Crypto's new frontiers
What you'll learn:
- The concept of the spatial web
- How DEFI will continue to grow
- How DAOs may be the companies of tomorrow
- Web3.0: the decentralised web
In any discussion about the future of crypto, it is essential first to understand where the industry is at the current moment in time. There are three aspects to this: the blockchain space is young, moves fast, and interacts with other technologies.
Cryptography has been around for a while. Much of the innovation around blockchain is rooted in the cypherpunk movement of the 1990s. However, we must realise that blockchain was only invented and first applied in 2008/09.
That’s only 12/13 years ago. To put this into perspective, the internet’s first application was in the 1970s when academia and military networks began using it to communicate and it took until the early 2000's for widespread usage to really take-off with expanding broadband and mobile penetration.
By comparison, Blockchain technology and the crypto industry is young.
The Spatial Web
Another important factor to consider is how quickly the industry is currently moving., The wider advancements in digital technology and communication, combined with the nature of blockchain technology, mean the space tends to move incredibly fast. So fast that it can be very hard to keep up.
Though blockchains are only a dozen years old, a huge amount has happened in that time. Ethereum and smart contract capability have led to the rise of entirely new industries and many companies - some of which have been legitimate innovators and haven’t.
These industries include (and are not limited to) Defi, DAOs, NFTs and Digital identity. To assess the industry’s future, it will be useful to break it down into these key areas of innovation and see where they are likely to be heading.
The third and final important consideration is that the blockchain industry is not operating in a vacuum. Developments in Artificial Intelligence, Augmented and Virtual Reality, Internet of Things (think smart cars, robotics and biometrics), as well as 5G networks, 3d Printing and GPT-3 are all beginning to converge along with the blockchain space. These developments have been dubbed web 3.0 but are also known as ‘The Spatial Web’.
To get any real sense of where the blockchain industry is heading, we can’t just analyse it in isolation. We must also assess how it will interact with other technologies and what innovations these interactions might lead to.
Given this current state of play, the article that follows assess some key areas of innovation within crypto today, focusing on their future. It will then finish by looking at blockchain technology within the context of ‘The Spatial Web’ and attempting to see the bigger picture being painted that blockchains will be a key part.
Defi (Decentralised finance) is an umbrella term for various financial applications using the programmable aspects of cryptocurrency - via smart contracts - to innovate wealth management.
The key innovation here is that financial instruments built on blockchains do not rely on intermediaries such as banks, brokerages or exchanges. This has many advantages:
- providing new access to finance for the unbanked population (estimated to be over 1 billion people)
- generating access to a new forms of yield
- enabling innovations such as decentralised stablecoins and synthetic tokens
- removing the barriers to entry for early stage investment
Stablecoins are a DeFi innovation that aims to solve the volatility problem associated with cryptocurrencies such as BTC and ETH. (as discussed in a separate article). The most famous example would be DAI, a cryptocurrency that uses smart contracts to maintain a value as close to $1 as possible. This has brought a stable currency option to the crypto industry, encouraging adoption and further innovation.
Synthetic tokens are a type of derivative (a financial product that derives its value from an underlying variable asset). These tokens can track any price index and allow exposure to different risk levels that were previously impossible. Some creative ideas for these synthetic tokens include:
- Tokens that track the number of downloads of a particular app
- Tokens that track non-tradeable price indexes
- Tokens that track the future usage of DeFi products
The main criticism of DeFi is that blockchain transactions are irreversible and so incorrect transactions cannot always be easily reversed. Regulation is also tricky to the decentralisation and private nature of the industry.
One key area of regulation is CBDCs. Central Bank Digital Currencies are currently heavily researched by 80% of the world’s central banks, and the people’s Bank of China is currently trialling their digital Yuan. CBDCs aren't necessarily a direct challenge to DeFi but governments playing catch-up to the innovation that DEFI is unleashing. They are hybrids that cherry-pick the elements of crypto that governments find useful - traceability & money supply control - while ditching those that challenge its role - permissionless & borderless.
DeFi is one of the most significant spaces in the blockchain industry at the moment for sure. There’s an estimated $11 billion deposited in various decentralised finance protocols. As the space matures and becomes more trustworthy, expect to see increased liquidation and adoption, leading to more innovation and the potential for globally increased access to capital and high-interest rates.
Decentralised Autonomous Organisations
Decentralised Autonomous Organisations or DAOs are organisations powered by smart contracts represented by the organisation members’ rules and not influenced by central governance.
DAO’s are challenging long-held beliefs around company organisation and democracy. They remove the need for mutable acceptable, trusted third parties to enable transactions. This makes transactions more straightforward and more efficient, but leaves the problems of human motivation.
That thorny issue was exposed in one of the first DAO implementations, the Ethereum DAO, which aimed to be a new type of Venture Fund run by its members, but ended up being being drained by a flaw in its Smart Contract logic. The debate around how to deal with the loss led to a split in the Ethereum community, producing two separate blockchains - Ethereum and Ethereum Classic.
Ethereum's fateful experience shows that DAOs are just codified rules; if the logic of the code can be exploited, it will. DAOs don't change human natures, they're an attempt to mitigate the difficulties of governance and as such have a long way to go really succeed.
The best example of a functioning DAO is MakerDAO which uses the model to enable community governance of the generation of DAI a stablecoin soft-pegged to the US Dollar. Users create DAI by pledging cryptocurrency as collateral, which is locked in a vault, called a CDP.
It is a very complex idea, and has not been without challenges, but the amount of value locked in DAI is increasing all the time, as is the value of the MKR token, which is used to pay stability fees, ensuring DAI keeps its peg. MakerDAO is advancing on a roadmap towards complete autonomy, realising the true potential of DAOs and set the benchmark for others.
NFTs, Supply Chains & Identity
Non-Fungible-Tokens or NFTs are a specific type of cryptographic token based on blockchain technology. In contrast to Bitcoin or other cryptocurrencies that are fungible - can be freely exchange for other tokens - NFTs represent something unique and are thus not mutually interchangeable.
NFTs are used to create digital scarcity and power applications that facilitate the digital trade of art, collectables and other digital items. One famous case is the blockchain-based game ‘crypto kitties’. NFTs represent in-game assets controlled by the user (instead of the developer) and can be traded on third-party marketplaces.
NFT collectible platforms are exploding, with individual examples changing hands for eye-watering sums. Banksy recently physically burned a piece of art - called Morons - then created an NFT from the live stream. It sold for $380,000.
The music and sports industries are turning existing engagement models on their head via NFT, whether it is the NBA selling NFTs of classic video clips or bands tokenising albums and VIP experiences.
Use of NFTs is growing, with Nike holding a patent for blockchain-based NFT-sneakers called ‘CryptoKicks’ and Decentraland, a crypto version of Minecraft where NFTs are being used for purchasing virtual real estate. MANA, Decentraland's token has a market cap of around $225 million, a more than fivefold increase since its launch in 2017.
One frontier that NFTs are being used to explore is supply chain management. In theory, NFTs can be used to represent physical goods as well as digital ones. The trade and management of goods in the global supply chain are still untouched by crypto and could be made much more efficient. It’s likely that NFTs will be part of the picture of supply chains managed by blockchain technology.
Identity and provenance are probably one of the clearest use cases for blockchains and are certainly a key area for the technology’s future. The Covid-19 pandemic has highlighted how the current fiat infrastructure used to manage our increasingly interconnected world is unfit for purpose.
From failing to track and trace carriers of covid to sourcing faulty PPE equipment, our management of these systems needs improvement. By providing a way of reliably and securely storing data, blockchains can potentially offer a way of achieving this improvement.
Digital identities powered by a blockchain could offer reliable ways to track immunisation records. They could also power things like digital passports that can help track and trace and border control efforts.
As we’ve already mentioned digital identities can be expanded beyond people to physical goods. This expansion may create radical shifts in our ability to trade goods and track their provenance.
To understand this potential, we now need to examine blockchains in their proper context, which brings us nicely onto Web 3.0 and blockchain interoperability.
Web 3.0 & Blockchain’s interconnected future
Web 3.0, aka ‘The Spatial Web’ is a set of developments across different technologies becoming increasingly interconnected. Blockchain technology is one development; also included are Artificial Intelligence, Augmented and Virtual Reality, Internet of Things, 5G networks, 3d Printing and many more.
Imagine a world where AI systems run our transport, intuitively display us information through augmented reality glasses and 3d print objects based on intuiting our needs connected through 5g networks and in sync off shared a blockchain. Sounds great, no?
A crucial part of this from the perspective of blockchain is interoperability. This describes the ability of computer systems or software to exchange and make use of information.
For the technologies mentioned in the example above to become increasingly interconnected, they will need a shared picture of the truth. Without this shared understanding of reality, these technologies will not integrate and be used to their full potential.
Distributed Ledger Technology (in other words, blockchains) provides the power for this interconnected infrastructure. Blockchain’s offer a way to securely, reliably store data in a decentralised fashion. Blockchains offer a path to a virtually unhackable, globally shared ledger of records, events and transactions.
From this foundation of data integrity, technologies can begin to reliably communicate with each other free from having to worry about malicious third parties or conflicting records. There’s an ocean of possibility that comes with this, and we’re only just at the start.
Blockchain platforms such as Ethereum are still working to scale and meet this need for a globally shared record system. As we move into the next era of the web, you can be confident that blockchain technology will play a key role.
Hopefully, after completing this article, and with it, the Crypto Basics section you can start to see the potential of this technology, understand more about how it works, what spaces it is innovating in and most importantly, begin to imagine the possibility of what is yet to come.