DECENTRALIZATION AS A PHENOMENON | PART 2
In Part 2, we explore how the Web3 era influences markets: how companies of the new generation appear and how they change our understanding of finance, valuable assets, and the world.
WEB3 = NEW MARKETS
Being a “disruptive technology”, blockchain does not only transform world-known markets. Blockchain creates new markets.
“[Blockchain] is the biggest opportunity set we can think of over the next decade or so.” — Bob Greifeld, Nasdaq Chief Executive (2015)
What is blockchain technology today?
To equate blockchain and cryptocurrencies is to underestimate the technology significantly. Today, blockchain is:
- a market for payment transactions and cryptocurrencies,
- a way to store data,
- a possibility for open and independent voting,
- a framework for corporate governance (DAO),
- a way to allocate rights for unique things (NFT) or individualized items (SFT),
- a possibility to authenticate and verify identity and documents (SBT),
- a base for complex financial transactions (DeFi).
EXAMPLES OF NEW MARKETS ON BLOCKCHAIN TECHNOLOGY
The blockchain base is the best encryption method. For this reason, digital assets with a blockchain base are called crypto-assets (from the word crypto—encrypted).
We offer to review some of the most striking examples of crypto markets in today’s world.
Cryptocurrency
Cryptocurrency is a blockchain token with a payment function. The registration is provided directly by a decentralized payment system. There are no strict criteria for cryptocurrency. In economic terms, it represents a new value — money with no issuer.
“Cryptocurrency is such a powerful concept that it can almost overturn governments.” — Charles Lee, Creator of Litecoin (2013)
Cryptocurrencies like Bitcoin are already called classic cryptocurrencies.
Later came stablecoin, private money issued by a particular emitter and tied to a national currency (U.S. dollar, euro, pound sterling). Stablecoin helps solve the volatility of “classic cryptocurrency”, but the danger of stablecoin is that it is not entirely decentralized and, therefore, does not protect against unfairness, greed, and inanity of the issuer.
There is a state analogue of stablecoin, CBDC (Central Bank Digital Currency), which the central bank issues. The advantage of CBDC is that the issuer is not a little-known company but the state.
Other types of tokens (non-payment tokens)
We can mention utility (i.e. Filecoin) and investment (i.e. SPICE) tokens depending on the purpose. Those token types are technically indistinguishable from cryptocurrency but different in an economic sense and legal regulation.
The Howey Test
As we can see from the latest news, including the FTX case, it is essential when a token can turn out to be a security.
In the U.S., tokens are not legally segregated. Tokens are regulated based on correlation with other assets. The most important is the Howey Test, a test for the correlation of tokens to securities.
The Howey Test is a test developed by the U.S. Supreme Court that is used to qualify individual transactions as investment contracts. It allows the project organizers to answer the central question: will the issued tokens qualify as securities under U.S. law?
Several large crypto projects, such as Ton Issuer, have suffered due to having their tokens recognized as securities.
Smart contracts
The term “smart contract” was suggested by a famous computer scientist, Nick Szabo, as a protocol for a computerized transaction that fulfils the terms of a contract. The primary purpose of a smart contract is to reduce transaction costs.
DeFi
One of the most widely discussed uses of smart contracts is decentralized finance (DeFi). The idea, in general terms, is to model all or some of the functions of a financial institution, such as a bank, with the help of a smart contract and, as a result, obtain the corresponding financial services almost for free (for the price of blockchain transaction processing only).
DAO
Another impressive example of the use of smart contracts is DAO — decentralized autonomous organizations. A DAO is a virtual analogue of a fund, which functions as a smart contract. There is no “executive body” of a decentralized organization; the transactions are made by an algorithm, programmed and acting according to the participants’ votes.
Legislators of some countries include DAO in the list of legitimate forms of company organization. Europe, for example, tends to interpret DAOs as partnerships, and in the U.S. (Wyoming, Delaware), DAOs are referred to as LLCs at the legislative level.
The first DAO
The first project of this kind, “The DAO,” was launched in 2016 and was a huge success. The idea behind the DAO project was as follows:
- a fully decentralized platform, not tied to a specific jurisdiction;
- an automatically managed venture capital fund in which investors on the platform vote to fund projects willing to attract investment.
In a short time, users transferred $150M in cryptocurrency to this virtual organization. However, it turned out to be a disaster. Unknown hackers discovered a bug in the smart contract code and managed to transfer a third of the organization’s assets (cryptocurrency worth $50M) to their accounts.
“Failure is an option here. If things are not failing, you are not innovating enough.” — Elon Musk (2018)
DAO nowadays
Hundreds of DAOs have emerged since then, many of which have become very successful. The capitalization of all DAO projects has reached nearly USD 10 billion. Some of the projects’ tokens are already among the top 100 cryptocurrencies. Among the most well-known of them are:
- Uniswap is a decentralized exchange based on Ethereum. The exchange is currently ranked #1 in the decentralized exchanges ranking. Uniswap DAO was established in 2022 and is responsible for developing the exchange and its ecosystem. Decisions in the DAO are made by voting with the UNI token. 348.9 thousand people already own it.
- BitDAO is a decentralized autonomous organization that aims to create a level playing field for everyone in the world by building a decentralized token economy. BitDAO is one of the world’s newest and largest DeFi-centric decentralized autonomous organizations. The BIT token holders themselves manage BitDAO. As of today, 20.2 thousand people own BIT tokens.
NFT tokens
A significant breakthrough in Web3 thinking was the introduction of NFT — a non-fungible token. Contrary to popular belief, NFTs are not limited to “monkey pictures.” Since NFT contains a unique non-reproducible code that distinguishes it from other tokens, this technology is used to fix rights to various unique objects, from digital works of art to real estate objects. Nowadays, NFT has already been used in the following markets:
WEB3 ECONOMY
The market analysis above confirms that decentralized thinking significantly impacts today’s economy, transforming existing markets and creating more promising Web3 projects. A complete transition to the new decentralized era does not look futuristic anymore, but it is a matter of time. Some questions, however, remain open:
- How to create a new generation of projects: what do you need to pay attention to?
- How to choose a project worth investing in today?
Would you like to know how to address those issues? Tomorrow, read Part 3, where we will share our unique know-how for digital projects.
This article was written by Catherine Smirnova of Digital & Analogue Partners. Visit dna.partners to learn more about our team and the services.
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