The ICO Is Dead. Long Live Blockchain! Part 2
In the previous blog post, we went through some blockchain basics and had a look at Cryptocurrencies with questions like:
- What are the key features of cryptocurrencies?
- Bitcoin as a store of value – was it stable when Covid-19 hit?
- Ethereum, Tether, Ripple – how they differ from Bitcoin?
Now we will focus on some other blockchain-based technologies and use cases like:
- Smart Contracts
- Non-Fungible Tokens, NFTs
- Decentralized Finance, DeFi
Wild dreams or true value?
Interest in Blockchain reached a peak during the Bitcoin and crypto craze of 2017-2018. Now the value of Bitcoin is skyrocketing again, and the interest in Blockchain is rising to a new level. The VCs are also again pouring money into blockchain and crypto-related companies:
- In Q1 2021 a total of 129 startups raised $2.6 billion.
- In 2020 the total was $2.3 billion in 341 deals – for the full year.
However, the search for actually useful blockchain applications has been relatively slow for a few reasons:
- The decentralized blockchain architecture and its advantages represent a new and different paradigm – it takes time to recognize and implement the truly useful applications.
- There has also been a lot of unfocused energy created by blockchain fanatics and enthusiasts – energy without proper fact-checking and analysis of the proper fit for blockchain technology.
Both positive energy and factual thinking are needed in changing the world, but the ratio must be right.
The excitement in Blockchain is growing again.
And the NFT craze is suddenly red-hot, which often means big overreaches. Source: Google Trends
1. Smart contracts
A smart contract is a piece of software (stored in a blockchain) that automatically executes actions according to the triggers embedded. The objectives are reduction of trusted intermediaries, arbitrations and enforcement costs, fraud losses, as well as malicious and accidental exceptions.
- Vending machines are mentioned as the oldest piece of technology comparable to smart contract implementation.
- Smart contracts were first proposed in the 1990s by Nick Szabo
- Ethereum dominates the smart contract market, but there are also other advanced platforms such as Cardano and Polkadots
My take on smart contracts:
Smart Contract platforms and applications are going to be agile tools of digitalization in the 2020s due to several advantages:
- Trust – No need to rely on a third party.
- Security – A distributed ledger protects transactions
- Speed – Once the conditions are met, the contract is executed immediately
- Savings – No intermediaries creating extra fees
Ethereum is the most likely winner of the platform market if the currently ongoing upgrade process to Ethereum 2.0 goes well.
2. Non-Fungible Tokens, NFTs
NFTs are blockchain tokens that offer a persistent and unique identity.
- NFTs can be used to represent both digital and real-world items.
- Using a tokenized identity, real-world tangible assets can be traded efficiently while reducing the probability of fraud.
- NFTs are mostly implemented on Ethereum tokens, sometimes on other technologies like Binance Smart Chain.
Initially, NFTs were used mostly for the virtual goods in games and other digital collectibles. The recent NFT rush is tied to the sale of unique NFT versions of digital works of art.
- NBA Top Shot – an online forum for trading virtual basketball cards. Fans can buy and sell (non-fungible tokenized) video clips of their favorite players, called “moments”. Some of these cards have sold for millions of dollars.
- The NFT version of the first-ever tweet has already been bid up to $2.5 million. ( A Tweet by Twitter CEO, Jack Dorsey, where he wrote “just setting up my twttr”)
- The Beeple artwork – An NFT created from a digital work of art sold lately for a cool $69 million at Christie’s Auction.
There is even a free iPhone app called S!ng to make your very own NFTs.
My take on NFTs:
NFT is an important and tangible tool in the digitalization spurt of the 2020s:
- Creation of secure digital assets with a trace that can’t be changed, erased, or forged
- NFTs also form an important bridge between the digital and tangible worlds: digital identity (and security) can now be attached to real-world items.
- Right now, the frenzy is running in overdrive, and a lot of the focus seems to be on making some easy money fast.
Until October of 2020, the most Mike Winkelmann — the digital artist known as Beeple — had ever sold a print for was $100. In March of 2021, an NFT of his work sold for $69 million at Christie’s. Image source: Beeple.
3. Decentralized Finance, DeFi
DeFi is short for “Decentralized Finance,” an umbrella term for various financial applications in cryptocurrency or blockchain, often geared toward disrupting financial intermediaries. The DeFi ecosystem allows participants to offer and access financial services in a peer-to-peer format without relying on traditional intermediaries like banks, credit unions, or brokerages.
- The most popular applications are decentralized cryptocurrency lending, borrowing, and crypto exchanges
- The total value stored under DeFi services is currently around $45B
- The majority of DeFi implementations are Ethereum based
The printing of fiat money is controlled by central banks, and bank accounts are increasingly controlled by state-regulated KYC (know your customer) processes. Cryptos are typically decentralized and offer varying degrees of anonymity combined with confidence-building openness (in slightly simplified terms: anyone can check account balances and transfers, but the accounts’ owners remain anonymous).
