Long Blog alert!

I recently spent some time learning up on cryptocurrencies and the related technologies. It’s the wild wild west out there right now and there’s a lot of crazy stuff ongoing. This is the 2nd blog in the crypto series: Blog 1 covers some basics about what crypto is, some important terminologies and my investments in crypto.

History

The oldest player in crypto space is Bitcoin. It’s also the most famous. The whitepaper was first published in 2008 and the currency was launched in 2009. It’s undergone many boom and bust cycle, the most famous of them is the one in 2017 when it went from $900 to $20000 within the year. And the next few years were famous for Bitcoin crash where it went down to $3000.

Ethereum is the next most famous player in the space and it’s whitepaper was published in 2013 with the blockchain launching in 2015. It built on top of bitcoin’s ideas but had its own features. It went from $8 to $700 in 2017 as well.

If there is one thing associated with cryptocurrencies, it is the volatility. They are known for exponential and parabolic price increases and similarly dramatic crashes. It’s quite common for them to go down 20-40% super fast. Hence they are generally viewed as a highly speculative asset category.

2017 craze

2017 saw crazy price increases for most cryptocurrencies. And 2018-2020 were periods of similarly dramatic corrections. From a high of $20K – bitcoin went down to $3K. Ethereum went from $1400s to $140 over that period. Many projects died, or vanished. A lot of scammers took advantage and swindled people of their money. Security exploits and hackers also had a great time trying to steal value out of the ecosystem.

One of the major hype of that period was ICOs or Initial coin offerings. Thousands of projects were launched with nothing more than a 1 page document (sometimes with fake names or fake investors) that could use Ethereum network to raise funds to build a project. This was called ICO similar to IPO (Initial public offering) concept in stock markets. Once the funds were raised, the owners would liquidate their own coins and vanish leaving people with worthless coins.

One of the general perception towards crypto has been that there is no real value associated with anything in the space. It’s also not considered a monetary system as no one uses it for payments. If anything 2017 solidified the view that crypto was like gambling and you better stay of this is irrelevant technology. 2018-2020 price drops further caused those who were burned to stay away and it lost people’s attention over that period of time.

2021: The value proposition

Crypto has not just been sitting around. It has developed by leaps and bounds over the 3-4 years since the last hype cycle. And this time, after having learned and experimented with some of the use cases, I feel there are a few value propositions of crypto that makes them valuable.

Store of value

Over the centuries, humans have become great at storing value in anything that they decided to believe in. Thousands of years back perhaps it was goats, or bushels of wheat, or bags of rice. Eventually they started using gold. Food or wine has been considered store of value in some parts of the world. Essentially, anything can be imbued with the store of value identity as long as enough people believe in it.

With inflation kicking and people’s trust in centralized entities going down, Bitcoin and some other cryptocurrencies have now been started considering as store of value. That’s because it is hard to mine it, there is limited quantity available and enough people are willing to store their wealth in it. Unless the vast majority of people decided to give up bitcoin as store of value, this will only continue to increase.

Gold is hard to transfer physically, there are ethical concerns on mining it, it’s hard to break it into smaller pieces and transactions in gold can be complicated. Bitcoin, being all digital, solves for all of these problems and hence the store of value proposition is here to stay.

Banking aka DeFi (Decentralized Finance)

Once again, people don’t want to trust banks. Getting a loan from bank can be cumbersome, you need to deal with humans and their subjectivity, collateral acceptance can be challenging, rates can be crazy high, creditworthiness can impact you significantly. But there are now crypto banks starting to solve these problems.

The simplest problem they are solving right now is that if you own assets for let’s say $1000, you can go to a crypto bank like Celsius or BlockFi and put your assets as collateral and collect a loan in USD stablecoins within minutes. The interest rates are fairly reasonable and depend on term and the amount of loan value compared to your collateral. For example, if I have $1000 of ETH right now and I want a $250 loan, I can get it for 6mo payment term at <1% APY. This area will only improve with more assets being collateral worthy, tuning of business models etc.

On the flip side of the loan is deposits. Across the world, it’s a losing battle to get risk free yields. Remember how happy we were to get 2% on our USD CD’s. Well that’s gone and the best banks offer 0.7% yields on safe deposits. Fear no more, open a BlockFi account, wire them your USD, it gets converted to stablecoin GUSD at 1:1, and you get 8.6% APY right now. Almost risk free 8.6% yield on USD deposits. After a month if you are bored, withdraw the money back to your account at 1:1 from GUSD -> USD. Celsius offers 10.5% APY but it’s not insured, BlockFi’s funds are insured by Gemini I believe. So while there is risk, the yields are crazy. I for one have money in all 3 products: Celsius (10.5%) , BlockFi (8.6%), Binance (7%).

I think as more money moves into crypto world, it never leaves. You can do all your transactions on here (especially in Europe) with some companies like Binance, Monolith etc offering debit cards and you have access to your funds anywhere in the world without a country and currency specific bank account needed.

For me personally as well, if I can now get a debit / credit card that will allow me to use my BUSD or GUSD – I would not ever want banking services from a traditional bank. I think banks are in for a lot of pain in the future.

NFT, Arts, Royalty

NFT or Non-Fungible Tokens are essentially digital entities that have a unique presence on a blockchain. You cannot mutate or copy them and they come with a set of legal bindings all built into the token itself. For example, someone recently burned a physical piece of art (Banksy) and sold the digital version as NFT. The owner of this NFT will now own the only copy of that art in digital form, forever.

