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Decentralised Economic Infrastructure
Digital Assets Take A Tumble
Decentralised Economic Infrastructure
“Economic infrastructure is the basic facilities which directly benefit the process of production and distribution in an economy”
Economic infrastructure is a set of tools or basic resources that aid in large scale human coordination. Our research has predominately been focused on the value of information and trust in society and how improvements in these areas lead to drastic economic booms. While the internet was a disruptive innovation to information creation and dissemination, the blockchain represents a similar innovation but for trust.
We don't need to tell anyone how important trust is. Every human being has felt the power of trusted relationships, whether they be with a friend, a business partner or a financial intermediary. Trust sits at the centre of human coordination; the ability to trust quickly and reach agreements is essential to the fast-paced lives we live today. This trust, however, comes with a hefty price tag; we estimate that the total cost of trust in society today is around $40 Trillion. That's right, we spend close to $40 trillion not on the production or distribution of goods but on manufacturing trust between one another so that we can coordinate our efforts or reach agreements.
Traditionally, we obtain guarantees to value transfer through a combination of third parties who manage centralised ledgers according to a countries law and provide recourse enforced by governments. These recourse deterring guarantees are most often delivered for a hidden or otherwise untransparent cost.
Cryptonetworks introduce a new alternative guarantee to value transfer by replacing centralised ledgers with decentralised ones. By utilising rules-based token incentivised hardware and node infrastructure instead of the law and government enforcement, we can achieve game-theoretical guarantees that are cost-prohibitive to reverse or tamper with. This new guarantee is transparent and derives its cost through the open market.
In simpler terms, blockchains are just rules-based trust systems enforced through mathematics and computer science, unlike our current brand-based trust system facilitated through well-known names, complicated legal constructs, and government enforcement.
This is an enormous breakthrough for trust in society as it opens a new cost function for transfers of value. Every transaction can be mapped on a spectrum based on its value and complexity. Daily value and simple logic transactions are cheap and well serviced today; however, as complexity increases, so too does the cost of attaching recourse. This is true for both low and high-value transactions. On the other hand, game-theoretical guarantees represent a single cost function that scales well regardless of complexity and value.
This opens up a whole host of transactions that would otherwise be reserved for the privileged or are just outright cost prohibitive and impossible to perform today.
Through competition, we expect to see different projects optimise for specific use cases. Every use case is essentially some combination of value and complexity. In order to optimise and increase the capabilities of blockchain technology, developers will need to make a trade-off between the amount of security they wish to offer verse costs to use. Not all use cases require high degrees of settlement assurances, and we expect to see an interconnected web of use case-specific blockchains.
Users and application builders will need to decide what mix of security and cost makes sense for them. Security and decentralisation are similar to insurance. If nothing goes wrong, it feels like having insurance was a mistake or waste of money, but when something goes wrong, and we need it, we become thankful we have it.
What we are really witnessing here is the rise of the internet of value. Blockchains are new infrastructure for the internet and will do for value what the internet did to the cost of transferring information. Blockchains are just another tool of the inevitable digital age that will replace the need for digital businesses to rely on their centralised analogue intermediaries.
In the same way that the internet represented a blend of different protocols to achieve its current form, blockchains will require additional protocols or rule sets to provide a truly expressive internet of value. Blockchains, the focus of most of this essay, are only the first layer of the internet of value; they perform basic tasks and are highly redundant settlement systems for agreements and transfers of value.
Token Standards and Protocols
The next layer is made up of token standards and protocols.
Token standards are how value is represented on a blockchain. Currently, there are two main token standards worth paying attention to, fungible tokens and non-fungible tokens. Fungible tokens such as the Ethereum ERC-20 token are ideal for financial assets, and non-fungible tokens like the ERC-721 standard are purpose-built for psychical consumables and digital consumables. Every underlying settlement system or blockchain aims to keep track of every user account, what tokens a user owns and how much of them they have.
Protocols on blockchains such as Ethereum are usually a combination of smart contracts that create deterministic business logic for any given peer to peer service. Smart contracts tie agreements with execution; therefore, they significantly reduce the cost of basic conditional agreements between distrusting parties. Protocols form part of broader decentralised economic infrastructure as they abstract complexity and standardise basic functions into easy to use rule sets.
Users can take their tokens, either fungible or non-fungible and put them into these protocols, which perform some kind of basic function; the underlying blockchain is doing the job of processing, executing and settling the requests of users. Smart contracts (protocols) in this sense essentially replace intermediaries or algorithms of tech giants that allow us to do something with our assets (fungible or non-fungible).
