The Future of Blockchain

A few weeks ago I left 12 hrs into a blockchain hackathon because our team couldn’t think of anything interesting to build. It seemed every idea we thought of had already been built before at one hackathon or another, and because none of the ideas we came up with would solve a problem non-crypto native people have. 

At Blockchain at Berkeley, our mantra is “blockchain is a technological solution to a social problem”. But it seems there are fewer and fewer social problems that demand blockchain to solve them.

When the Bitcoin whitepaper was written in 2008, the only way to send money was through Western Union, which took up to a week and had a 5% fee. On top of that, this could only be done at physical Western Union locations, typically only available in big cities. Combine that with the backdrop of the global financial crisis, and you get a very convincing reason to use a decentralized, trustless, and pseudo anonymous form of electronic cash that settles in 10 minutes and could be made anywhere with a computer and an internet connection.

Ethereum was launched in 2015 as a piece of infrastructure inspired by the underlying technology of Bitcoin with no use case in mind. More precisely:

“What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create "contracts" that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.”

15 years later, and the reasons to build a solution to social problems using Turing-complete blockchains rather than web2 tools are less convincing. The FinTech and digital revolution of the past decade have sprouted solutions to real problems that offer the same user-facing benefits that blockchain offers without the need to overhaul infrastructure.

Payments:

The only problem that blockchain alone can solve in the global payment industry is creating alternatives to unstable currencies. It is cheaper and easier to buy USDC and other stablecoins in a country with high inflation like Argentina and Türkiye than trying to buy US dollars. This problem is already being solved by companies like Reserve or Circle that offer stablecoin services, as well as DolarApp, ripio, or Ledn, which offer investing options tailored for certain regions, like LATAM.

After that, there are no other problems that require a blockchain to solve. Another “problem” people often believe blockchain solves is fees. However, the problem of expensive fees on remittances and money transfers no longer exist due to a wave of FinTech. For example, Coinbase, which charges a 1% fee on money transfers, is more expensive than India’s upi or Brazil’s Pix (instant payment systems). A FinTech alternative is Wise, an international money management company that charges an average 0.65% for currency exchanges and ~0.5% for transfers between bank accounts (changes based on currency and volume). 

Another mantra is that blockchain will “bank the unbanked”. But the reality is that you can only bank people digitally if they get paid digitally. Otherwise, if they work in informal sectors and operate in cash, they will need to go to physical bank locations to deposit their money, making blockchain solutions as helpless as fintech ones.

Government focus and regulation is also sweeping through this space. The legitimacy of a countries’ currency stems from demand; if no one uses a currency, it is worth nothing, and vice versa. Therefore, why should a country willingly let their citizens use a cryptocurrency they cannot control? This has led to countries’ sweeping bans of crypto and creation of Central Bank Digital Currencies (CBDC’s), many of which are instead centralized databases of users’ accounts. China, for example, has launched its e-Yuan CBDC amid a ban of cryptocurrencies. Nigeria, who has banned crypto currencies in banking, launched its eNaira. For now, both currencies have seen limited uptake because citizens have found little reason to switch from credit cards to a CBDC. Yet, 114 countries, representing over 95 percent of global GDP, are exploring a CBDC, up from 35 countries in 2020. My best guess is that national governments around the world will start banning crypto to encourage use of domestic CBDC’s, just like how the SEC is slowly regulating companies out of business and building a CBDC, but I digress.

My point is that companies building financial products outside this narrow scope of increasing access to more stable currencies are not solving social issues; they are still searching for problems to solve. All the L0, L1, L2 chains, and protocols that deal with exchanging value are building infrastructure only for other web3 users and not everyone else.

DeFi:

To me, DeFi is just an equities market that operates using a different infrastructure. The only previous use case of using DeFi over TradFi - anonymously owning assets and trading - is gone, given the stringent KYC rules being imposed in the US and around the world. There is nothing wrong with making a market; crypto markets have created enormous amounts of wealth out of thin air and code. There is money to be made in the vibrant selection of financial instruments provided by Uniswap (shoutout to Uniswap V4), Compound, Opyn, and more, but there is no social problem being solved.

