It’s not surprising to see that positive developments often don’t get the same coverage in the mainstream media as failures do
Ifyou skim through the headlines in the fintech space, you are bound to find that the world of cryptocurrency has been surrounded by a lot of fear, uncertainty, and doubt (FUD) lately. Now, I am not implying that all of them are false or anything, but the good news in all this mayhem easily gets drowned and people looking to learn about this nascent technology and its implications on our lives in the future are left with nothing but negativity.
There’s no denying that 2022 was a tough year for cryptocurrencies with all these high-profile failures like the Stablecoin LUNA collapse, followed by the FTX bankruptcy. Both these events stole the headlines for a good part of last year — needless to say, their contagion effect highlighted itself in the extremely bearish price trends of digital assets. 2023 started with a ray of hope as prices rebounded, but the regulators, especially in the U.S. (SEC) started suing crypto companies left and right — big names like Binance and Coinbase being two of them.
My bone to pick with them is not they shouldn’t do it, bad business practices should absolutely be punished, but you need to understand the schematics of the space first — don’t make it a wild goose chase. Anyways, it is probably going to be a long-fought battle and I still believe a proper regulatory framework that provides clarity, is eventually going to help in the adoption of this novel tech.
It is also important to remember that emerging technologies, like blockchain and cryptocurrencies, evolve in cycles. The early stages of any new technology are often marked by a lot of hype, followed by a period of consolidation and development. This is where we are in the blockchain movement today, and while there may be some bumps along the way, there are also many positive developments that are worth celebrating.
A recently published State of the Crypto report published by a16zcrypto aims to address the imbalance between the noise of fleeting price movements — and the data that tracks the signals that matter, including the durable progress of web3 technology. I am going to highlight four of the key takeaways from the report which I believe matter most.
This one is really a no-brainer for someone who knows the functionality of cryptocurrencies. Apart from the blockchain trilemma of scalability, security, and decentralization that is often talked about as being the key to widespread adoption, the energy consumption of these blockchain networks often comes under scrutiny, especially when it comes to the Proof of Work (PoW) consensus mechanism— the underlying protocol governing the Bitcoin and Ethereum network (previously).
Last fall, Ethereum, the second biggest crypto network, underwent a major upgrade — transitioning from the conventional and power-hungry “proof-of-work” to a more advanced “Proof-of-Stake” (PoS) consensus mechanism. This shift, referred to as “The Merge,” brought about an architectural transformation that significantly reduced Ethereum’s energy consumption, marking a pivotal moment in its development.
This major network upgrade enabled the smart contract platform to transition to an extremely energy-efficient network. As you can see in the chart above (Figure 1). The novel energy-saving mechanism enabled Ethereum to reduce its power consumption by more than 99.9%. Another interesting statistic shows how the PoS-enabled ETH network compares to some of the other platforms in operation — Web 2 giant YouTube consumes an estimated 244 Terawatt hours annually, or 94,000x as much energy per year as Ethereum.
Before the energy consumption issue came to light, one of the biggest criticisms that crypto networks faced was scalability. While Layer 1 solutions like the ETH network still struggle with the problem, other proposed solutions have started to filter through in the blockchain ecosystem. These blockchain scaling solutions are facilitating the inclusion of a larger user base, more complex applications & increased transactions.
Currently, there are several promising paths in this dynamic design space, and web3 developers are working to address foundational challenges. One of the paths is “Layer 2” blockchains (Figure 2), which are specifically designed to enhance underlying Layer 1 blockchains such as Ethereum. They achieve this by providing more block space, increasing transaction throughput, and reducing fees.
In the past year, the use of L2s on Ethereum has surged, with the fees paid via L2s skyrocketing from 1.5% to 7% of the total fees paid on Ethereum. This upward trend suggests that more applications are opting to build on L2s, benefiting end-users. This trend is expected to persist and further benefit users.
Despite the recent challenges, the potential of NFTs and decentralized finance to revolutionize the internet’s economics remains compelling. Over the past two years, NFT (Non-Fungible Token) marketplaces have paid out almost $2 billion in royalties to creators through secondary sales. By contrast, consider web2, where Meta, has set aside $1 billion for creators up to 2022.
2023 has witnessed an increase in both NFT buyers and DEX volume. Uniswap — a decentralized exchange, has recorded higher trading volume than Coinbase, the largest centralized exchange in the U.S., for two consecutive months. Web3’s users and creators enjoy lower “take rates” — the portion of revenue that platform owners take from users (Figure 3).
In the crypto world, users genuinely own their digital assets and can freely transfer them to any platform of their choosing. Facilitating platform switching fosters competition and limits the ability of platforms to extract excessive fees or suddenly alter the rules. Lower platform pricing power often translates to lower take rates.
And finally, despite all the FUD around us, most of the legacy corporations are exploring the potential of Web3 — beginning with the NFTs (Figure 4). The chart above highlights how some of the big names in the corporate world are showing interest. Nothing fancy, but nobody wants to be left behind. All of us have seen how the AI frenzy was let loose with the launch of ChatGPT.
You can also check out the State of Crypto Index — an interactive instrument that monitors the vitality of the crypto industry from a technological point of view, rather than a financial one. With the aim to provide a more precise and sophisticated assessment of the state of crypto, the index calculates the monthly weighted average growth of 14 industry metrics, including the quantity of verified smart contracts, transacting wallets, and other essential indicators.
Originally Published on Medium