Are cryptocurrencies finally getting real?
El Salvador’s citizens woke up at the beginning of September to a new currency – bitcoin. All citizens were given a small amount of bitcoin to start them on their digital money journey, and shops have to accept crypto payments. It’s a belated, slightly niche arrival for the world’s fourth-biggest currency (after the US dollar, EU euro, and Chinese yuan).
I personally have serious doubts about the long-term viability of bitcoin, as expressed in this RTE article [https://www.rte.ie/brainstorm/2021/0810/1240045-cryptocurrencies-bitcoin-dogecoin-monero-ethereum-polkadot-polygon/], but I am very supportive of the general cryptocurrency movement. There have been a few false dawns for the cryptocurrency movement to date, only to subsequently fall flat. So in this short perspective article, I make the case that now might indeed be the time when cryptocurrencies are ‘finally getting real’.
The big thing that is different now is that we seem to have finally worked out what cryptocurrencies are for.
Cryptocurrencies and blockchain (the place where transactions in a cryptocurrency are recorded) have famously been described by anonymous scribes in the past as a solution in search of a problem’. But that has changed in the last year due to the rapid rise of decentralised finance (DeFi) and non-fungible tokens (NFTs). Both show very clearly the potential of the crypto movement.
The problem with centralised finance, or regular finance as we might call it, is that too many participants try to take a bit of every financial transaction. The purchase of a house is a case in point, where innumerable participants have cropped up to take a slice of the act of two people trading a house with each other. Banks, estate agents, solicitors, mortgage brokers, insurance companies, bank valuers, central bank officials, surveyors, local councils, Revenue Commissioners. Everyone wants a piece either directly or indirectly. That makes centralised finance expensive for the users.
DeFi, at its heart, is about stripping away these layers and, therefore, the costs. A DeFi house purchase might, for example, involve just a buyer and a seller meeting in an automated marketplace. Legal rights would be automatically assessed based on registry documents, finance and insurance would be arranged from a risk pool based on an automatically generated risk profile. The two people agree to trade, and it is done. Reducing a multi-month transaction to one that lasts maybe a week. With that time mainly spent on finding the right home.
Right now, DeFi is still incredibly risky, as automated layers can be exploited or can go wrong. But increasingly, DeFi is starting to give hints of becoming a set of smart, low-cost markets that ‘just work’. We see this in many new crypto exchanges, where the process of engagement is far easier than with traditional exchanges. If DeFi really becomes mainstream, then all bets all off as to the upper value of cryptocurrencies.
The other big signal of the potential for cryptos is the rise of NFTs, which I wrote about in more detail here [https://www.rte.ie/brainstorm/2021/0610/1227297-nft-non-fungible-token-investments-cryptokitties-sorare-decentraland/]. NFTs, or unique assets registered on a blockchain, are a very 2021 phenomenon: jumping from obscurity last year to about €8 billion traded so far in 2021. Digital creations such as artwork trading for millions have grabbed the headlines, but the potential for growth in other types of NFTs is even more phenomenal. Concert tickets, memberships, and any type of digital creation can all be turned into NFTs, giving some very desirable attributes. We finally have a use-case for unique assets on the blockchain, and this can, in time, be extended to every asset, physical or digital. There’s clear value in being able to track assets – security (ownership is registered), safety (faults can be recorded), value (prices can be efficiently tracked over time), and innovation (seeing how assets are used ‘in the wild’). This will be a major driver of blockchain value.
All this doesn’t mean that cryptocurrencies are a great investment. It is astonishing how quickly prices can fall on even well-established cryptocurrencies. But the space is rapidly becoming somewhere that can’t be ignored – cryptocurrencies are finally growing up and getting real jobs.
Michael Dowling, Professor of Finance, DCU Business School – https://business.dcu.ie/staff/professor-michael-dowling/
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