I used to believe that the decentralized nature of DeFi gave retail investors like me a better chance to beat the market as opposed to institutions, but because of the decentralization of liquidity for retail users and centralized liquidity exchanges for institutional investors like EDX, Usman Ahmad, chief executive of Zodia Markets predicts that it “may lead to a disparity of spreads between institutions and retail [and lead to] institutions paying a tighter spread in a more liquid market.” A lot of people think companies like BlackRock setting up their own Bitcoin ETF’s and Fidelity setting up fee-less custody accounts are a good thing for retail web3 users. But in reality all it does is segment the market into two parts: a retail side with decentralized liquidity pools, and an institutional side that is based not on actual wallets with coins, but IOU’s and futures that integrate crypto into existing financial assets, allowing them to trade in centralized liquidity pools which have tighter spreads. It's a sobering thought that after all of this, institutions still have the upper hand in pricing. Hardline crypto users might argue that the philosophy of owning your own coins over having them held by a custodian by a bank is worth the trouble, but the global financial system has not collapsed to the point where people distrust banks and care enough to make the switch. Even in crypto, over 90% of trading volume happens at custodial CEX’s compared to non-custodial DEX’s, making this argument even harder to support. 

Social Networks and Infrastructure:

If an on-chain contract needs to store information, it is much easier for the contract to call an on-chain storage solution like IPFS than to call an off-chain one. It is also much easier to track ownership via an on-chain social platform like Lens than connect it to an off-chain web2 social media. Thus, there has been significant growth in on-chain infrastructure to solve on-chain solutions. Unfortunately, very few of these protocols are trying to compete with web2 ones - they are trying to help web3 users at the end of the day, meaning services are not built to encourage web2 users to make the switch. This especially applies to interoperability projects like Caldera, Cosmos, and Wormhole, which are purely infrastructure projects for web3 users.

The biggest positive breakthrough in my opinion is the advent of companies that use blockchain purely as a secure, immutable public ledger, allowing them to abstract away their use of blockchain. A lot of institutions are doing this, like IBM which owns its own Hyperledger Fabric chain to track supply chain management with customers that include Walmart, Maersk, and Schneider Electric. Everledger is another supply chain management application, and Factom allows users to spin up chains and treat them like a database. Perhaps with time, these will fill a gap that web2 companies cannot, by guaranteeing security and non-tampering of on-chain information. 

Institutions: 

For a myriad of reasons, many crypto-based companies have started reaching out to sell services to institutions, perhaps as a more stable revenue stream or from increased corporate interest. For example, Sui, a new L1 chain, recently announced a partnership with F1 to “partner for real world and online activities alike.” Many of the companies I previously mentioned have built services targeted towards institutions. 

To say that Sui’s partnership solves a social problem would be an overstatement; but at the very least, it shows sustained institutional interest in using blockchain technology, even when there is no problem being solved. If money flows, then new on-chain services will be built.

Omitted Topics:

I expect there to be people who read this and think I haven’t considered other use cases and market segments. I actually meant to write a short memo, but here we are.

There are two interesting niches I’m interested to see develop: gaming and Zero Knowledge proofs. Using blockchain’s public ledger to store asset ownership could be an interesting use case in games that are increasingly interconnected (asset-wise, anyways). ZK tech is fascinating, but is still very nascent, given how constrained the schemes are (like PLONK), exemplified by the falling coin price of Mina and the dwindling user count of StarkNet.

Conclusion:

I initially intended to write an article about the downfall of blockchain. Instead, I’ve written about a diverse and adapting ecosystem, one that is ever changing, and one where money flows regardless of their real-world impact. But what concerns me most is that even after the boom cycle of crypto, most non-web3 users only recognize Ethereum and Bitcoin, not the protocols and smart contracts built on top of them. Those who have engaged in the space still, by a large margin, use CEX’s to trade crypto and discover new protocols, as opposed to using the decentralized alternatives.

When the internet was created, even after a few years, people derived value from the applications built on top of it. Users did not flock to the internet because of its underlying technology, they came because the apps built on top of them solved problems they had which made life better for them.

Even though web3 has been around for over a decade, the same cannot be said about blockchain.