Blockchain basics hold promise amid crypto woes

1 JANUARY 2023

Blockchain basics hold promise amid crypto woes

Underground tunnel with blue lights angle shot

While crypto enjoyed continuing popularity in 2021, since 2022 the cryptocurrency market has certainly been going through a rough time. Both the news media and recent research show the lack of trust, with some even talking about a “crypto crash”. 2022 has seen major digital projects imploding for various reasons.

The most recent was on November 11 when the exchanges FTX and FTX.US filed for Chapter 11 bankruptcy on the back of inadequate corporate governance and virtually no control of clients’ assets. Directly linked to this, the prominent crypto startup BlockFi filed for bankruptcy on November 28. In May 2022, the cryptocurrency TerraUSD and LUNA collapsed, mainly due to flawed business models, and multiple crypto platforms folded after this. As a consequence, some investors even see the crypto market as experiencing something similar to the dot-com bubble of 2000. The prices of most cryptocurrencies went south, most prominently Bitcoin and Ethereum. There is an undeniable trust crisis in crypto land.

One-year view of Bitcoin in USD, down 64% from $48k to $17k

But when you look at the general trends, there seem to be two different layers.

First, blockchain technology itself is stable and works. The transition of the Ethereum blockchain to a less energy-hungry proof-of-stake concept was quite smooth. The so-called Lightning network for small transactions on the Bitcoin blockchain is getting more popular. If you read that crypto assets have been “stolen” it was never the actual blockchain layer that was hacked. Instead, criminals hacked a crypto exchange and stole the keys that give access to the coins.

This leads to the second layer. There will be much tougher regulation for all participants in the crypto universe starting 2023.

Central banks, regulatory officials and politicians do not miss a chance to warn the public that cryptocurrency is highly volatile, risky or even a scam. European Central Bank President Christine Lagarde recently said in an interview that cryptocurrencies are “based on nothing” therefore would be “worth nothing”, and that regulation is required to prevent inexperienced investors from losing all the money they put into cryptos.

After a statement like that – and it’s not an isolated statement – it is a logical consequence that regulation is quickly advanced. The European Parliament approved in July 2022 the Market-in-Crypto-Assets (“MiCA”) proposal. Upon implementation, expected for 2024 in all EU member states, crypto-asset providers will not be allowed to operate without authorization. This authorization, plus its terms and conditions, has the goal to protect investors from fraud on the one side. And for crypto-asset providers, it will force them to make their accounts visible to provide greater transparency, probably with the aim of tracking and taxing this form of wealth.

Legal experts await a rise in so-called crypto litigation cases. Some blockchain-specialised law firms offer certain advice and monitor international proceedings. Experts see an increase in disputes stemming from deals gone wrong, contractual breaches and bad actors over the past months.

On the positive side of the upcoming regulations, they may help to restore the lost trust and therefore could also mean greater stability. And with more guidance to investors as well as to crypto-asset providers it could be the catalyst for the survival of cryptocurrency.

Into the metaverse

Closely related to the crypto space is the metaverse trend. Supporters hope it could play an essential role as a digital marketplace ideally suited for tokens, coins and cryptocurrencies.

The future seems to be black or white. If it takes off, metaverse can be massive. New research by McKinsey & Co shows the metaverse could grow up to $5 trillion in value by 2030. That number illustrates the impact the metaverse is expected to have across key sectors like entertainment, but also other businesses over the years. Even now, with no single valid definition of what the metaverse entails, it’s clear many businesses are working on a metaverse strategy.

But there is a risk it takes the other path. Perhaps the metaverse will turn out to be a playground for nerds and consumer brands only. Like every new technology – email for the early internet, the App Store for the smartphone – you need a killer application. Nobody knows what this could be.

What’s clear is big tech is investing massively. Meta (formerly known as Facebook) is working on new technology, and there are the metaverse environments Microsoft, NVidia and others are developing to cooperate on digital projects. Already, several companies including Microsoft, Roblox, and Epic are investing in their versions of the metaverse, supported by advancements in technology enablers such as 5G, artificial intelligence (AI), edge, and cloud computing. The key expectation for the coming years is that the metaverse will become an important marketing tool, much like search engines already have. Businesses like Nike, Gucci and others are already building a metaverse presence. More are likely to follow either establishing their own platform or entering existing ones like Meta Horizons, Fortnite, VR Chat, or Decentraland. According to Statista, more than 35% of people are willing to spend between $700 and $1,000 on VR gear that allows them to physically feel everything they experience in the metaverse.

