same thing. If someone has your credit card information (analogous to a public key), they can effectively charge at will. For anyone who is crypto-native, this is absolutely insane.

Over the last few decades, payments companies have built myriad layers on top of this core system to try to secure it. The most well known of these among people in the payments space is the need for PCI compliance. There are many others.

Recently, Apple layered public key cryptography onto the legacy system via Apple Pay using the secure enclave in every iPhone. This actually reduces fraud to such a meaningful degree that banks pay Apple every time a consumer buys something with Apple Pay!

Public key cryptography is the solution to the fraud problem. Conveniently, every blockchain leverages public key cryptography for all payment authorizations. However, public key cryptography on a blockchain creates a few new problems: key management and gas consumption.

Superfluid mitigates both of these problems, and then goes above and beyond to create a new network of interlocking, composable, extensible value streams that is not even possible in the legacy financial system.

Programmable Streams

Since the dawn of Ethereum, people have been talking about programmable cashflows. Superfluid takes the idea of programmable cashflows to the logical extreme.

To understand Superfluid, let’s build up in three layers.

The base layer of Superfluid is streaming cash flows. This is straightforward: “stream $5 per hour.” This sounds like a state channel, but it is not. State channels require bilateral, synchronous signatures between sender and receiver. Superfluid allows the sender to authorize the stream with a single signature, and doesn’t require the receiver to be online at all. This reduces the key management burden. Stream recipients can claim the tokens that they have been streamed anytime with a signature (or never claim them at all, and stream them on to someone else using Superfluid).

The second layer of Superfluid is programmability. Smart contracts can manipulate incoming flows of tokens just like they do with deposits. For example: “stream $5 per hour to Bob as long as I am receiving at least $10 per hour.” The cashflow logic can be arbitrarily complex.

The third layer of Superfluid is a network of interlocking streams of value across many assets, all of which run concurrently without any additional gas consumption. For example: “Bob receives a stream of $20 per hour from his employer, streams $5 to pay back a loan, streams $10 of it into a savings account, pays a few subscriptions, and commits the rest to buy ETH every second.”

The third layer—the network layer—is what makes Superfluid so powerful. Superfluid streams can build on other Superfluid streams—so that Bob can stream funds to Carol as he receives streams from Alice.

This solution natively solves a whole bunch of problems concurrently: it increases capital efficiency, reduces gas consumption, and reduces the number of times users need to sign transactions.

Applications

Nothing like Superfluid has ever existed before, so it can be difficult to imagine all of the creative things that developers are going to build with it. In the ~4 months since the beta launched, developers have built all kinds of incredible solutions. And the first wallets, such as Minerva Wallet, have integrated Superfluid natively.

DAO payments infrastructure

  • It’s a hassle for DAOs to run payroll and pay contractors on a weekly or bi-weekly cadence. Superfluid allows DAOs to authorize a single transaction to pay a contractor indefinitely, or until the end of an assignment. I expect every major DAO will be leveraging Superfluid by the end of this year. DAOHaus enables DAOs to create streams with a no-code interface.
  • This can be expanded to DAO-to-DAO interactions. Eventually, when multiple DAOs come together to provide novel services, Superfluid will act as the glue that connects all these DAOs together.

DeFi

  • DeFi derivatives are just on the horizon, along with credit and debt protocols, and exotic on-chain financial instruments. These protocols will have algorithmic periodic asset streams that will be encoded via Superfluid.
  • Superfluid will reshape risk management as collateral management will become programmable in real time (as opposed to multi-day settlements of the status quo which exposes lenders to significant counterparty risks).
  • Users can dollar-cost-average into positions with only a single on-chain transaction (minimizing gas consumption) using Superfluid. Ricochet is building this.

Internet of Things

  • There will be hundreds of billions of connected IOT devices (hopefully on the Helium network!) in 10 years time powering a smart planet, including use cases such as autonomous cars, radars, cameras, wearables, etc. These devices will leverage Superfluid to facilitate real time payment streams.

Subscription Services

  • Subscriptions aren’t possible yet in crypto because there’s no way to authorize an ACH payment (by design! Public key cryptography does not allow other people to charge your account). Superfluid solves this problem by allowing subscribers to push value over time to a service provider without requiring further authorization. Supersaiyan is one such project already building on top of Superfluid.

Real-Time Finance

  • Using Superfluid, it’s possible to build an entirely new streaming economy on top of DeFi, one that moves assets around programmatically at a velocity we have never seen. Wolta Finance and Streamswap are two projects that are building tools and interfaces to transfer assets into and out DeFi protocols programmatically in a continuous streaming fashion.

Improving The Velocity of Money

Looking 10-years out, Superfluid will have profound implications on value flows, working capital management, IOT machine payments, and even valuation models for large companies.

Today, people and companies batch payments on weekly, bi-weekly, and monthly cadences. Sometimes products and services are paid for 30 or even 90 days after delivery. The lumpiness of these cashflows reduces the rate of turnover of capital through the economy, and increases working capital costs throughout the economy. The only reason we accept these arrangements is because of the lack of better technology coupled with the inertia of the past.

DeFi is increasing the capital efficiency of assets by enabling assets to be rehypothecated across protocols. Superfluid is increasing the capital efficiency of currency by streamlining and automating networks of asset flows.

Traction

I first read about Superfluid in September of 2020 at one of the Ethereum hackathons. Although Superfluid was very early, I immediately recognized the power of a conditional asset streaming primitive. I reached out to Francesco over Twitter, and after meeting Michele, Miao and the rest of the team, we were extremely excited for the chance to lead Superfluid’s round.

Since then, they have been shipping nonstop. They have cultivated a strong, organic community that is eager to build on top of the primitive they are pioneering. At the most recent Ethereum hackathon, over 35 teams built on Superfluid despite almost no hype or marketing. As the first investors in The Graph, which was similarly underhyped and underappreciated early in its life, we see many parallels to Superfluid. We expect some of the teams emerging from this recent hackathon that leverage Superfluid to become premier apps in the years ahead, much in the same way that early Graph based applications went on to dominate DeFi (Aave, Uniswap, Compound, etc).

Superfluid is growing rapidly. They have over seven open positions, including a senior smart contract engineer and a marketing manager. If you’re interested in joining this team, check out their open positions here.