It's clear that decentralised economic infrastructure has a lot to offer and will take market share from centralised systems that extract more value than necessary from their users. However, just like everything in life, the future is probably found somewhere in between two distinct extremes. The obvious extremes are on one side, an authoritarian type centralised system all the way to a wild west completely decentralised one. Our view is that these systems will co-exist competing with one another, not on an ideological basis but on the efficiencies and utility they offer their users.
Whilst Etherbridge focuses on decentralised technologies, we expect the world to have multiple investable value nets. We are focused on decentralisation because it's not just innovative; it doesn't just make existing services better or more efficient it actually extends the capabilities of human coordination to realms unimaginable today.
So much about life is about being in the right place at the right time. We often have to pinch ourselves when we realise just how lucky we are as entrepreneurs to be born in an era of substantial disruptive change. The winners of disruptive change invariably own the very infrastructure on top of which this change occurs, such as the Rockefeller's and Standard Oil, the Vanderbilt's and railways and Bezos and e-commerce. History teaches us just how powerful owning new and disruptive infrastructure can be, and blockchain technology will be no different.
Many will look at the massive price rise of bitcoin and feel that the opportunity has long been over; whilst bitcoin might no longer offer a 1000x return profile, it has only just begun its diffusion into society. Bitcoin, however, is truly only the tip of the iceberg. Blockchain technology is being adopted at a faster rate than the internet, and its penetration in society is maybe 2,5% thus far. Decentralised economic infrastructure like the internet, phones and digital intermediaries grow through network effects.
As it stands, after 13 years, cryptoassets have a market capitalisation just north of $1,9 trillion. We see exchange volumes of $3 billion daily across decentralised exchanges, outstanding borrowed volumes of $22 billion, daily active users of bitcoin and Ethereum north of 1 million a day, and countless partnerships with some of the most forward-thinking businesses of the 21st century. We have just reached 115 million users of crypto and expect to reach 1 billion people by 2024.
Not to mention the endorsement of some of the greatest minds in the world of investments, from Paul Tudor Jones, George Soros and Ray Dalio to Stanley Druckenmiller, Steve Cohen, Bill Miller and Howard Marks. All of these prolific individuals have dealt with the exact same pain points many people reading this are dealing with; however, their conclusion, which is shared by us, is that blockchain is truly disruptive and, more importantly, it has only just begun.
Notable Articles and News Stories This Week:
Aave Arc to Provide 30 Financial Institutions Access to Private Pools of DeFi Liquidity
A permissioned version of the DeFi liquidity protocol, Aave Arc, launched today and Fireblocks “whitelisted” 30 financial institutions to participate in it.
“Aave Arc allows institutions to interact with the Aave Protocol the same way any other user would, but on their own separate and permissioned liquidity pool where every user has been verified,” Stani Kulechov, founder & CEO of Aave, told Blockworks.
The permissioned Aave Arc has the same features as Aave Protocol and fits within the KYC and AML compliance standards, Kulechov said. “This allows institutions to leverage almost all the benefits of DeFi while remaining aligned with their compliance requirements,” he added.
Read more about the new offering here
Kazakhstan’s Hashrate Drops as Internet Blackout Persists
Kazakhstan’s bitcoin mining industry, the world’s second largest, has been severely disrupted for a second day by a nationwide internet blackout amid widespread protests.
Top mining pools had lost an average of 10% of their hashrate in 24 hours as of 6 a.m. UTC, according to data from pool BTC.com. The hashrate measures computing power on the bitcoin mining network.
Kazakhstan is second only to the U.S. in bitcoin mining hashrate, with about one-fifth of the global total according to August data from the Cambridge Bitcoin Electricity Consumption Index.
Read more about the outage here
Crypto Browser Brave Passes 50M Monthly Active Users
Crypto-centric browser firm Brave announced it had passed 50 million monthly active users, doubling growth on a year-over-year basis for the fifth year in a row. Daily active users averaged 15.5 million during December.
Brave Search, the privacy-preserving search engine launched last year, had 2.3 billion annualised queries. Other products launched in 2021 were crypto wallet Brave Wallet and private video call offering Brave Talk.
Brave’s market share is still small. For comparison, Firefox has about 211 million monthly active users, not to mention Google’s industry-leading Chrome.
Read more here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.