Blockchain Finance: What To Expect In 2020
From extreme speculations about blockchain-powered currencies’ prices to hopeful wishes that it will be a game-changing year, there’s been so much excitement cultivated about 2020 that it reminded me of the excitement people had about 2012.
Putting aside Mars’ colonization, and a WWIII, 2020 is definitely the year where previously innovative technologies subject to skepticism will eventually make it to the mainstream market and by effect in our own houses and well…our digital pockets.
Fifth-generation telecommunication networks (5G), the Internet of Things (IoT), and Distributed Ledger Technologies (Blockchain) will all see major growth in this fresh decade, but in this article, we’ll be focusing more on the later, and see how blockchain technology will shapeshift physical and digital economies besides the overhaul that pretty much already happened.
How Blockchain Transformed Digital Finance from Inside-Out
It should be obvious by now, that blockchain technology is mainly used as the backbone of an alternative self-sustainable economic model that can not only run parallel to the established physical economy, but it could keep operating unaffected even if the traditional financial system would collapse.
A short history of blockchain would present the economic shift in these steps:
- Bitcoin (layer1 public blockchain)
- Ethereum (layer2 public blockchain + smart contracts)
- USDT/Libra (layer 3 private stablecoins)
- CBDC (gov-layer central bank digital currencies)
- DAI/SAI (layer 3 public stablecoins)
Bitcoin (layer 1 public blockchain)
Bitcoin is the first digital currency that utilized blockchain technology in its architecture. It is a permissionless network that’s based on its creator’s predesigned peer-to-peer protocols in order to operate with integrity.
Sometimes that makes it slow and expensive, but for many, it is worth considering the tradeoff stands for one of the few layer-1 blockchains left (others include Ethereum Classic and DASH), meaning that it cannot be manipulated by third parties with egoistic intentions.
Whether 2020 is the year Bitcoin reaches $1m per piece or not, it shouldn’t matter, as regardless of its price per unit, it works, and that is practically what makes it important and widely adopted.
Bitcoin is an insta-winner for the reason it is the first public cryptocurrency that my mother talks about.
Ethereum (layer 2 public blockchain + smart contracts)
Similar to Bitcoin, Ethereum uses blockchain to provide us with a public digital currency that is cheaper and faster when compared to its pre-successor, but being a layer 2 DLT means that sometimes decisions within the legal entity behind the Ethereum Foundation could affect things in the blockchain.
Of course to avoid malicious actors and to further empower institutional financiers, Ethereum has introduced smart-contracts, which are basically autonomous contracts that will be deployed and fulfilled as long as the pre-agreement terms set between two or more parties are met.
Essentially that means that one could use the Ethereum blockchain for malicious acts as long as a smart-contract allows it. For example, if I create a smart contract that says George is gonna pay me half of his Ethereum every time he gets some Ethereum and send the contract over to George to sign it, he might not look at the terms of the contract and instantly sign it. Therefore I will be able to make money out of George’s income and he could never stop it unless he moved his operations in a totally new wallet.
Concluding, Ethereum can be as secure as a layer 1 blockchain is, but it requires excessive attention and awareness when signing contracts, or transactions with your smart digital wallet.
note* nowadays smart-contracts are also possible on the Bitcoin blockchain with the help of Lightning Network.
Tether (layer 3 private stablecoin)
Moving on, we have USDT, a stablecoin commonly known as Tether, and which is run by a homonymous Chinese company. Tether was the first stablecoin in the DLT sector, and what it offered to the table was practically ‘minimum influx’ in a highly volatile market.
For example, if your Bitcoin holdings skyrocketed and you wanted to redeem, you would either go fiat, or in order to avoid traditional money brokers, banks, and tax dogs, you would simply trade it for another crypto, let’s say Ethereum.
But what if Ethereum goes down the moment you shift from BTC to ETH? All your earnings could be lost in just one downtrend. Here comes USDT to save the day. Basically, Tether is a cryptocurrency whose price is pegged to the USD dollar (hence the name), yet it is a blockchain-based digital asset, meaning that you can directly trade your Bitcoin for USDT without the need to go outside the crypto market.
That was more than just cool when it was introduced and it managed to make Tether the most active cryptocurrency for 2019, although nowadays there are numerous other stablecoin options.
Tether is considered to be a layer 3 DLT due to the fact that its operations completely rely on the company overseeing the project and not its users and/or community.
An analogous proposition would be Facebook’s own native digital currency Libra, which is supposed to be launched later this year. While it is designed to be a stablecoin backed by physical fiat currencies, Libra itself is 100% directed by the Libra Association and its users have no say whatsoever when it comes to operations.
CBDCs (gov-layer central bank digital currencies)
CBDCs were a point of interest during the past couple of years, with a peak in 2019, where several economically advanced nations including China, the US, Switzerland, BRICS alliance, and the EU announced their respective CBDCs are being developed as you read this.
The race towards a government-backed stablecoin sparked when the People’s Bank of China publically announced that their own currency DC/EP, will be deployed by the end of 2019, thing unlikely to happen as we’re already in the next decade, but the announcement itself was more than enough to initiate a domino effect between other economic superpowers addressing the subject with counterpart projects.
CBDCs are far from public cryptos, and they are usually using a private architecture developed by tech giants such as IBM, R3, and Tencent, instead of traditional blockchain providers. They aim into creating private gov-monitored chains which supposed to be attached to any other blockchain out there whether private or public.
Essentially CBDCs are central authorities’ way to say “we’re into Bitcoin in our own terms”.
DAI/SAI (layer 3 public stablecoins)
Last but not least, in 2019, a new concept and a series of projects popped out relying on Maker DAO’s decentralized finance architecture, offering anything between lending, borrowing, and trading dapps which would work in a wallet-to-wallet fashion instead of using intermediaries as happens with older cryptocurrencies.
For example, you can trade Bitcoin on Binance, or on localbitcoins, yet both of the mentioned platforms act as custodians and manage your assets to make more profit while you’re sleeping, similar to traditional banking institutions.
The introduction of open finance or decentralized finance (DeFi), enables people to trade their crypto directly through their wallets without the need for third-party brokers and/or vendors.
The most interesting addition DeFi brought in though is not the wallet-to-wallet exchange protocol, but the first-ever public stablecoins dubbed DAI (multi collateral DAI) and SAI (single collateral DAI) respectively.
Unlike Tether who claims to have physical fiat assets to back its USDT supply (which cannot be confirmed as it is a private company and not a transparent public project), DAI is a stablecoin based on the Ethereum blockchain that is essentially backed by its users. Anyone can stake ETH and/or other altcoins (ERC-20 tokens) to generate multi collateral DAI, or ETH-only backed SAI.
Users can use dapps to track how much money is locked in DeFi, MakerDAO, and DAI accordingly and in a transparent fashion. The more users choose to stack their ETH to generate DAI the more DAI is coming out, selling your DAI will grant you your ETH back and vise versa.
Besides the directly-attached to blockchain use-cases mentioned above, DLTs have been used by financial regulators, banks, and governments to empower SME loans, bonds, collateral settlements, and more applications possible thanks to smart-contracts.
But from a mainstream financial perspective, it seems that blockchain technology has made it through the worst, and it is now more dynamic than ever. Also, fears of governments fully manipulating the public DLT domain are slowly fading away, and projects such as Maker’s DeFi ecosystem will give netizens the power blockchain was meant to offer in the first place.