How Blockchain Went from Crypto Craze to Real-World Chase: A Quest for Practicality?
In every bear market, there is a pressing, and somewhat valid, question posed by founders, investors, financial institutions — basically anyone who works in tech and finance. That is: “Why do we need blockchain for this business?”
Popular answers:
1. AI & blockchain are trendy and help raise valuations ❌
2. Blockchain will replace ALL existing technology ❌
3. Tokens will replace ALL currencies in the future ❌
The real answers relate to Trust, Accountability and Transparency (another version of TAT for easier recollection!). Blockchain helps verify and trace multistep transactions, provides security, reduces compliance costs, and speeds up data transfer processing. It can also help contract management and audit the origin of a product. How it has been so far perceived in the world is how money enters circulation, which makes people wonder why decentralised finance is rising, and how important is real-world asset tokenisation to economic growth. ✅
How does money enter circulation and why is blockchain being explored?
TL;DR: Central Banks evaluate the economy → decide money supply needs to be increased → either print additional currency, change interest rates, or buy securities on the open market to increase cash in bank reserves → banks get excess reserves → these are lent to consumers and businesses → businesses pay salaries, consumers incur expenses → these funds are loaned and/or deposited again → they are sent internationally using SWIFT for personal or business reasons.
Players: Several startups have been head-on with SWIFT, trying to replace/ modify it, including Ripple, Facebook’s Diem, JP Morgan’s Onyx etc. They have tried to use distributed ledger technology to ease the effort of transfers.
Now: Over time the consensus has been that it is imperative to embed blockchain in different layers of how money moves, but it will be tricky to replace any layer altogether — there are institutional network effects as well as regulatory preferences that play a massive role in defining the future of crypto.
There are retail use cases that, in partnership with players like Visa, have resulted in cards being issued for B2C payments. Coinbase, Binance, Crypto.com, Coinme, and others have enabled this, while online payments have been facilitated by leading crypto wallets.
Why are institutions adopting decentralised finance and what do they need?
TL;DR: DeFi refers to the shift from traditional, centralised financial systems to peer-to-peer finance enabled by the Ethereum blockchain. No offence to retail traders, but it’s institutions that move significant volumes into DeFi with a simple goal: diversify portfolio assets to yield better returns. One key way, along with yield farming, staking, lending etc., is digital asset trading that has seen the maximum amount of capital inflows.
At its 2021 peak, DeFi had seen volume growth of more than 20x, a trend that is heightened after the crash of FTX, one of the largest centralised finance players onchain. As of the day of writing this, DeFi is experiencing about $35Bn of volumes globally, expected to grow at a 42% CAGR till 2030.
Players: Decentralised exchanges such as 1inch, Uniswap, Pancakeswap, Sushiswap, DYDX, Curve, Balancer etc. have all seen significant institutional adoption, with 75% of all trading still on Ethereum.
Now: Economic headwinds mean institutional needs go beyond simple access to digital assets for trading. Institutions also need custody, which is being addressed by players like ClearLoop by Copper* and Fireblocks. A custodian holds customers’ securities for safekeeping to prevent them from being stolen or lost. The custodian may hold stocks, bonds, or other assets in electronic or physical form on behalf of its customers. This is where institutions need multi-sigs with multiple logins to access the keys, and/or multi-party computation.
Another key requirement is risk management, specifically for comprehensive portfolio management systems. Players like Cloudwall*, and Elwood are solving this need in real-time, while Credora (funded by S&P500) and LedgerScore are providing credit scores to leading players with proprietary algorithms.
Finally, no discussion of institutional adoption can be complete without compliance. Access to sensitive data on-chain requires privacy controls and checks and balances to ensure KYB and AML are transferable, bringing in new network effects. Players like Synaps, Anima, Fractal and others are facilitating this.
Why is real-world asset tokenisation gaining traction?
Imagine all the cherished possessions you have or want — a house, a car, maybe even an Hermes bag. You might also desire philosophical possessions such as health, happiness, and stability. 🙂
These are all real-world assets, and investors have tried, mostly successfully, to tokenize everything from real estate and fine art, to gold and oil in order to make money from the volatility of the token.
TL;DR: Blockchain not only makes this trading cheaper but also eliminates the need for third-party intermediaries that have acted as brokers in the past due to its distributed ledger technology and capability of instilling trust without knowing much to anything about the counterparty. It also facilitates security, increases the pace with self-authorising smart contracts and almost eliminates manual risk since these transactions are encrypted and immutable.
Up to 10% of global GDP could be stored on blockchains by 2025, according to the World Economic Forum. That means an astonishing $10 trillion of financial products and services will become digital tokens of different types.
Players: With few leaders in the space such as Polymath and the entry of innovators like Ostium*, we hope to see creative use of oracles, liquidity and a diverse set of real-world assets being used for tokenisation and giving daily value to predominantly expensive asset classes.
Next: Use cases in DeFi, with innovators like Radix* with its upcoming Babylon mainnet launch has the potential to start a new era for DeFi where both builders and users can confidently engage with blockchain.
Other areas where blockchain has had a massive role to play is via NFTs with players such as SoRare*, NBA Top Shots etc. that allow fans and users to own assets within their loved sports. This also emboldens the need for infrastructure that enables environments where such users can directly interact with each other as well as largest celebrities. Players like Improbable* and multiple companies incubated/ owned by Animoca Brands are facilitating such metaverses.
Whether AI will play a key role here, or help facilitate the growth of the space by adding a layer of convenience remains to be seen. Massive players like Worldcoin, have also been rampant and it is exciting to see how proof-of-personhood (and SBT?) is being used to solve for identity and privacy, which are, after all, truly real-world assets for an individual too. 💪🏼
*LocalGlobe portfolio company