The corporate metaverse however focuses on providing platforms and tools to do work remotely and efficiently. One example of such a collaborative working environment is BMW’s augmented reality labs in cooperation with Epic Games. BMW is already able to create a complete customer journey using game engines and is seeing the benefits. This success shows that the idea of an immersive, experiential technology is central to the metaverse and is likely to define how it might look like in the end.

With this sort of technology, the metaverse should be more engaging than the digital worlds of today where we mostly “watch”. Expect multiple ideas of how we interact with it via immersive technology such as virtual reality (VR), augmented reality (AR), and mixed/extender reality (MR/XR) to evolve, creating another type of IT specialization.

Smart contracts: Blockchain beyond cryptocurrencies

NFTs use smart contracts. After reading that statement, you may be asking what is a smart contract?

Critics will say it is neither “smart” (meaning intelligent) nor a “contract” (legally). Basically, it is a software application or protocol that can be used as a tool for automating a transaction between different parties. Smart contracts are executable codes that run on top of the blockchain to facilitate, execute, and enforce an agreement between untrustworthy parties without the involvement of a trusted third party. This technology is being used to minimize the cost of contract management by requiring less human supervision and being more efficient. In comparison with traditional contracts, smart contracts enable the users to codify their agreements and trust relations by providing automated transactions.

According to Verified Market Research, the smart contracts market size was valued at USD 149.5 Million in 2021 and is projected to reach USD 820.62 million by 2030, growing at a CAGR of 26.40% from 2022 to 2030.

The current key players in the global smart contract market are entities such as EOS, Tron, Ginete Technologies, Hedra Hashgraph, Hyperledger, IBM, Icertis, NEM, Neo, OpenXcell, Stellar, Waves, Thomson Reuters, Monax Industries, Blockstream, Coinbase, BlockCypher and Monetas.

Smart contracts are stored in the blockchain as programs in one of the blocks. This provides immutability as the conditions of the contract cannot be altered and it is monitored in real-time. Regular verification as well as the absence of an intermediary ensures a faster fulfilment and completion of the contract.

As for the blockchain platform, the market is split into Ethereum, Bitcoin, NXT, and Sidechains. Ethereum accounted for the largest market share of 36.28% in 2020, with a market value of USD 52.59 million, and is projected to grow at a long-term CAGR of 23.25% during the forecast period. Bitcoin was the second-largest market in 2020, valued at USD 42.23 Million in 2020.

Covid-19 has surely increased the awareness of smart contracts across the globe due to remote working and social distancing. However, smart contracts do face certain challenges. One example was the attack by Decentralized Autonomous Organization (DAO) in 2016 when this organization stole around 2 million Ether (USD 50 million at the time) to prove its vulnerability. Other critical issues are privacy, legal and performance issues that still need to be clarified.

At the end of the day, the reliability of the underlying technology determines the growth of an industry. The internet protocol HTTPS, Java, HTML and other basic codes turned out to be the basis for a multi-billion dollar market. While thousands of failed online business models burned billions in cash, successful corporations got tremendously rich using the internet. Nobody knows who will turn out to be the Amazon, Google or Apple of the blockchain era. But there is a high probability that there will be business models which are able to monetize innovative ideas based on blockchain technology and smart contracts. The core of cryptography – in short, crypto – has always been to secure value and personal data, and prevent fraud. This big advantage will eventually prevail.

Key takeaways: Infront’s view on blockchain in 2023

After a year of falling cryptocurrency markets, an increase in both regulation and litigation in the sector are expected in 2023
Blockchain technology itself has been proven stable and useful. Expect it to play a part in more spaces beyond cryptocurrencies, including the metaverse as this new technology enters and disrupts the business world
The mainstream rise of crypto will leave a longer-term legacy in the form of smart contracts based on blockchain technology, offering advantages to parties using them

If you want to learn more about cryptocurrencies and upcoming regulations or litigation please refer to:

NFT Development Trends in 2023: In-depth Guide for Plausible Upcoming NFT Trends – Cryptostars

Don’t Let These Top 5 Crypto Trends Spook You in 2023 – Tech Funnel

Blockchain & Cryptocurrency Regulation 2023 – Fenwick

Crypto market 2023-24. How will it change? – Finextra

Lawyers see crypto regulation coming in 2023 because industry needs to rebuild - TechCrunch

The top 5 Web3 trends in 2023 – Forbes

If you want to learn more about the future of the metaverse please refer to:

Top 10 metaverse trends to look out for in 2023 and beyond – Fintech News

Latest McKinsey tech outlook identifies 14 key trends for business leaders - McKinsey

Metaverse statistics and facts – Statista

What is the metaverse and what does it mean for business – McKinsey