Three Blockchain Successes | Wealth management
Unpredictable times provide a great opportunity to reflect, put circumstances into perspective, and pivot to new possibilities. For example, blockchain technology emerged after a global financial crisis to encourage a more democratic economic system. Although prices are currently falling, volatility is high, and uncertainty reigns, the fundamental purpose of the digital asset ecosystem remains firmly entrenched.
The promise of an equitable future for all hinges on accessibility, decentralized governance and ownership, principles that can revolutionize countless facets of modern life when harnessed effectively. Poor projects can fail and sustainable businesses can falter; Yet there is no doubt that the industry will survive and thrive because the digital asset ecosystem is antifragile—improve despite adversity. We have seen antifragility at work time and time again in this nascent market, following the Mountain. Gox bankruptcy filingthe ICO bubbleand China‘s cryptocurrency bans. The ecosystem rallies after every calamity with a increase in digital asset portfoliosNew institutional offersand the influx of capital into business projects.
However long this current downturn lasts, we salute blockchain’s initial commitment, early successes, and promise of future innovations. The blockchain has already shaped the addressable digital asset ecosystem, expanding functionality and opportunities within currencies, governance and value enhancement. Additionally, technology has enabled developments that we believe will change the world forever: Bitcoin, Decentralized Finance (DeFi), and Non-Fungible Tokens (NFTs).
For years, Bitcoin, the first cryptocurrency powered by blockchain technology, was considered the entire ecosystem of digital assets. It has been widely misunderstood and has been the subject of many false accounts, branding it as a waste of energy and a vehicle for fraudulent activities. Despite a general misinterpretation, Bitcoin has reached a market capitalization of more than $1 trillion in March 2021 because industry leaders have discerned its true benefit as a decentralized store of value.
Bitcoin is the largest digital asset today, accounting for more than half of the market capitalization of the entire digital asset universe. It currently has more than 80 million unique bitcoin wallets – an impressive feat compared to a traditional bank like Citigroup, which has 200 million customer accounts. While much of Bitcoin’s success has been driven by retail audience appeal, institutional adoption has been growing, with new offerings from financial incumbents making headlines. Recent articles suggest that Bitcoin is on the verge of widespread adoption and development. For example, consider Bridgewater‘s interest in a cryptocurrency fund and Goldman Sachs‘ first OTC cryptocurrency trading.
Although Bitcoin is a remarkable asset for its unique characteristics and stature as the first decentralized virtual currency, a whole universe of digital assets powered by blockchain technology claims equally powerful qualities.
The Bitcoin blockchain had a first-mover advantage, but the Ethereum blockchain pioneered decentralized finance (DeFi). In 2018, the concept of DeFi was born from a Telegram group of Ethereum developers who recognized a new world of financial services potential.
Similar to Apple’s App Store apps, DeFi uses Ethereum as a Layer 1 protocol or infrastructure to provide a platform on which digital asset transactions and innovations occur. Additionally, 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 advances industry expansion. While Ethereum was the first layer 1 protocol, now there are others popular layer 1 protocols, including Solana and Avalanche. In November 2021, the total value locked (TVL) of staked assets 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 DeFi will help financial services improve processes and innovate as they transition to a token era.
Most assets are non-fungible: a house, a college degree or a trademark, for example. Tokenizing these assets helps form surrounding markets that create or increase liquidity and overall value. In this vein, non-fungible tokens (NFTs) provide a way to monetize assets in virtually any industry. NFTs have seen significant growth in private funding over the past year, reaching approximately $5 billion venture capital companies. Additionally, NFT trading volume has been significant, reaching a peak of $1.07 billion in August 2021.
NFTs were initially met with confusion and skepticism; however, growing adoption by retailers and institutions has generated excitement about practical use cases. NFTs have dominated pop culture conversations, with fashion houses like Gucci create digital art and Tom Brady collaborates with ESPN to start an NFT collection. We believe the structure and application of NFTs will expand across industries, providing decentralized ownership and revenue opportunities.
Blockchain technology has brought about substantial changes in our global ecosystem, providing new opportunities through Bitcoin, DeFi and NFT. These digital assets have opened the doors to accessible financial transactions and global communication while stimulating additional developments like Web3, CAD and the metaverse. The digital asset ecosystem has more to offer today than ever; we believe it will continue to thrive as our future is brighter with blockchain.
Peter Hans is the Chief Strategy Officer at Arca.