PayPal and Web 3

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Hey all, Robin here—I hope you enjoyed my last Substack on Apple’s plans to enter the AR and VR market. Today, we’re going to doing a detailed analysis and overview of PayPal and their Web 3 ambitions. We’re going to cover: 1) The origin of PayPal; 2) How PayPal adapted to Web 2; 3) Bitcoin’s OG Dream; 4) Web 3 and payments and 5) Why PayPal must reinvent themselves

The origin of PayPal

Before we cover the origins of Paypal we need to cover X.com and Confinity. And before we begin covering X.com, X.com is not an adult website, even though it sounds like it is. X.com was an early online banking site, essentially you can do anything you could do at a bank but on a computer.Sounds common sense, right? Well, common sense isn’t common and the idea of doing banking on a computer beyond insane. You had to deal with security issues and a myriad of legal troubles. The government could shut down your whole operation with a knock on the door.

X.com was founded by Elon Musk (former CEO of Zip2, an early combination of Google Maps and Yelp, and sold the company for $200 million to Compaq Computers), Harris Fricker, and Christopher Payne. Fricker and Payne didn’t like the direction the company was going in so they scooped up key engineers and tried to stage a coup against Musk to make him resign.Musk didn’t and Fricker and Payne left. For Musk, it was a huge loss given the loss of engineering talent and the millions of laws in place preventing something like X.com from happening. Musk went out to secure funding and hired more engineers and bounced back from the loss in the face of insurmountable setbacks. Musk secured a banking license and X.com became one of the world’s first online banks secured with FDIC insurance.

X.com would continue to develop further and created a prescient peer to peer payment system where you can send money by plugging in an e-mail. The goal of X.com was to make the world move away from using old banks to send money and process money (which, believe it or not took days). As X.com grew, a new competitor began to appear known as Confinity. Confinity was founded by Peter Thiel and Max Levchin. Confinity even rented their office from X.com. Confinity was developing their own payment system for PDAs.

As fate would have it, the early internet financial revolution would pretty much occur in the same building in San Francisco’s University avenue. However, after Confinity moved away from their office in X.com’s office they’d enter a fierce war against X.com over control of the future of internet payments. Confinity became Paypal and began pouring millions of dollars in the fight against X.com. The war over internet payments would have ripple effects for the future of internet.But as the war dragged on, Confinity and X.com would end up merging into one entity known as X.com in Jan 2000.But Musk would eventually be ousted in a corporate marriage gone wrong with Confinity and X.com employees fighting over trivial matters.Thiel and Levchin would leave the company less than 5 months after and Musk was forced to run a fractured business and would have to endure a nastier corporate coup than the one Steve Jobs had to endure against John Scully.

Musk would be ousted out of X.com during his honeymoon with his first wife and the company would later change its name to PayPal when peter Thiel returned. Musk would become an advisor to the company and continue purchasing shares until he became the company’s largest shareholder. In July 2002, as the DotCom bubble popped, eBay offered $1.5 billion to acquire PayPal and the board of PayPal accepted.Musk netted a cool $250 million which he would later use to start SpaceX and fund Tesla motors.Now, I bet you’re wondering why I spent so long covering the early history of PayPal.I spent this much time covering them because we need expertise on how PayPal has functioned in the past and how they’ll function in the future. But get ready for some more history.

How PayPal adapted to Web 2

PayPal.What’s the first thing that comes to mind when you hear that name?Is it the payments behemoth that you quietly encounter on the internet as you shop online? Or is it the company that owns Venmo?For most, people it’s the first option since most people don’t know that PayPal owns Venmo and Venmo was PayPal’s premier Web 2 acquisition.

Venmo is a simple to use app for sending payments. The main thing that lead to Venmo’s growth was the ability to split payments that you paid for with your phone. At the time, it was absolutely revolutionary. Venmo was founded by Andrew Kortina and Iqram Magdon-Ismail in their University of Pennsylvania dorm room and the nascent company was then acquired by BrainTree in 2012 and then PayPal.PayPal saw the 800 pound gorilla that FinTech would become and acquired BrainTree for, the relatively nascent, Venmo. 10 years later, Venmo is a staple of PayPal holdings and is a titan of Fintech with the Covid-19 pushing Venmo as one of the key financial services apps of the world and growing around 30% per quarter. Now, that we’ve covered the necessary history of PayPal and Venmo let’s talk crypto.