Part of the drive behind DeFi, Bitcoin, and other cryptos springs from the limited control of any authority
- In the early years, cryptos were championed by enthusiasts strongly opposing government control and taxation rights
- If the trust in local authorities or currencies is weak, cryptos have a compelling advantage
- DeFi could also enable people outside of the traditional banking systems to access banking services
One of the leading Defi platforms is Aave (which originated from Finland), a decentralized platform for depositors and borrowers of Cryptocurrencies.
My take on DeFi:
The first DeFi platforms have been mostly internal systems for the crypto world: borrowing and exchanging cryptos. Traditional banks are trying to get in on the action by offering basic tools for crypto-investing. These use cases are highly dependent on the short and medium-term positive value development of cryptocurrencies.
Over time, blockchain technologies and applications utilizing them such as cryptocurrencies, NFT, and smart contracts will mature and integrate into the mainstream of IT, making it smarter, more automated, and transparent.
If governments feel their fiat currencies are threatened, they may set even surprising limitations:
- In 1933 and 1934, US Executive Order 6102 and Gold Reserve Act made it a criminal offense for U.S. citizens to own or trade gold. Further, it authorized the president to establish the gold value of the dollar by proclamation.
- Currently, India is considering a law banning cryptocurrencies, fining anyone trading in the country, or even holding such digital assets.
So what do we have today – is there anything useful?
Recapping the core advantages of blockchains from the previous post:
- Blockchain technology offers a way for untrusted parties to reach and share consensus on a common digital history
- A common digital history is important because digital assets and transactions are otherwise easily faked or duplicated
Below is a collection of initiatives that support cryptocurrencies or leverage blockchain technologies. Currently, most of the enthusiasm seems to be in asset management services and payment solutions, and actual industrial applications utilizing blockchain technologies still play a minor role.
The payments industry integrates cryptocurrencies into its payment systems
- Mastercard Will Begin Facilitating Cryptocurrency Transactions
- Visa is Embracing Both the Blockchain and Cryptocurrency
- PayPal launches crypto checkout service
- Visa moves to allow payment settlements using cryptocurrency
- Are Crypto Rewards Credit Cards A Good Idea?
Asset managers and others offer services to crypto-hungry investors
- Deutsche Bank Quietly Plans to Offer Crypto Custody
- PayPal enabling users to buy, hold, and sell cryptocurrency
- Fidelity offers enterprise-quality custody and trade execution services for digital assets
- First Bitcoin ETF Hits $421.8M AUM in Two Days
- Aave’s marketplace surpasses $5bn in liquidity
Sample industrial Blockchain use cases
- IBM and Salesforce join forces to help deliver verifiable vaccine and health passes
- Walmart brought unprecedented transparency to the food supply chain with Hyperledger Fabric
- Rotterdam is using blockchain to reinvent global trade
- Nestlé Expands Use Of IBM Food Trust Blockchain
- Dubai’s Digital Silk Road modernizes trade with Hyperledger Fabric
The long term view
While I am bullish on blockchain technology in the long run, there are still some challenges ahead, including:
- Crime – AML (Anti-Money Laundering) and KYC (Know Your Customer) regulations may steamroll privacy. Finding the right balance between strong anonymity and stopping criminal/prohibited uses can be tough.
- Regulations – Governmental forces may throw a spanner in the works (like China and India have already done)
- Carbon footprint – the energy consumption of Bitcoin mining is a significant ethical dilemma as the ESG (Environmental, Social, and Corporate Governance) mindset is spreading through the financial markets
My long term prediction is as follows (in the short term anything crazy might happen in the crypto world…):
- Energy-efficient and full-featured blockchain platforms will dominate the market.
- These platforms will be utilized as building blocks for increasingly agile and intelligent digital services.
- These platforms will also slowly integrate with traditional financial services and the management of fiat currencies.
Ultimately, blockchain is as much a political and economic hypothesis as a technological one. Blockchain technology provides a new way to think about how we agree on things and document the results digitally and safely. For the first time, multiple untrusted parties can create and agree on a single source of truth without using an intermediary. The technology’s implications for traditional middlemen and corporate players are therefore potentially enormous.
The next blog post will dive into the latest trends in Artificial Intelligence – stay tuned!
PS. Some further reading about crypto and blockchain:
- World Economic Forum “Crypto, What Is It Good For?“
- CB Insights “What Is Blockchain Technology?“
- CB Insights “58 Big Industries Blockchain Could Transform“
- A list of DeFi projects