How Blockchain Went from Crypto Craze to Real-World Chase: A Quest for Practicality? | by Ash Arora | LocalGlobe Notes | May 2023

In every bear market, there is a pressing, and somewhat valid, question asked by founders, investors, financial institutions – basically anyone who works in technology and finance. It is: “Why do we need blockchain for this business?“

Popular Answers:

1. AI and blockchain are trendy and help to raise the valuation ❌

2. Blockchain will replace ALL existing technology ❌

3. Tokens will replace ALL currencies in the future ❌

The real answers apply Trust, accountability and transparency (another version of CRIMINAL CRIMINAL for easier recall!). Blockchain helps verify and track multi-step transactions, provides security, reduces compliance costs and speeds up the data transfer process. It can also help contract management and audit the origin of a product. How it has so far been perceived in the world is how money enters circulation, which makes people wonder why decentralized finance is on the rise, and how important asset tokenization is to economic growth. ✅

TL;DR: Central banks assess the economy → decide that the money supply must be increased → either print additional currency, change interest rates, or buy securities on the open market to increase cash in bank reserves → banks receive excess reserves → these are lent to consumers and businesses → businesses pays wages, consumers incur expenses → these funds are lent and/or re-deposited → they are sent internationally by SWIFT for personal or business reasons.

Players: Several startups have been direct with SWIFT and tried to replace/modify it, including Ripple, Facebook’s Diem, JP Morgan’s Onyx, etc. They have tried to use distributed ledger technology to facilitate the transfers.

Now: Over time, the consensus has been that embedding blockchain in different layers of how money moves is critical, but it will be difficult to completely replace any one layer – there are institutional network effects as well as regulatory preferences at play huge role in defining the future of crypto.

There are cases of retail use that, in collaboration with players such as Visa, have resulted in cards being issued for B2C payments. Coinbase, Binance, Crypto.com, Coinme and others have enabled this, while online payments have been facilitated by leading crypto wallets.

TL;DR: DeFi refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by the Ethereum blockchain. No offense to retail traders, but there are institutions moving significant volumes into DeFi with a simple goal: to diversify portfolio assets to provide better returns. An important way, along with yield farming, staking, lending, etc., is digital asset trading which has seen maximum capital inflows.

At its peak in 2021, DeFi had seen volume growth of more than 20 times, a trend that has been reinforced after the crash of FTX, one of the largest centralized financial players on the chain. As of the day I write this, DeFi is experiencing around $35 billion in volumes globally, which is expected to grow at a 42% CAGR until 2030.

Players: Decentralized exchanges such as 1inch, Uniswap, Pancakeswap, Sushiswap, DYDX, Curve, Balancer etc. have all seen significant institutional adoption, with 75% of all trading still on Ethereum.

Now: Economic headwinds mean institutional needs go beyond easy access to digital assets for trading. Institutions also need custody, which is being addressed by players such as ClearLoop by Copper* and Fireblocks. A custodian holds clients’ securities for safekeeping to prevent them from being stolen or lost. The custodian can hold shares, bonds or other assets in electronic or physical form on behalf of its customers. This is where institutions need multi-sigs with multiple logins to access the keys, and/or multi-party computation.

Another key requirement is risk management, especially for comprehensive portfolio management systems. Players like Cloudwall* and Elwood address this need in real time, while Credora (funded by the S&P500) and LedgerScore provide credit scores to leading players with proprietary algorithms.

Finally, no discussion of institutional adoption can be complete without compliance. Access to sensitive data in the chain requires privacy controls and checks and balances to ensure that KYB and AML are transferable, creating new network effects. Players such as Synaps, Anima, Fractal and others facilitate this.

Imagine all the cherished possessions you have or want – a house, a car, maybe even an Hermes bag. You can also wish for philosophical assets such as health, happiness and stability. 🙂

These are all real-world assets, and investors have tried, largely successfully, to tokenize everything from real estate and art, to gold and oil, to cash in on the volatility of the token.

TL;DR: Blockchain not only makes this trade cheaper, but also eliminates the need for third-party intermediaries who have acted as brokers in the past due to its distributed ledger technology and the ability to create trust without knowing anything about the counterparty. It also facilitates security, increases the pace of self-authorizing smart contracts, and virtually eliminates manual risk since these transactions are encrypted and immutable.

Up to 10% of global GDP could be stored on blockchains by 2025, according to the World Economic Forum. That means an astonishing $10 trillion of financial products and services will become digital tokens of various types.

Players: With few leaders in the space like Polymath and the entry of innovators like Ostium*, we hope to see creative use of oracles, liquidity and a diverse set of real-world assets used for tokenization and providing daily value to predominantly more expensive ones. asset classes.

Next: DeFi use cases, with innovators like Radix* with its upcoming Babylon mainnet launch having the potential to usher in a new era for DeFi where both builders and users can safely engage with blockchain.

Other areas where blockchain has had a huge role to play is via NFTs with players like SoRare*, NBA Top Shots etc. that allow fans and users to own assets within their beloved sports. This also reinforces the need for infrastructure that enables environments where such users can interact directly with each other as well as the biggest celebrities. Players like Improbable* and several companies incubated/owned by Animoca Brands facilitate such metaverses.

Whether AI will play a key role here, or help facilitate the growth of the space by adding a layer of convenience remains to be seen. Massive players like Worldcoin have also been prevalent, and it’s exciting to see how proof-of-personality (and SBT?) is being used to solve for identity and privacy, which are, after all, real values ​​for an individual as well. 💪🏼

*LocalGlobe portfolio company