Read the first part of this article here!
4. DECENTRALIZED FINANCE (DeFi)
Decentralized Finance or DeFi refers to the ecosystem made up of financial applications that are developed on blockchains. This new model is called to facilitate access to markets and financial products for millions of people marginalized by traditional institutions.
To achieve this, protocols have been developed that allow anyone, regardless of their credit history, to access a loan immediately, for example. One of the largest Dapp in Ethereum is called Compound. It is defined as "an autonomous interest rate algorithmic protocol designed for developers to create and integrate DeFi into their applications".
Aave is another blockchain protocol intended for the decentralized financial market. Depositors of the $AVA token earn interest by providing liquidity to certain groups, while others could obtain loans by accessing these groups collaterally.
An interesting project in the area of micro-financing is RCN (Ripio Credit Network), the Latin American startup that connects creditors and debtors on a blockchain to create a more transparent, accessible, and globalized debt market.
But undoubtedly one of the most interesting developments in the DeFiarea is related to micro-financing, and in this area, BlockFi and Nexo stand out.
These are platforms in which users deposit digital assets in their accounts (this deposit is then used as collateral) and instantly acquire a line of credit in their local currency, without the need for additional verification or guarantors.
This completely breaks down the barrier of requirements imposed by financial institutions when granting loans, especially to people who request their first loan or to immigrants without due economic roots, eliminating the need for a guarantor in the operation or to dispose of traditional assets as a guarantee.
We need more people using Dapps and DeFi protocols. According to StateofDapps, there are only 3,734 Dapps and, for instance, Splinterlands had approx. 5,900 users in the last 24 hours. This is minuscule. Once we have apps like Instagram, Google, or games like Fortnite or WoW, products with more than 100 Million daily active users, then everything will be different.
Financial institutions know the immense potential of blockchain, smarts contracts, and Dapps, although their representatives are often opposed to the implementation of certain blockchains.
In an intervention before the Committee on Financial Affairs of the United States Senate, Jamie Dimon (CEO of JPMorgan) said “we support cryptocurrencies as long as they are properly controlled”. Something that is contrary to the very foundation of cryptocurrencies that promotes decentralization not only of records but also of decision-making, additional issuance of tokens (deflationary control), member access or fees, to prevent an entity from obtaining control over the network.
At the beginning of the year, JP Morgan developed the JPCoin (token created in a blockchain network called Quorum) to transfer financial assets of corporate clients through a distributed balance sheet (Distributed Ledger), for not wanting to directly call it a blockchain and not associate with Bitcoin or other cryptocurrencies.
JPCoin requires authorization to integrate nodes and users must be approved by JP Morgan in advance, which is why many do not consider JPCoin truly a cryptocurrency.
The truth is that if a private entity controls the blockchain by issuing tokens or access by the members, we are not in front of a cryptocurrency.
Cryptocurrencies, in principle, are open-source and decentralized, integrating their regulation into the source code to ensure the least possible human intervention and thus guarantee and promote trust among the members.
But the interest in these digital assets does not end there. According to a survey conducted by Fidelity Investments (a firm that manages more than 3 trillion dollars in assets), it was determined that more than 30% of the main institutional investors have investments in Bitcoin and other cryptocurrencies.
This shows the enormous interest on the part of financial institutions, reflected in their investments. Digital assets that some called fraud, pyramids, or bubbles at the time, are now part of their investment portfolios.
5. NOT EVERYTHING THAT SHINES IS BITCOIN
Many experts agree that most digital assets are destined to fail in the next few years. As of the writing of this article, there are 7,500 cryptocurrencies, stablecoins, and tokens issued around the world, according to CoinMarketCap.
I understand that there are several reasons that lead to this conclusion: there are many "copies" and cryptocurrencies that pretend to do the same; not all areas require a decentralized database, or simply the implementation of a blockchain is not a guarantee of improvement of the function that it is intended to replace.
Bitcoin was born as a decentralized and anonymous electronic payment system; Ripple as a vehicle for the international transfer of value and assets between financial institutions; Augur to operate in the market bets and predictions; Mana to acquire digital items in video games; and so on.
In my opinion, many of the cryptocurrency projects that we have today will be forgotten, as happened with most Internet companies during the Dot-Com bubble in 2001.
There is a possibility that in the next few years they will only be established and massively adopt around 20 or 30 cryptocurrency projects will remain mainstream. Blockchains need trust, and the most trusted networks will be the ones that will remain.
Another factor that hinders the adoption of cryptocurrencies is their valuation. The valuation of cryptocurrencies is very volatile which makes many people not want to invest in these digital assets.
Many are likely to be inclined to use stablecoins to make international payments and transfers due to the price stability and low cost they offer, leaving aside other digital assets as financial investments.
6. DECENTRALIZED PUBLIC ADMINISTRATION
Governments will have the challenge of adapting this new technology with the particularity that it is called upon to replace some of their institutions, eliminating in many cases intermediaries and traditional registries.
Some of the institutions and public administrations that could adapt and benefit citizens with the implementation of a public Blockchain are:
• Pension Funds
• Voting Systems
• Civil Registry
• Social Security Treasury
• Patents and IP Registries
• Apostilles, Exequaturs and Legalizations
• Real Estate Certificates
• Social Aid Programs
A State could delegate, for example, the management of pension funds or general voting to a system based on a blockchain.
In this scenario, pensioners would have full transparency and greater control over their savings, which would force the States to be more diligent with the management of public funds.
Or a general election where each voter has the results updated in real-time, immutable, and anonymous. Elections without a single central registry but with a decentralized registry distributed among all members.
To alter these results on the ballot, all the bulletins verified by the participants in the blockchain would have to be modified. The entire network would have to confirm said altered block, something that could not happen because the Blockchain itself would reject it.
More and more states are considering the development and issuance of a cryptocurrency or digital currency controlled by governments.
Recently, China became the first country to issue a cryptocurrency controlled by a central bank (Central Bank Digital Currency or CBDC) and has already started a pilot test in the city of Xiong'an in which companies such as McDonalds or Starbucks to be part of the program and accept the new digital Yuan in their stores.
Another Asian country joining the CBDC revolution in South Korea. It recently announced the creation of a committee that will be in charge of developing the regulatory framework for its state cryptocurrency, indicating that this process of digitizing the currency is crucial for the economic stability of the region.
Sweden has taken the lead in Europe for the creation of the first European state cryptocurrency: e-Krona. The intention of the Scandinavian country is that by 2023 it will stop operating with cash and that it will be completely replaced by the new digital currency.
These possible applications of public functions in Blockchain will put governments to the test since there are many public institutions that would become obsolete with the implementation of a Blockchain, so it remains to be seen which entities are going to sacrifice in favor of the development of these networks decentralized.
This article was originally written in Spanish by Ivar Cifré Molina, a lawyer who specializes in New Technologies, E-Commerce, Data Protection, and Blockchain. He is the Founder of JURISPIXEL, a legal consultancy for technology startups and entrepreneurs located in Madrid, Spain. He writes articles on tech law for the Spanish legal magazine A Definitivas. Also, he is the creator and developer of a security app for Android called lockIO.
Follow on Twitter and Instagram @ivarcifre
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