If you’re an early investor in bitcoin, ether, SOL or Crypto Punk NFTs, you have lots to be thankful for this year.
But as I prepared this special Thanksgiving edition of “Money Reimagined,” the idea of celebrating soaring crypto prices was rather unsatisfying.
The good news is there are lots of developments in the crypto sector that capture its transformative economic and social potential and don’t require embracing the rather distasteful “have fun staying poor” mindset of a few speculators. After looking through CoinDesk’s coverage the past 12 months, here are five things I think the crypto community can be thankful for.
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1) The advance of “Layer 2″ scaling
I chose this nerdy topic first because, ultimately, the question of whether crypto can one day be a viable alternative for the wider global economy depends largely on its ability to scale. It needs the capacity to rapidly settle a massive number of transactions without imposing burdensome costs on users.
Some folks, such those at Bitcoin Cash who led a largely failed move to increase Bitcoin blocks’ data storage capacity, believe scaling requires changes to the base layer blockchain protocol. But that can undermine network security and lead to more centralization. The real promise lies in “layer 2″ middleware that pushes processing capacity “up the stack.” With this, transactions and software commands are executed “off-chain” while the base blockchain still acts as a validation anchor to prevent double-spending.
The best known layer 2 product is Bitcoin’s Lightning Network, which was first fleshed out by Thaddeus Dryja and Joseph Poon in a January 2016 white paper. Only now, in 2021, has Lightning come into its own, however, as the basis for El Salvador’s embrace of bitcoin as legal tender. The country’s Chivo wallet remains beset by bugs and President Nayib Bukele isn’t exactly the international community’s darling. Still, the fact that Lightning is allowing many poor Salvadorans to make small payments without incurring heaving processing fees is a positive sign for the advance of this technology.
Other layer 2 advances this past year lie in decentralized finance, or DeFi. Protocols like Polygon and Arbitrum are using tools such as zero-knowledge rollups and Plasma to increase throughput of transactions on Ethereum and other smart contract layer 1 chains, while also creating more opportunities for cross-chain interoperability. These advances are vital if DeFi is to truly challenge the traditional finance model for the global economy.
2) Developing world crypto innovation
While there has been a great deal of attention in the U.S. and other developed countries on the flood of institutional investors into crypto assets (see point 3), there’s an equally important trend of adoption in the developing world. Bitcoin- and stablecoin-based cross-border remittances are increasing in many developing countries, crypto payments have rapidly expanded inside troubled economies such as Turkey and Argentina, and, most interestingly, new hubs of unique innovation have popped up in the developing world.
We covered three examples in separate episodes of the “Money Reimagined” podcast: the expansion of DeFi projects in Nigeria; the outsized role played by the Philippines in the global advance of “play to earn” crypto gaming models; and the lead that Cambodia has taken in using a blockchain system for internal payments that improve financial inclusion without requiring a formal central bank digital currency.
3) The institutions have arrived
The past year has seen investments in bitcoin and crypto from a who’s who of hedge funds, big-name investors like Ray Dalio and George Soros, and even pension funds. A few more adventurous crypto-ready hedge funds are now finding their way into DeFi.
A more cynical eye might view the arrival of these institutional investors, which has pushed up the price of tokens, as crowding out smaller players and therefore undermining the dream of an open, accessible and inclusive decentralized financial system. But if we believe layer 2 projects like those described in point 1 will make transactions cheap and efficient, then there’s a more positive way to view this trend: that it makes the crypto ecosystem more secure, for two reasons.
First, the more money locked in these systems, the more difficult they are to compromise, because it makes it much more expensive for an attacker to take over the network. Second, the more that Wall Street and its wealthy investors are exposed to crypto, the harder it is for regulators in Washington to shut it down.
4) An NFT creativity burst
Suddenly, non-fungible tokens are everywhere. Collins dictionary has even declared “NFT” the word of the year. Cynics (and snobs) worry that profit-making obsessions for collectible avatars such as the Bored Ape Yacht Club series are giving art a bad name. But the myriad commercial and non-commercial NFT art and entertainment projects represent an explosion of creativity, one that merges money, technology, community and art into a confusing but fascinating mix of forces.
It’s indisputable that the biggest financial winners in this boom are confined to a narrow set of early-adopting collectors and big splash-making artists such as Beeple, with his record-breaking $69.3 million Christie’s sale in March. But there are also signs that previously marginalized digital artists are finding new avenues for both creativity and for directly selling their work to collectors. We highlighted South African artist Lethabo Huma in a “Money Reimagined” podcast in February that doubled up as a special Clubhouse edition and attracted innovative NFT artists such as Micah Johnson.
5) Protocol upgrades: Bitcoin’s Taproot and Ethereum’s London hard fork
Having started out with a nerdy topic, I’ll close with another. This one might seem to contradict the idea that it’s better to develop layer 2 products that sit on top of the base protocol, rather than try to insert new bells and whistles into the base layer. But the truth is that some problems can be dealt with only at the protocol layer. It’s really hard to make those changes in a decentralized system, because you need to find community consensus around them or risk a split in the chain.
So, it was encouraging to see two rather significant upgrades get through for the two biggest blockchains in 2021. One was Bitcoin’s long-awaited Taproot upgrade, which improves privacy, efficiency, programmability and security. And the other was Ethereum’s London hard fork, which (among other things) helps reduce volatility in that blockchain’s “gas price” transaction fees and created the potential to reduce long-term ETH supply in a manner that boosted its value in the market. Both upgrades represent important, material changes that will advance the broader crypto ecosystem.
