Everybody and their dog talks about enterprise private blockchains or launches utility token ICO. The former without being open, permissionless and distributed and without a cryptocurrency attached to it is just slow and expensive database. The latter – when not outright scams – are analogous to creating your own currency specifically for fruit trading.
The real future of crypto is being conceptualized and built outside of the spotlight and is missed by most media outlets and corporate bureaucrats. Each of the following three trends is important on their own, but together they will completely transform how we think about trust, innovation, and governance.
Stablecoins are cryptocurrencies pegged to another, highly liquid asset, typically USD. That can be achieved in three ways.
The first is backing the stablecoin directly with the asset it is supposed to be pegged to. By nature, this means centralisation of the issuance of the stablecoin, as is the case with USD-pegged Tether. The problem with this approach is, that even if the company running it is 100% honest, there is still a massive risk of it being shut down by regulators and of all the tethers in the circulation rendered worthless.
The second approach, used e.g. by Cryptopeg project is backing the stablecoin by a highly liquid cryptocurrency. In this case, the algorithm merely defines at what rates the stable token can be minted or claimed and it is up to the market participants to decide whether they want to mint it or not. The challenge there is, how to align the incentives to create enough liquidity and stability.
The last method, used e.g. by Basis is for a non-collateralised peg managed by a distributed algorithm. If the price of the token leaves a defined range, the smart contract either issues new tokens, or it auctions off bonds to pull tokens out of circulation. It effectively created automated central bank (which is why the author is not a fan of it), and in a black swan event, the bond auctions might not be able to keep up with the downward pressure on the price of the stablecoin.
To avoid – at least some – slack, let me be clear: I don’t hate fixed-supply cryptos like Bitcoin (Cash) or Litecoin. To the contrary, I would like them to become money of the future. But I also live in the world of companies with accounting, treasury and risk departments.
Stablecoins combine the distributed, permissionless nature of the cryptocurrencies with the unit of account and store of value utility of money. That combination could bring companies on board by offering them cheap international transfers or access to trustless digital marketplaces of the future without a necessity to run separate accounting of a new asset class.
2. Security tokens
Security (or equity) tokens are tokens representing a share in an organisation, functions of which are distributed via smart contracts to a blockchain.
The vast majority of new tokens and ICOs so far have issued and sold utility tokens, i.e. what is supposed to be a currency of its marketplaces. The analogy to that approach would be to create a separate currency for a newly built mall, require merchants to denominate their prices in that currency and to exchange at the entrance.
It would arguably make much more sense to wrap the utility token around an existing highly liquid cryptocurrency and issue it on a need-be basis for each new contract. It would even make it possible to use stablecoin in such a marketplace.
Security tokens could then distribute the functions of an organization running the marketplace and charge fees, which could pay for dividends to the investors. They would then become a crypto analogy to company shares but would enable distributed and thus much more resilient organizations whilst still support capital financing of the development of those applications.
Example of such an approach is Bitcoin Hivemind.
One big reason why we’re not seeing this approach are regulations. It is implied (or explicitly stated), that security tokens are be treated as publicly traded securities, making them subject to hundreds of thousands of dollars of compliance costs. But with regulatory arbitrage being much easier for distributed organizations,, governments will have to catch up very quickly or be left behind.
Another reason is, that utility tokens provide a non-dilutive method of raising funds, which shouldn’t be an excuse to ignores laws of economics and best interest of the market and investors.
3. Smart contracts on Bitcoin Cash and Bitcoin blockchains
Bitcoin all but missed the boat on smart contract capabilities. Opcodes, which were supposed to allow smart contracts were disabled for dubious reasons and Ethereum was born. However many are not comfortable with Ethereum governance and have doubts about its ability to scale. The middle-of-the-road solution can be a separate chain running its own smart contract functionality, “outsourcing” its security to another highly distributed and secure blockchain by merge-mining, and using its cryptocurrency for payments and settlement.
With opcodes gone and Bitcoin stuck in scaling war, any on-chain solutions seemed to be out of the question, so external platforms such as Rootstock emerged. Drivechains by Bitcoin Hivemind’s Paul Sztorc are proposed for Bitcoin, but it remains open when and where they will see the light of the day. And finally, re-enabling some opcodes and introducing new ones in the latest Bitcoin Cash upgrade enables much easier, albeit limited smart contract capabilities pegged on BCH blockchain.
As a result, we could soon see crypto applications with capabilities not inferior to those running on Ethereum, but with a much more efficient medium of exchange being used for underlying payments and settlement.
Used together, these three concepts will enable permissionless, trustless, and censorship-resistant marketplaces developed by well-funded, but distributed organisations.
Over time, we’ll take it for granted, that any transaction purely in the digital realm will be trustless, i.e. without any central authority settling and securing it. Gaming assets and currencies will become truly scarce, digital marketplaces open, but resilient. Governments will lose the ability to forbid many types of non-violent, victimless activities such as prediction markets, sharing economy, or data-driven healthcare research.
Even at non-digital markets, cheap and fast payments in stable cryptocurrencies could make the trade more capital efficient or remove many barriers and sanctions while the distribution of many settlement and oversight functions could improve trust in the marketplace (or remove the necessity thereof).
The startups that will pay attention to these trends will become part of that transformation. Corporations and governments, that will dismiss or resist them will be crushed by it.
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