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.
Decentralised Finance
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.
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