Here are 5 upgrades which has been indefinitely beneficial for crypto this year.
There have been many developments in the crypto sector realizing its transformative economic and social potential that did not require the adoption of the somewhat repulsive “have fun while you stay poor” thinking from some speculators. Here are five things I think the crypto community can be grateful for.
- Progress in upgrading Layer 2
- Developing global crypto innovation
- Institution has arrived
- NFT creativity explosion
- Protocol upgrades: Taproot to Bitcoin and Hard Fork to Ethereum in London
Progress in upgrading Layer 2
I picked this nerdy topic first because the question of whether cryptocurrencies could one day become a viable alternative to the wider global economy ultimately hinges heavily on their scalability. This requires the ability to process a large number of transactions quickly without incurring high costs on consumers.
Some, such as Bitcoin Cash, which largely failed to increase the storage capacity of Bitcoin blocks, believe that upgrading will require changes to the core layer blockchain protocol. However, this can undermine network security and lead to greater centralization. The real promise lies in the Layer 2 middleware, which pushes processing capacity onto the stack. This allows transactions and software commands to be executed "off-chain" while the main blockchain continues to act as a validation anchor to avoid double spending.
The best-known Layer 2 product is the Bitcoin Lightning Network, which was first developed in January 2016 by Thaddeus Drya and Joseph Poon in a whitepaper. Only now, in 2021, Lightning is establishing itself as a legal tender as the basis for Bitcoin from El Salvador. The country's Chivo wallet remains contaminated, and President Naib Bukele is not a man of the international community. However, the fact that Lightning allows very poor El Salvadorans to make small payments without incurring high processing fees is a positive sign of this technological advancement.
Another Level 2 advancement in the last year was in decentralized funding, or DeFi. Protocols such as Polygon and Arbitrum use tools such as zero-knowledge aggregate packets and plasmas to increase transaction throughput on Ethereum and other tier-1 smart contract chains while creating more interoperability between chains. These advances are critical if DeFi is to truly challenge traditional financial models for the global economy.
Developing global crypto innovation
While much attention is paid to the influx of institutional investors in crypto assets in the United States and other developed countries (see item 3), there is an equally important trend of adoption in developing countries. Cross-border bitcoin and stablecoin transfers are on the rise in many developing countries, crypto payments have spread rapidly in troubled economies such as Turkey and Argentina, and most interestingly, new unique innovation centers have emerged in developing countries.
We looked at three examples in separate episodes of the Money Reimagined podcast: the expansion of the DeFi project in Nigeria; the major role the Philippines is playing in the global advancement of the “play to win” crypto gaming model; and the leading role Cambodia is taking in using a blockchain system for internal payments that enhances financial inclusion without the need for an official digital currency from a central bank.
Institution has arrived
Last year, bitcoin and cryptocurrencies were invested by hedge funds, big investors like Ray Dalio and George Soros, and even pension funds. Several adventurous hedge funds are now finding their way into DeFi.
More cynical eyes may see the arrival of these institutional investors who have raised the price of tokens as a smaller crowd of players, undermining the dream of an open, accessible and inclusive decentralized financial system. But if we believe that Layer 2 projects as described in point 1 make transactions cheap and efficient, then there is a more positive view of this trend: that it makes the crypto ecosystem more secure for two reasons.
First, the more money there is in this system, the harder it is to compromise, as it becomes much more expensive for attackers to take over the network. Second, the more open Wall Street and its wealthy investors are to cryptocurrency business, the harder it will be for Washington regulators to shut them down.
NFT creativity explosion
Suddenly, irreplaceable tokens were everywhere. The Collins Dictionary even calls "NFT" the word of the year. Cynics (and snobs) fear that profit addiction for collector avatars like the Bored Ape Yacht Club series has earned art a bad name. But NFT's countless commercial and non-commercial arts and entertainment projects are bursts of creativity that bring money, technology, community, and art together in a bewildering but compelling mix of forces.
Undoubtedly, the biggest financial gains in this boom have been limited to a small group of early-adopted collectors and big-name artists like Beeple, with record sales of $69.3 million at Christie's in March. But there are also signs that hitherto marginalized digital artists are finding new ways to both be creative and to sell their work directly to collectors. In February, we picked South African artist Letabo Huma on the Money Reimagined podcast, which acts as a special issue for Clubhouse and attracts innovative NFT artists like Mika Johnson.
Protocol upgrades: Taproot to Bitcoin and Hard Fork to Ethereum in London
As soon as I start on one nerdy topic, I'll end another. This seems to go against the idea that it is better to develop a Layer 2 product based on the main protocol than to try to add new bells and whistles to the base layer. But in reality, some problems can only be solved at the protocol level. It is very difficult to make these changes in a decentralized system because you have to find consensus from the community around them or split the chain.
Therefore, it is very encouraging to see two very significant upgrades for the two biggest blockchains in 2021. One of them is the long-awaited Taproot bitcoin upgrade which improves privacy, efficiency, programmability and security. And the other is the London Ethereum hard fork, which (among other things) helps reduce the volatility of the “gas price” transaction fees of this blockchain and creates the potential to reduce the long-term supply of ETH in a value-adding way. These two upgrades represent important and significant changes that will develop the broader crypto ecosystem.