Cryptocurrency upheaval could be a blessing in disguise for the future of blockchain technology

Every cloud has a silver lining. So whether the sun sets on cryptocurrencies or not, its underlying technology, blockchain, has a bright future beyond mere coins.

Sam Bankman-Fried was the darling of the cryptocurrency world, then he became its black sheep. In November of this year, the cryptocurrency company he founded, Futures Exchange (known as FTX), collapsed in spectacular fashion.

The exchange, a digital platform where users can buy and sell cryptocurrencies, filed for bankruptcy after allegedly misusing customer funds. Bankman-Fried had previously been well-liked by investors and the media, who applauded his generous donations to charity and calling out unethical practices in the industry. The bankruptcy destroyed that image. The collapse also came on the heels of a massive crash in cryptocurrency prices, and the failure of several major players in the industry.

Behind this crash and allegations of fraud, companies remain surprisingly optimistic about the potential of blockchain.

One of these is Motoblockchain, a small startup from Malaga, Spain. They created a system where all relevant information about a motorcycle (parts, use and repairs) can be stored on a blockchain. Anyone from mechanics to bikers looking to buy a used bike can access the records in this system to verify the origin and history of a motorcycle.

“Having a reliable way to show the provenance of a product, or its parts, is very important in many industries,” said João Fernandes, analyst at the Portuguese investment fund Bright Pixel Capital, which supported Motoblockchain through the EU-funded project BlockStart. “This is also something blockchain excels at. It adds an extra layer of credibility to information in an ecosystem.’

This trust is one of the many benefits that blockchain technology can offer the European economy. It keeps startups like Motoblockchain hopeful about blockchain despite the spectacular boom and bust cycles of crypto. Stimulating their growth, and convincing European companies to use the technology, could be crucial to the long-term success of blockchain.

“The impact of blockchain will only be fully realized if we convince SMEs to use it,” Fernandes said. “Over 90% of the economy consists of these businesses. And many of these companies can really benefit from using blockchain-based technologies.’

No intermediary

Blockchain allows cryptocurrencies to digitally record transactions without one party controlling the currency. Unlike regular databases, which are usually controlled by one party, it is decentralized.

Most importantly, blockchain technology (distributed ledgers) can be used to record anything of value without an intermediary – not just financial transactions.

This is a concept with applications far beyond cryptocurrency. For example, it is useful to trace the history of a motorcycle, as Motoblockchain does. The motorcycle may go through dozens of inspections, visits to the mechanic and sales throughout its lifetime. A number of actors, such as users, motorcycle companies and workshops, must communicate this information. Something that is difficult to use centralized systems. A motorcycle company may not want to use a centralized tracking system owned by one of its competing motorcycle manufacturers. A decentralized, neutral blockchain offers an alternative here.

“Blockchain shines when there are several different stakeholders who need to access the same system and share information in a decentralized way,” said Robert Richter who coordinated the EU-funded Blockpool project at the Frankfurt School of Finance & Management. ‘It creates a system where you don’t need an intermediary.’

In this way, blockchain may underpin some of the software ordinary people trust in the future, without even knowing it.

“Look on the Internet,” Richter said. “Today, everyone uses it without understanding how it works. But in the past, something new had to be developed. The same is now happening with blockchain.’

For that to happen, start-ups need to develop blockchain applications that make the complex technology accessible to mainstream companies, such as SMEs. A problem that BlockStart and Blockpool worked on for several years. Both projects set up programs that selected interesting blockchain start-ups, provided them with funding and guidance, and connected them to potential customers. On top of that, they educated existing companies about the potential of blockchain.

“We found that one of the main hindering effects for the success of blockchain is that business leaders do not have enough knowledge about the technology’s potential,” Richter said. “That’s why it’s so important to educate SMEs and other companies.”

BlockStart supported 60 startups, connecting them with 67 SMEs, and also awarded €20,000 to the startup finalists. Blockpool did something similar, 25 startups went through their program, each receiving up to €30,000 in equity-free investment.

One of the SMEs that participated in BlockStart is AlBicchiere, an Italian company that offers a “Nespresso for wine” device to customers. The company wanted to be able to map the journey of their wine, from the grape grower to the customer, and a blockchain system was built by Datarella, one of BlockStart’s start-ups, for this purpose.

Crypto winter

Surviving crypto winter will not be easy. Most of these start-ups now have to deal with a technology market that is in turmoil. Even mainstream tech companies are in trouble, with major players such as Meta, Amazon and Spotify announcing mass redundancies. This may put a damper on the growth of the start-ups supported by BlockStart and Blockpool.

“The current crypto winter will, I think, delay the implementation of blockchain,” Fernandes said. “Some projects will have a tougher time raising investment and finding customers.”

But for the broader blockchain and cryptocurrency space, this crash could be a blessing in disguise, according to Richter and Fernandes. For example, it can weed out the weaker companies, in favor of those with the greatest potential.

“There are some blockchain projects and cryptocurrencies out there that don’t really serve any purpose,” Richter said. ‘That’s always the first question I ask: does it have a use case?’

Fernandes agrees. “The blockchain space was too crowded before. Now only the best projects will survive. The survivors of this winter will be the first movers of the future. In five to ten years they will be the winners.’

The research in this article was funded by the European Union. This article was originally published in HorizonThe EU’s research and innovation magazine.