February 23, 2022
In 2021 the biggest buzzword of the financial world was obviously cryptocurrencies. However, this market develops every single day and as we’re diving into 2022 trends, new perspectives and opportunities emerge. So many that we couldn’t decide on which one to write about, hence we brought to you all of the most important ones. In this article we will introduce you to the world of DeFi, NFTs, Metaverse, Web 3.0, DAOs and CBDCs. For most people these are just random letters put together but in fact they will have a huge impact on the financial sector in the upcoming years as they have a great chance to replace the traditional financial system.
First, let’s start with DeFi, also known as Decentralised Finance. The idea of DeFi roots to the fundamental concept of blockchain technology and many cryptocurrencies, which is decentralisation. It is meant to cut out the financial intermediaries of transactions such as banks or card issuers, enabling users to do transactions with each other directly without any central system. DeFi achieves this goal by leveraging self-executing software protocols, which are not binded by any central authority. Therefore it gives the control of money back to the hands of users by letting them trade, borrow and lend money from anywhere in the world where they have Internet access. DeFi applies blockchain technology, therefore peer-to-peer (P2P) transactions are key premises of it. For instance, the users of decentralised applications (dApps) can lend cryptocurrencies to other users while earning interest, just like banks do in the traditional financial system. The next figure illustrates the difference between the transactions of centralised and decentralised financial systems.
In case of Centralised Finance (CeFi), the sender’s and the receiver’s financial institution take full custody of the transferred money. On the other hand however, Decentralised Finance transactions are made through the blockchain without any third party taking custody of the funds. DeFi interest rates are also more appealing for users than the ones of traditional banks as well as the barriers of entry are much lower.
The world of DeFi certainly has numerous advantages and opportunities, although we must mention the downsides as well, as there exist many threats. As Decentralised Finance is a newly developed financial system, it is yet a quite unregulated one. As there is no central system to take care of people’s funds, users must act extremely cautious when they start using these platforms. There exist hundreds of scams with the only purpose to deceive retail investors, making them invest their money in a fake project and then steal all of their crypto assets. Another big disadvantage is that accessing DeFi platforms is quite a complex process even for those who are somewhat familiar with blockchain technology and cryptocurrencies. In order to do that one has to create and set up a so-called “hot wallet” (e.g. Metamask, Trust Wallet, etc.) and connect it to a DeFi platform (e.g. UniSwap or Pancake Swap). After that the user has to send some of the platform’s cryptocurrency to that hot wallet from his/her existing account (Binance, Coinbase, etc.). This step is necessary because users have to pay the fees in the native token of the blockchain on which the given DeFi platform is operating and they have to use it in exchange for the coin they want to buy. For instance, in the case of UniSwap it is Ether as it is operating on the Ethereum blockchain, while Pancake Swap works with BNB as it is a Binance Smart Chain DeFi platform. However these platforms have their own coins as well (e.g. UNI, CAKE). After that the user can buy almost any cryptocurrency, even those which are not listed on bigger exchanges, like Binance or Coinbase. At this point users must take extra care. When they copy the address of a cryptocurrency’s contract, they must double check it every time, since scammers usually use fake addresses in order to steal the money of investors. Some of the best websites for checking the credibility of addresses are BSCscan1 or Etherscan2.
2021’s greatest hit in the crypto market was obviously NFTs. Millions of dollars flowed into this market within just a few months. For an average person, an NFT means nothing more than just a JPEG or a GIF, which they can easily screenshot and they don’t understand why anyone would pay for these thousands or even millions of dollars. To understand why people purchase such things at this ridiculously high price, first we have to understand what NFTs are and what utility or use cases they have in real life.
NFT stands for Non-Fungible Token, which basically means the ownership of a unique digital asset, which represents a certificate of authenticity that sits on a blockchain. This can be any kind of digital asset, such as a picture, a video, a song, a skin from a video game or even a single tweet. The following image categorises different assets according to whether they are digital or physical and fungible or non-fungible.
