Cryptocurrencies, DeFi, & NFTs
How everything comes together in the New World
We’re witnessing the dawn of a New World. The horizon might be hazy due to multiple cultural, technological, and political debates that surround the crypto ecosystem. However, once we get past it, there is a world full of infinite possibilities about to emerge.
Today largely everything that we see happening in the crypto ecosystem happens in a closed silo. But, to dismiss it as a transient phenomenon will probably be akin to repeating the same mistakes that people did when the internet was just emerging decades back.
A Brief History of the Internet
“History doesn’t repeat itself, but it often rhymes” — Mark Twain.
Crypto is an extremely fast-moving space with rapid developments happening on multiple fronts. We don’t have a crystal ball to predict how the future will shape. What we can do instead is look back at the evolution of a similar phenomenon and draw parallels.
The timeline below is not an exhaustive history of the internet. However, if we look closely though, we can see three major themes emerging.
The Digital Only Phase
The first decade of the Internet was about information exchange and consumption. ARPANET which was the first Wide Area Network was invented to give scientists and professionals access to computing infrastructure remotely.
As World Wide Web
(www) and web browsers emerged, people could browse for information online from their computers as opposed to visiting a library or subscribing to a paper magazine. People discovered web pages and communities around their niche interests.
Digital enhancing Real World Usecases
Jeff Bezos identified that he could leverage the internet to bring online the complete catalog of books for sale, something a regular store couldn’t. Google made information available on the world wide web universally searchable. People could search for information about local businesses and services online too. For instance, if you needed a cab drop from your place to airport, you could look up cab services on google, land on one of the cab business web pages, and book a cab over a phone call.
Integration of the digital and the real-world
Where Google just returned the text address of a location, Google Maps showed you exactly where it was and then gave you turn-by-turn directions. Earlier you would look up a phone number and call a cab. Uber enabled you to hail a cab by clicking a button and then seeing in real-time where your cab was. Amazon digitized books and started delivering them electronically providing instant gratification to book readers.
The key theme that emerged in this phase was that the touchpoints in the user journeys became more integrated and the time to delivery of the value reduced significantly.
Drawing Parallels
“It has all the signs. Paradigm shift, hackers love it, yet it’s derided as a toy. Just like microcomputers.” — Paul Graham
In the early days of Bitcoin, hackers and early adopters acquired and used cryptocurrencies purely to satiate their curiosity about the new technology. Gavin Andersen, one of the early developers of Bitcoin wrote an online faucet that gave away bitcoins for free. Platforms such as Virwox funneled bitcoin into the Second Life economy to purchase digital cars and virtual mansions. Second Life players spent close to 100K BTC (over $4 Billion in current value) every 30 days in the summer of 2011. The utilization of cryptocurrency these days was primarily digital native. This can be considered as the Digital Only phase for cryptocurrencies.
The first real-world transaction on bitcoin happened in 2011. Laszlo Hanyecz a programmer and bitcoin contributor, traded with an 18-year-old kid Jercos for 2 Dominos Pizza which he paid in 10000 bitcoins. That is worth close to half a billion dollars today in 2021. The day is commemorated as Bitcoin Pizza Day.
As the price of bitcoin and other cryptocurrencies started growing, crypto exchanges such as Binance and Coinbase emerged over the last decade to cater to a new class of traders. These users viewed cryptocurrencies as alternative asset classes and started trading in billions. Similar to the internet, where the exchange and consumption of information was married to real-world use cases with search-based information rendering (Google), the online catalog of books by titles, authors, etc (Amazon); using Bitcoin and other cryptocurrencies for real-world trading marked the digital enhancing real-world economic use cases. These markets were open 24x7 and the assets were much more fungible; you could take your bitcoin out of coinbase and transfer it to another exchange to transact there if you wish.
With the advent of automated DeFi Protocols and Bitcoin getting adopted by a nation-state, it can be argued that we are in the early days of real-world integration of cryptocurrencies.
The making of the Real-world Integration
Google Maps digitalized geographical data and put it on the internet. Uber leveraged that and GPS to identify the real-time location of demand and supply and created a marketplace to match them.
