Crypto is Eating the World
Cryptocurrencies historically have had a bad rap due to unhealthy speculation around them. The get-rich-quick schemes are abundant, and today’s supernova-hot NFT market is no exception.
But if you pierce through the noise, you will see that the currents are fundamentally shifting. People are beginning to talk more about web3.0 — universally accessible decentralized applications running on blockchain as an alternative to web2.0 — centralized services that are often paywalled or prey on our data.
Crypto is working towards reorganizing our entire way of life.
Crypto Vending Machines
The foundation for this transition was laid in 2015 when Ethereum was launched. It was a natural evolution of Bitcoin: instead of just sending digital money to each other, we could now send money to programs (smart contracts) that can execute arbitrary rules. The blockchain became programmable.
Naval Ravikant compares this to vending machines: when you want a snack, you insert cash or card, and the machine executes some rules to give you the snack in return. There are a few key aspects of these digital vending machines:
No one controls the vending machine.
It is decentralized. Once the machine is installed, it’s there forever. You can’t take it down or change the rules for how it operates.
These rules are transparent and available for everyone to see in the open.
If you don’t like the rules, you can copy them, make adjustments and create your own machine.
You can’t get the same snack twice (just as you can’t double-spend your digital money).
It would take inordinate amounts of money to alter the vending machine records and convince the network that you didn’t get your snack yet.
Smart contracts enable the creation of decentralized applications (dapps) — applications that run on a decentralized computer network.
In short, anyone with a computer and internet connection can create decentralized applications, and, in turn, anyone with an Ethereum wallet and some digital currency (Ether) can interact with these applications. No one needs permission to do so.
Let’s take a look at three key areas where smart contracts and decentralized applications are changing the way we live.
Money
The first area that was ripe for disruption naturally was the incumbent financial system.
The basis of any blockchain technology — the ledger of record — is at the core of how banks operate. Previously, we had no choice but to trust them to keep track of who-owes-what-to-whom. Unlike banks, though, blockchain has a globally distributed (i.e. decentralized), rather than a centralized ledger. Instead of a trusted third party, we can now rely on crypto networks like Bitcoin and Ethereum for record-keeping.
So… we don’t need banks anymore?
Well, the modern financial system is exponentially more complex than just sending money to each other. Even forgetting esoteric financial instruments of Wall Street, Main Street consumers can now take out a loan, exchange currencies or invest in publicly traded companies.
This is where the decentralized applications come in.
Anyone in the world can now take out a loan without a centralized authority that can unilaterally decide if you are credit-worthy. Protocols like Compound, Aave and Maker are Ethereum smart contracts that facilitate permissionless borrowing and lending. All you need to borrow is to connect a digital wallet to their dapps and provide collateral (in crypto assets) that will be used if you fail to repay the loan.
If you want to exchange cryptocurrencies, you typically need to go through a centralized exchange (Coinbase or Gemini). With smart contracts, that is no longer needed: Uniswap or SushiSwap are protocols that allow you to instantly swap a pair of crypto assets.
One of the most beautiful aspects of smart contracts is that they can interact with other smart contracts. Once someone builds a smart contract, it’s there for everyone to use. This enables what is aptly called “money legos”: you can compose complex financial applications from any possible combinations of smart contracts.
Out of these money legos, a new, previously unimaginable financial primitive was recently born: Alchemix is a protocol that allows users to take out loans that automatically pay themselves back.
This emerging parallel financial system is called decentralized finance, or DeFi, and it’s poised to make banks, along with most of the traditional finance, obsolete.
Culture
NFTs, or non-fungible tokens, have taken the world by storm this year. If DeFi and money legos are redefining the financial system, NFTs are a cultural revolution.
As Packy McCormick succinctly put, “they make digital media ownable and collectible”. Another way to view it is a natural extension of Bitcoin’s idea of scarcity: NFTs’ value is by definition in scarcity — they are, after all, non-fungible, or unique.
The biggest application of NFTs so far has been in digital art. NFTs have enabled new ways for creators to monetize their artwork: because NFTs are smart contracts, they can incorporate rules for capturing the value of future sales. Every time an image or a song is resold, an artist can earn a share of the sale price. This provides a sustainable earnings model for artists — something we as a society have tried and failed to create over centuries.