Bitcoin’s OG Dream

Bitcoin was initially envisioned as a coin for global payments, not “digital gold” and in 2013 when most people talked about Bitcoin one of the key bullish theories was that Bitcoin would take the world by storm and take out players like PayPal. As it turns out, this did not happen because the majority of people had a hard time getting accurate information about crypto or even knew of any payment processors. But names like BitPay began to appear and began to tap into the nascent cryptocurrency payment industry and now BitPay is the defacto standard for online cryptocurrency payments being used by sites such as Twitch and Microsoft.While Bitcoin has not taken the payment world by storm, not yet anyways, the entrance of FinTech firms like Square’s CashApp, PayPal, and Stripe into the cryptocurrency payments games represents another massive opportunity to rewrite the global financial system in a similar way to what we saw earlier with X.com.

Web3 and Payments

Web 3 has largely remained untouched in the area of cryptocurrency payments due to insane gas costs and the majority of the Decentralized Finance sector, right now, having a ponzi fever moment with protocols like OHM and many others attracting large amounts of blockchain developers. However, Web 3 and DeFi are so much more than insane APY and virtual money trees. There is a very real possiblity of being able to pay in cryptocurrency in a more efficient way than cash and being able to outpace rising inflation is a far more compelling thing to 99% of the human population. I will now refer to these firms from now on, as Consumer DeFi.

However, in order for this vision to happen a few things need to align:

1. Everyday people have access to a wallet.

2. Easy ways exist to turn USTT into cash.

3. Point of Sale and Checkout payment tools exist.

And PayPal has already built many of these tools and is trying to do more.

Why PayPal must reinvent themselves

PayPal is in a bit of a pickle right now, they’re growing, but not as fast as they’d like. Profitability is just sitting pretty and the company is placing a lot of faith in their ability to grow in the future in acquisitions. It’s highly likely that PayPal could acquire a bad company and severely harm their future prospects. However, in the face of regulation and CashApp, Stripe, and FinTech quartet appearing to be cannibalizing the old titan, PayPal is investing heavily into another angle for growth; cryptocurrency and the nascent Web 3. Paypal’s Venmo and the PayPal app itself have recently allowed for users to buy cryptocurrency and according to the recent investor update during Q3, PayPal is trying to create a financial super app by integrating payments and crypto.

All signs point to PayPal’s future being, to some either small or massive degree, in cryptocurrency and possibly even Web 3 with payment processing. And we have a pretty solid indicator that it might be in Web 3.

On January 7th, Bloomberg posted an article outlining how Steve Moser, a developer, found evidence of PayPal developing a stablecoin known as PayPal Coin

PayPal Coin could be a way for PayPal to test a real stabelcoin experiment by allowing a relatively small amount of users to pay at PayPal merchant sites with PayPal coins and avoiding the fees that traditional credit cards have.

What’s next and why does this matter?

PayPal is just one example of the slow awakening of FinTech to the potential of Web 3 and, like most companies, certainly don’t want to miss out on it. But more broadly, we’re starting to see something very unique as the technology companies that have disrupted face disruption; they are preparing to meet problems head on and abandon their egos. Meta, Match Group, and now PayPal are now among the pantheon of companies that know they are facing existential threats from emerging technologies. However, just because they know that a challenge exists and are preparing to meet it does not that they are insulated from it. These companies also have the potential to open the world’s possibilities to new technologies and be the first movers that will face disruption from emerging titans.

You can think of them as the rocket fuel for a larger trend that will change the world; with their vast resources they smoothen the road for the future titans to appear and eventually disrupt them. It’s the 1990s and we’re about to experience another revolution in payments so strap on in and let’s enjoy the show.

As noted above I’m going to provide paid content on this substack going forward and hope that many of you will join me in the journey. Primarily, my focus will be on early stage/Seed type investing ideas and edge of technology implications. If you’re reading this and haven’t subscribed, click the button below to join the early birds!

Disclaimer: This is not financial advice in any way shape or form. I’m literally just an angry and angsty bird writing down my thoughts on the future and technology. I can’t believe Amazon didn’t have my toy— this is rigged.