As you can see there are 4 distinct categories in which we can group assets: physical and fungible, digital and fungible, physical and non-fungible, digital and non-fungible. The first group represents traditional currencies, such as USD or EUR, which have physical form and are interchangeable (there is no difference in value between two pieces of 10 dollar bills). But also gold, silver and other precious metals can fit into this category. The digital fungible group is the category of cryptocurrencies for instance. Cryptocurrencies do not have any physical form as they exist only in the digital world, although they are interchangeable just like any other traditional currency (there is no difference in value between two Bitcoins). The physical non-fungible category stands for unique physical products which are one of a kind, such as the original painting of the Mona Lisa. There exist hundreds of copies and replicas all around the world, however only one real Mona Lisa exists, with an invaluable price. The same applies for digital non-fungible assets, a.k.a. NFTs. These unique digital products are recorded on the blockchain, hence they can’t be copied because the blockchain tracks the identity of the true owner of that digital asset and it makes the token verifiable and visible to everybody.
That sounds great but why would anyone pay so much money for it? What is the utility behind NFTs? Similarly to cryptocurrencies, NFTs have been constantly evolving and developing over the past few years. In the first wave of the hype, NFTs started as digital art and collectibles, however nowadays NFTs have interactive utility, meaning that they have real functions and the UX built around them gets increasingly more elaborated and varied. As the following figure shows, utility NFTs can be categorised into 3 groups: Access NFTs, Gamified NFTs and Engagement NFTs.
These categories and subcategories certainly differ from each other as they perform different functions. For instance, with the help of Access NFTs users can get access to exclusive experiences or events and premium content (e.g. the Bored Ape Yacht Club NFT collection, which is one of the most expensive ones nowadays). As of its subcategory, Community NFTs represent the ownership of exclusive NFTs with which users can be part of, for example, a specific fan community. Gamified NFTs have 3 different subcategories: Fantasy Sports, Gambling and In-game NFTs. In the case of In-game NFTs, if users are actively playing a game they can earn valuable NFTs, which they can utilise during the game. With the help of Fantasy Sports NFTs, people can buy player card NFTs of different athletes and they can create a different lineup each week, while earning points based on players’ real-life performances. As for Engagement NFTs, they are used to engage with other users within a community, while Social NFTs can be used socially like profile pictures, emojis or GIFs.
The Metaverse is an online, virtual world that combines many aspects of people’s digital and real lives, including work, social interaction, and recreation. In 2021, several tech giants, such as Meta (formerly Facebook), Microsoft, and Epic Games, began to develop and explore this new space. Blockchain technology plays a key role in bringing meta-versions to life, as blockchain provides a framework for digital ownership, identity, and cryptography too.
Metaverse projects are digital worlds that users can usually explore with their 3D avatars. SecondLive, for example, provides venues for concerts, conferences and exhibitions. Developers create large-scale maps divided into small parcels that are sold in the marketplace. To represent the unique ownership of an area, users purchase NFTs associated with a particular parcel. These plots can be purchased directly from the project or by selling them on the secondary market, like Opensea. What users can do with their NFT plots always depends on the specific project.
Digital landowners have numerous options for monetising their property. For instance, if someone’s site is in a popular area, which attracts a lot of visitors, they can use their virtual space for advertising purposes. In addition, NFT plots can be used in NFT video games as well. For example, in Axie Infinity, the land can provide extra raw materials and tokens for users. The lands that can be explored with a 3D avatar can also be used as a virtual office space or for the provision of digital services and employment. Management consulting giant PwC also purchased plots in Decentraland in December 2021 as part of their web 3.0 consulting services. Institutional investors have also begun to infiltrate NFT land projects. The Metaversum Group, for example, made headlines when it bought a large amount of digital real estate.
