Unpredictable periods present a prime opportunity to reflect, put circumstances in perspective, and pivot to new possibilities. For instance, blockchain technology emerged after a global financial crisis to encourage a more democratic economic system. Although prices are currently down, volatility is high and uncertainty prevails, the fundamental purpose of the digital asset ecosystem remains firmly grounded.
The promise of an equitable future for all is based on accessibility, decentralized governance, and ownership—tenets that can revolutionize countless facets of modern life when harnessed effectively. Mediocre projects may fail, and sustainable businesses may falter; still, there is no doubt that the industry will survive and flourish because the digital asset ecosystem is antifragile—improving despite adversity. We have seen antifragility at work repeatedly in this budding market, following the Mt. Gox bankruptcy filing, the ICO bubble, and China’s cryptocurrency bans. The ecosystem rallies after every calamity with an increase in digital asset wallets, new institutional offerings, and capital flooding into venture projects.
No matter how long this current downturn lasts, we commend blockchain’s original pledge, its earliest successes, and the promise of future innovation. Blockchain has already shaped the addressable digital asset ecosystem, expanding functionality and opportunity within currencies, governance, and value accretion. Moreover, the technology has enabled developments that we think will forever change the world: Bitcoin, decentralized finance (DeFi), and non-fungible tokens (NFTs).
For years, Bitcoin—the first cryptocurrency powered by blockchain technology—was viewed as the entire digital asset ecosystem. It was largely misunderstood and the subject of numerous false narratives, branding it as an energy spendthrift and a vehicle for fraudulent activities. Despite mainstream mischaracterization, Bitcoin reached a market capitalization of more than $1 trillion in March 2021 because industry leaders discerned its true advantage as a decentralized store of value.
Bitcoin is the largest digital asset today, amounting to more than half of the market cap of the entire digital asset universe. It currently boasts more than 80 million unique Bitcoin wallets—an impressive feat compared to a traditional bank like Citigroup, which has 200 million customer accounts. Although much of Bitcoin’s success is due to traction from the retail audience, institutional adoption has increased, with new offerings from financial incumbents making headlines. Recent articles suggest that Bitcoin is on the cusp of expansive adoption and growth. For instance, consider Bridgewater’s interest in a cryptocurrency fund and Goldman Sachs’ first OTC cryptocurrency trade.
Although Bitcoin is a remarkable asset for its unique characteristics and stature as the first decentralized virtual currency, an entire universe of digital assets powered by blockchain technology assert similarly powerful qualities.
The Bitcoin blockchain had a first-mover advantage, but the Ethereum blockchain pioneered decentralized finance (DeFi). In 2018, the concept for DeFi was born out of a Telegram group of Ethereum developers who recognized a new world of financial services potential.
Akin to applications in Apple’s App Store, DeFi utilizes Ethereum as a Layer 1 protocol, or infrastructure, to provide a platform on which digital asset transactions and innovations occur. Further, the open-source nature of DeFi allows all information to be freely shared. The ability for developers to build “on top” of these open-source protocols promotes collaboration and progresses industry expansion. While Ethereum was the first Layer 1 protocol, there are now other popular Layer 1 protocols, including Solana and Avalanche. In November 2021, the total value locked (TVL) of assets staked in DeFi protocols reached more than $100 billion.
DeFi presents opportunities for free markets, new investment strategies, innovation, and alternative financial resources outside the confines of centralization. We believe that DeFi will assist financial services in improving processes and innovating as they transition into a tokenized age.
Most assets are non-fungible: a house, a college diploma, or a trademark, for instance. Tokenizing these assets helps form surrounding marketplaces that create or increase liquidity and overall value. In this vein, non-fungible tokens (NFTs) provide a means of monetizing assets across virtually all industries. NFTs have experienced significant growth in private funding within the past year, reaching approximately $5 billion from venture capital firms. Additionally, trading volume for NFTs has been significant, reaching a peak of $1.07 billion in August of 2021.
NFTs were initially met with confusion and skepticism; however, escalating adoption from retail and institutional audiences has stoked excitement regarding practical use cases. NFTs have dominated pop culture conversations, with fashion houses like Gucci creating digital art and Tom Brady collaborating with ESPN to launch an NFT collection. We believe the structure and application of NFTs will permeate all industries, providing decentralized ownership and income opportunities.
Blockchain technology has driven substantial change in our global ecosystem, providing novel opportunities through Bitcoin, DeFi and NFTs. These digital assets have opened doors to accessible financial transactions and global communication while stimulating additional developments like Web3, DAOs and the metaverse. The digital asset ecosystem has more to offer today than ever before; we believe it will continue to thrive because our future is brighter with blockchain.
Peter Hans is the chief strategy officer at Arca.