One of the missing pieces today in DeFi is the understanding of real-world economic data. For instance, Aave, a popular lending DeFi protocol today can give out loans automatically against crypto assets as collateral. But if a small business owner wants to take out a loan against their shop, Aave neither understands that the person behind a wallet currently owns a shop or how the shop itself can be valued.
NFTs and Crypto Oracles can help solve this. Crypto Oracles such as Chainlink act as a bridge between Real World Data and Blockchain. Data Providers can set up their own nodes with Chainlink and start providing data to smart contracts. Chainlink provides an additional layer of validation by having multiple sources of the data and maintaining a reputation score for oracles to arrive at a consensus on the validity of the data being provided.
The owner of the asset can have an NFT that certifies the ownership of the shop and use the NFT to present their shop as collateral. In this specific case of a small business loan, oracles can act as the source for providing the valuation of the shop and thus enabling the smart contracts to compute the loan terms such as interest rate and amount. We can think of a similar construct in other use cases. An example can be that of students at Lambda School having their academic performance on-chain and this can be used by smart contracts to compute their potential future income and ability to pay back the loan.
Another frontier where we can see crypto making inroads is commercial payments. Visa recently started issuing crypto cards that you can use to get cashback in certain cryptocurrencies or even better spend your money in USDC. Twitter recently launched to a limited set of users a feature to tip in bitcoin.
While cryptocurrencies have demonstrated the benefits of enabling cheap transactions for large amounts of money, the network fees are still atrociously high for low-value transactions. However, with the advent of Lightning Network on Bitcoin and Layer 2 scaling solutions such as Arbitrum, Optimism, and Polygon on Ethereum, on-chain microtransactions are a possibility now.
The Role of Government
DeFi Protocols may work well when the assets are crypto native but if we have to extend to use cases such as Business Loans and Real Estate Transactions, it leaves us with the question of the enforceability of the contract. For instance, you can complete the sale of a real estate property using NFTs on-chain, but if in the real world the seller refuses to hand over the property, you’re in the soup.
Fortunately, we are already seeing positive developments in this direction with different states in the US have begun to start recognizing blockchain, digital assets, and smart contracts. Bitcoin is already recognized as a legal tender in El Salvador. The Maharastra’s government in India stored the vaccination certificates on Polygon Blockchain. It is not hard to imagine a future where property ownership is recorded on-chain and the government plays an active role in maintaining the sanctity of these agreements.
Towards the future
Cryptocurrencies and almost everything around them are a polarizing topic. People hold strong opinions at the extreme ends of the spectrum. But, there is another way of looking at the decentralization movement. Humanity has been constantly on a journey of automating activities they engage in today to work on more interesting items that shape the future.
In colonial America, agriculture was the livelihood of 90% of the American population. Today, that number stands at less than 10%. These changes are driven by innovations in technology. Similarly, blockchain brings a level of efficiency to financial services that didn’t exist before. Blockchains enable a trustless network of nodes to process financial transactions, enable economic activities, and manage monetary policy algorithmically without the overhead of large institutions and bureaucracy.
However, before we get there, there is still a lot of ground the ecosystem needs to cover from a user experience standpoint.
In its current form, using crypto is way too complex as compared to what users are accustomed to with say something like Venmo, Chime, or UPI. Crypto wallets are the gateway to the cryptocurrency ecosystem. Wallets need to simplify and abstract out the underlying complexities as opposed to expecting users to figure out the nuances of blockchain networks, tokens, L2 bridges, etc.
This is something that we’re aiming to solve at Brew. At Brew, our goal is to become the simplest platform to access DeFi and avail it is benefits for your financial needs.
Once we get there though, a decentralized infrastructure comprising of Cryptocurrencies, DeFi Protocols, and NFTs can create a new world with financial inclusivity and individual sovereignty that humanity had been striving for for ages now.
If you liked the post, please drop a few claps. The will help get this post to more people. I would say that I’m still in the early stage of understanding crypto. If you have any feedback, please do share.
Also, this is the final part of a 4 part series of posts I wrote on the evolution of the crypto ecosystem. You can check out the previous posts below:
