True Innovation in Cryptoland
If you look beyond the hype and the hurdles, there’s true innovation in crypto—the collective set of technologies, decentralized networks and digital assets enabled by blockchain.
Admittedly, I came to the industry gathering at Consensus 2023 looking for those real-world use cases—the kind that business and policy audiences and other non-crypto natives might take to. Especially those that solve real world problems that are poorly met by the existing order, that are stable and secure enough for adoption by major organizations and governments, or that level the playing field for ordinary people who are up against extraordinary challenges. Here are some noteworthy applications available now or coming soon.
True DeFi: While decentralized finance’s main function seems at first glance to be to disintermediate banks, its real innovation is the risk management proof of concept for smart contracts. The scandals and blow-ups involving FTX, Celsius and TerraLuna that cost investors billions of dollars in losses share at least one commonality. They built highly centralized, poorly managed traditional businesses, and their lack of risk management doomed them to failure. That contrasted with the remarkable performance of DeFi—decentralized lending between people who may not know or trust each other. The smart contracts that govern DeFi through code have pre-set rules and collateral requirements that operate automatically to produce pre-determined outcomes under various what-if scenarios. New innovations are focused on preventing theft by hardening smart contracts against hacking and making self-custody more user-friendly and less risky by enabling recovery if you lose your private password.
Sustainability: While crypto’s energy use grabs the headlines, there’s real innovation in environmental applications for climate action and the circular economy to solve for major obstacles to sustainability—how to finance it, how to incentivize and make it efficient and how to verify its integrity in delivering measurable impact. Traditional policies and markets have failed our environment, but institutions are developing climate solutions that combine blockchain innovation with more traditional financial tools and markets. The World Bank’s International Finance Corp. is piloting a project to attract investment to conservation and decarbonization projects certified by registries by enabling them to sell carbon offsets to major institutions and corporations in the form of digital tokens. That’s a step-change in efficiency and transparency for the voluntary carbon market. Other projects employ traditional financial instruments that investors and regulators understand but innovate by using blockchain-enabled smart contracts and data trails to ensure abatement of greenhouse gas emissions is happening and additive. The ability to integrate environmental data and financial flows is also enabling recycling solutions that track efficient sorting of waste materials and provide economic incentives and consumer rewards.
“Real World” Assets: This process involves bringing tangible, non-crypto financial or physical assets into a blockchain ecosystem and trading them in the form of tokens that represent ownership rights. Major securities and commodities markets are a lot more efficient than they used to be, yet they are like a house that looks brand new but where the plumbing is creaky, costly to operate and patched together in odd ways with the most modern infrastructure layered on top of decades-old ductwork. Optimizing multi-trillion-dollar markets will take a long time, but there is real innovation in developing new markets that tap into rising demand for alternative assets that require a data layer as proof of authenticity. This includes transition metals like nickel, lithium, and other electric vehicle battery raw materials where the buyer needs to establish sustainable sourcing and physical delivery. It also includes illiquid assets and markets that are opaque and involve middlemen who take hefty fees, like real estate. Finally, tokenization of agricultural output and DeFi credit products are being used to increase the opportunities for small farms and food enterprises to sell into global markets and obtain financing.
Arts, Music and Culture: The art market is centuries old (at least), and music has been an investible asset ever since David Bowie monetized his future royalty streams through his “Bowie Bonds” capital market offering twenty-five years ago. Now tokenization is giving lesser-known artists and musicians ways not only to earn recurring revenues from their creative output but to offer their fans and followers financial returns combined with cultural side benefits. Some streaming services control all data on who is listening to a band with millions of plays, but with blockchain and tokenized assets, those artists and fans are able to build direct community and interact with each other to create cultural spaces and financial returns together, without a centralized gatekeeper.
Programmable Money: The idea of using stablecoins (privately issued crypto pegged to the value of one U.S. dollar or euro) as the payment layer of the internet is not new, but it has not taken off in the real world of large enterprises and other major organizations. The culprits are lack of regulation, concerns about security and soundness, and the “clunkiness” compared to say, cloud-based applications built on standard internet services. Proposed regulation of stablecoins to put them under banking supervision and backed by reserves would be a gamechanger for open programmable money applications. New developments in preventing theft of stablecoins by hacks against vulnerabilities like cross-chain bridges are also essential for market adoption. Innovations to make blockchains more sustainable and regulatorily compliant while at the same time making them as decentralized and secure against attacks as possible are the third critical element. Finally, the user-experience needs to be so seamless that the average user is not even aware of the technology behind the routine transaction they just performed.
The latter goes especially for “normies.” Consumers should not have to be educated on complex technology or get involved with crypto when all they are looking for is a something that works “faster, better, cheaper” for sending remittances to their families back home, or be able to sign up for a new service without complicated downloads and passwords or having to provide all their data.
There is a lot of hype in the industry echo-chamber combined with pervasive complaints about regulatory hurdles. Communication is a two-way street, however, and one that can shift overly optimistic or pessimistic assessments to a constructive, pragmatic new consensus. While everyone should maintain a healthy dose of skepticism, we also need healthy conversation between industry leaders and the mainstream policy and business community around true innovation in cryptoland.