NFTs are picking up steam in all sorts of arts from paintings, digital arts, songs, music videos, collectibles etc. Anything that people would consider art can be minted (created) as a NFT. For those own NFTs, it’s easier to manage as they don’t have to keep moving it physically, don’t have to maintain it, can easily verify the authenticity and can easily sell the NFT if they want to do so.

The real game changer is actually for the artist or creator though. NFTs allow you to put legal binding in the token that each time the token gets resold, the original creator receives a percentage of the sale value as royalty. This keeps going on until eternity. As a creator, if I can get paid for my work forever – I would seek out such alternatives and once they can sustain me sufficiently, I would never ever list my art on Amazon or YouTube or Spotify or sell physical art, right? I am not saying it will happen soon but over the next 5-20 years perhaps we will see more and more creators just move to blockchain to sell their art.

Decentralized – DAPPs – DAOs – DEX

As people’s trust in governments and centralized organizations reduce, they are seeking out more and more decentralized solutions. Cryptocurrencies and Blockchain are decentralized by their nature. There is no one entity that owns Bitcoin or Ethereum. There is no gatekeeper that can block you from using the Ethereum blockchain or prevent you from executing transactions. Once executed, the transaction will stay on chain forever and cannot be scrubbed in future (just because someone did not like what it contained).

With recent issues like US instability, strongman central governments cracking down on free speech, increasing political instability in certain countries, Gamestop saga in US financial markets, and the de-platforming of Donald Trump on twitter, there are various sections of users all seeking out platforms where they cannot be removed or censored. Blockchain offers that solution.

Dapps are decentralized apps not hosted on any central server and live on the blockchain itself. People can create Dapps that mimic Facebook or Twitter and once enough network is on there you can have a set of applications that run by themselves. A subset of these apps are Decentralized exchanges that are not owned by any company. For example: Uniswap is a DEX that runs on Ethereum blockchain that allows anyone to exchange any sets of Tokens. No one can be blocked or no token pairs can be blocked.

There is also an increasing push towards DAOs (Decentralized autonomous organizations) where an app can issue tokens to all its users. These tokens act as governance token and each decision can be voted on by the token holders: hence ensuring a decentralized organization deciding on future of a product etc.

IMHO, the world will increasingly move towards these decentralized solutions as they fear the power of massive central organizations locking them out of banking, governance, decision making etc.

Smart Contracts

Ethereum is the main chain that supports Smart contracts. There are other chains like Cardano trying to do something similar but Ethereum has had smart contracts for years. I believe this functionality is a game changer. It removes the trust element from contracts. Imagine if you didn’t have to trust a few different humans to all live up to their side of bargain in a transaction. Well smart contract allows that explicitly. It allows you to program a contract that gets executed automatically when a trigger happens.

This is the major differentiator between Bitcoin and Ethereum and why I feel Ethereum will do better. Bitcoin is a transaction only blockchain. Ethereum allows you to do all sorts of complex stuff on the blockchain and the whole DeFi space was made possible by smart contracts. As more people find more novel use cases of smart contracts, this space will evolve to remove middle-men, market makers and other human based trust models.

Market cap and volatility

Crypto market cap i.e. sum of market caps of all cryptocurrencies etc is now more than $1 trillion. BTC is closing in on that $1 trillion mark by itself. The bigger the market capitalizations of any asset, the harder it is to manipulate or speculate on since it requires more money to move the price. As the size grows, volatility will drop and it will become even more trust worthy investment.

International fast payment system

Imagine you own 10,000 BTC (almost $500m) – you can send it to another address within seconds and that address can then convert to currency immediately on an exchange. Similarly if you are a bank and want to move funds around – BTC or ETH allow super-fast and relatively ultra-low-cost transactions. The transaction fee in ETH for example is not a function of # of ETH moved. Whether a $100 transaction or $100m transaction, both will incur same transaction fee (~$10 based on recent transaction prices).

The other key element of Blockchain is that it is both a payment, transaction and settlement layer together. One of the biggest challenge with any system dealing with money is settlement since money does not move in real time. This creates a big over head in tech systems to deal with settlement of funds at daily level (since most banks work at daily settlement level). With blockchain, once a transaction is executed – it is final and it is settled immediately. The transaction is only completed when all addresses have been updated and the history of transaction is seared into blockchain forever.

I feel even centralized organizations and people dealing with international payments will adopt blockchain as base layer of funds transfer as it’s cheaper and simpler to maintain.

Charity, Logistics, Attribution etc

Another major use case of blockchain that is already being used is tracking. Be it money you spend on charity or the source of your fish or the money invested into a given product – blockchain is an open ledger that allows you to track back movements of any digital attribute to the source.

Binance charity for example allows you to see where your exact $ was spent in charity. There are companies that tag fishes the moment they are caught and transaction is added to blockchain. At each step of fish processing industry the sequence of events that gets that fish onto your grocery shopping is tracked (without being mutated) so you can verify if the fish was sourced ethically.

There are many similar use-cases being developed and over the next few years we will see the attribution to source solutions cropping up even more as the world becomes more conscious of their usage. What if we could know the gold we wear was mined responsibly, or the money we pay in tax was used to build a school somewhere. That would be cool, and I think that will happen in the coming times.

Summing up, I think crypto and blockchain are here to stay and have real world business applications (some of which like banking I have used first hand). I believe this industry will grow 100x like internet grew from 90s to now and will create a lot of jobs.

Next Blog: I will share my thoughts on different cryptocurrencies and which one I believe will do best.

Referral links: Celsius , BlockFi , Binance, Coinbase