Crypto. Web3. Blockchains. While it’s known by many names, I prefer to call it the latter, as a reference to the underlying technology. Regardless of how one refers to it, it’s a game changer. As characterized by Chris Dixon in his industry-defining book “Read Write Own,” “blockchains are a new class of computer…(t)hey store information and run rules encoded in software that can manipulate that information.” But what does that really mean? A blockchain is a decentralized network which is not controlled by any one (corporate) entity, is accessible and transparent to all, and can’t be changed based on the whims of a few, powerful individuals.
If you’re the ever practical individual who lives in the “here and now”, the question might arise…how does it affect me? What does the centralized governance of the internet and astronomically high take rates put in place by corporate networks, have to do with me? Blockchain encapsulates the true essence of ownership. A means of reaping the full benefits of ownership on the network, while changing the fundamentals of a marketplace and how businesses are run. Many people think of recent tumultuous events such as the fall of FTX and the “casino” culture (as coined by Chris Dixon), while thinking of blockchain or crypto as a whole. But the casino culture focuses on speculation with little focus on substance. Take memecoins, for example, which derive their value solely from the enthusiasm of supporters such as Dogecoin and Bonk. However, this blog focuses on the “core” blockchain networks which are building a new type of internet. One that securely yet transparently facilitates transactions, with the promise that the network will not change or deviate from its core principles without consensus.
Real life applications
Where would blockchain networks intersect with everyday life? One major application is decentralized finance or DeFi. Blockchain has the potential to disrupt payment systems, which currently rely on central intermediaries, like Visa/Mastercard and banks, which are part of a system that has high friction (relies on transaction settlement during “business hours”) and high transaction fees. By removing the intermediary, transactions can occur much more quickly (i.e. a few minutes or even less; this depends on the time taken for a transaction to be validated on the blockchain network), and can be more cost effective. Coinbase, one of the largest digital currency wallets and transaction platforms, allows for the trading and storage of numerous cryptocurrencies as well as stablecoins. [A stablecoin is backed by a fiat currency, such as Coinbase’s USD Coin].
Another application is for content creation mediums such as art, music and even gaming, the use of non-fungible tokens, also known as NFTs, allow for digital ownership which helps unlock value and ensures profits are primarily held by the creator/owner of the NFT rather than the bulk of the profits take by an intermediary (aka corporates). NFTs have seen some success; per Flipside Crypto, between 2020 and early 2023, creators have received $9 billion through NFT sales. Although the NFT market has seen a dip during the latest “crypto winter” (OpenSea might be one the largest victims), there have been some silver linings. Pudgy Penguins mint and trade NFTs (with an adorable penguin avatar!) allowing the NFT holder IP licensing rights and access to community engagement. Retail brands have also started leveraging NFTs for brand engagement, including Starbucks, Nike, and Gucci.
How does it work?
Blockchain networks work by using incentives to drive software development, to perform transaction validation and as a payment medium. For example, Bitcoin is the token on the Bitcoin network, and Ether is the token on Ethereum. Tokens serve as a form of digital ownership, and are used as levers to drive blockchain adoption by adjusting the demand and supply of tokens on the blockchain. Tokens are used to help bootstrap and bolster the network with rewards or “airdrops,” enhance network security, promote blockchain access/use, and even allow token holders to participate in how the blockchain is governed. A well-designed incentive structure using tokens dictates the future success of a blockchain.
Road ahead
One of the biggest challenges blockchains face is regulation and government scrutiny/oversight. While there have also been some “wins” (such as CFTC deeming bitcoin as a “commodity” rather than a “security, the approval of a spot bitcoin ETF), the persistent wariness of government officials with regard to blockchain remains a hindrance. As humans, we resist all things we don’t understand, and blockchains are next on this list. The key here is to understand enough about this complex technology to allow blockchain builders to continue innovating rather than stifling growth.