Not a long time ago, the barriers to prestigious galleries and auction houses were insurmountable to small artists. Now, Cryptopunks, Bored Ape Yacht Club and Cool Cats are regularly sold at Sotheby’s and Christie’s. Beeple sold his Everydays: The First 5000 Days NFT for $69 million. Today, anyone can create NFTs using their own smart contracts or on OpenSea — a peer-to-peer NFT marketplace — and garner global attention.
ArtBlocks, a generative art platform built on Ethereum, combined the well-established field of generative art (visuals produced by computer algorithms) with smart contracts. They allow anyone to participate in creating unique artwork: when collectors purchase an NFT, it contains a unique string that controls how the generative algorithm works. You don’t know ahead of time what you will get: in a way, you are an artist together with a computer program.
There already exist applications of NFTs beyond art: you can buy land and clothing in virtual worlds like Decentraland and Cryptovoxels, collect characters and digital items in play-to-earn games like Axie Infinity and even represent intellectual property rights (VitaDAO’s IP NFT).
Work
As the NFTs dominated the news cycle in 2021, an even more profound innovation enabled by Ethereum and web3.0 — DAOs — went a little under the radar.
If cryptocurrencies and DeFi redefined how we think about money, and NFTs — culture, DAOs are disrupting the way we work together.
So what are they?
In her introductory piece on the subject, Linda Xie provides an excellent definition: “A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.”
Hopefully by now when you hear “rules enforced on a blockchain” you automatically think “smart contracts”! And if you have, you’re right: they are powering DAOs built on Ethereum.
You can think of DAOs as the new crypto-native, distributed companies: they are the internet communities that have a shared financial account and a shared mission. DAOs typically issue fungible tokens (which are themselves a kind of smart contract) that are then distributed to DAO’s investors and contributors.
These tokens are at the core of what’s called decentralized governance: holders of the DAO tokens vote on proposals that can change how the organization operates. Voting is implemented as a smart contract on a blockchain. They are also used to compensate individual contributors who work for the DAO.
Community ownership of an organization is a radically new model and comes in stark contrast to significantly more exclusive equity in traditional companies. It has the potential for a much better incentive alignment in an organization: everyone working to maximize stakeholder value, where most of the stakeholders are not just a few external investors, but the contributors themselves.
The beauty of DAOs is that they have such a low barrier to entry: all that is needed is to have passion, requisite skills and time. Anyone from around the globe can join one or multiple DAOs.
Today, there are countless DAOs with rather distinct goals: pooling and allocating capital to fund public goods (MolochDAO, the LAO); governing DeFi protocols (AAVE, Uniswap); collecting rare and high-value NFTs (PleasrDAO, FlamingoDAO); funding longevity research (VitaDAO).
Everything
We are still in the super early days of the crypto-driven restructuring of the world. There are undoubtedly more areas of our lives that are going to be disrupted, the same way as money, culture and work are being transformed today.
Even in those three areas, the sky’s the limit.
The number of active DeFi users is rapidly soaring, and the total value locked across top dapps blew up exponentially from $2 million to $90 billion over the last four years. Most of this growth was achieved by decentralizing just some of the existing financial applications. Imagine how much more value will be created by inventing entirely new financial primitives, like self-repaying loans?
Art, music and collectibles were the first natural choices to become NFTs. Even with just these few categories, OpenSea — the largest NFT marketplace — did $3.4 billion in sales in August of this year. Remember: most of our lives are spent online now. An increasing fraction of the things that we own is going to be digital. With the unprecedented amount of innovation in the NFT space, there will be countless innovative use cases that we cannot envision today.
With DAOs, we have an opportunity to quickly experiment with various governance systems and learn which ones work best. As technology has finally allowed us to coordinate at scale, we will be able to tackle ever bigger challenges. Can we use the flexibility and global decentralized nature of these DAOs to solve monumental problems of our time like climate change?
We have barely scratched the surface of what’s possible. Crypto has only taken a tiny bite of the world, but it won’t be long before it swallows it whole.