In order to understand what Web 3.0 is, first we should examine Web 1.0 and Web 2.0 and how they have evolved over the years. The Internet went through drastic changes since its initial inception. Web 1.0 is considered the original Internet, as websites in the 90s and the early 00s could only display information and users could not change the data or interact with them. Then, with the appearance of Facebook and other social platforms Web 2.0 became dominant. The Internet wasn’t static anymore, as users were able to interact with websites through databases, forms and social media. And finally, with the help of blockchain technology and decentralisation Web 3.0 started to emerge in the 2020s. The advantages of Web 3.0 against its predecessors are the following:
Web 3.0 as a technology paradigm aiming to provide bridges for the creation, tokenization, and movement of values and assets. Web 3.0 aims to address the ownership of content and the portability of digital assets through their tokenization. It allows its creators to monetise their efforts in their work. These efforts may include (but are not limited to) mining and content creation, such as art, music, and other forms of NFTs that represent a share in an ecosystem, similar to gaming tokens.
In a future where dynamic, borderless, non-hierarchical organisations can take on much of the value creation, the delivery of services is more feasible as if they were interconnected value networks and interconnections between ecosystems. These decentralised exchanges (DEXs) or organisations not only provide an opportunity to exchange different assets, but also facilitate the global movement of these assets, thereby creating truly global economies that attract stakeholders, investors and talent.
Decentralised Autonomous Organisations (DAOs) started out as a simple concept that automates business functions and processes by leveraging the fundamental cornerstones of smart contracts and blockchain technology. The basic idea was to flatten the complex business processes deepened by different organisations and facilitate the movement of assets in digital interactions. These interactions do not require intermediaries, as it promises faster, cheaper and more transparent transaction processing.
In a broader sense, a DAO is an organisation with membership, rules, and responsibilities recorded in an unchangeable general ledger, which is supported by blockchain technology. Its statutes and development are public and inalterable. Usually, joining a DAO requires resources and some kind of community membership in the form of tokens or NFTs, therefore members will gain privileges such as voting. Tokens are denominated in monetary assets (fungible or non-fungible tokens), either cryptographic or fiat assets. Acquiring tokens in most cases demands either participation that requires time and talent, or purchases using fiat- or cryptocurrency. The following figure illustrates the structural differences between a traditional top-down organisation and decentralised autonomous organization.
To function properly, a DAO must have a set of rules and instructions encoded in a smart contract making it to operate accordingly. Driven by decentralised and transparent token-economy models, innovation is designed to provide a great end-user and employee experience while ensuring that the organisation delivers cost-effectiveness and competitive advantages from the participants’ superior experiences. This is exactly what DeFi, NFTs, and DAOs involved in various other metaverse projects provide, as a handful of developers or founders formulate goals and pursue decentralised development through platform projects or crowdsource development with token incentives and participants. The participants here are not only consumers, but they can earn money with their meaningful participation.
CBDC is the abbreviation of Central Bank Digital Currency, which refers to the digital version of a nation’s fiat currency. CBDCs are regulated by the central bank of a given country in which the currency is utilised.
The rapid increase in the acceptance of cryptocurrencies makes the emergence of digital national currencies globally unavoidable. The US Federal Reserve recently published a nearly 40-page study entitled “Money and Payments: The US Dollar in the Age of Digital Transformation”3.The study points out that stablecoins can still play the role of CBDC, but their current deregulation and operation could disrupt the current payment system on the one hand and allow for the concentration of economic power on the other. According to the FED, if the U.S. CBDC is going to be established, it will have to meet several criteria. Firstly, consumers' rights to privacy must be respected. Secondly, the principle of mediation must be complied with. Thirdly, the criterion of transferability must be met and, finally, it must be identifiable in order to prevent money laundering and other dubious cases.
As you could see, the crypto world has countless opportunities and possibilities and not only for the super-wealthy, but for the average person as well. Anybody who has internet access can enjoy the perks of DeFi, flip NFTs for profit or even create their own avatar and go for a concert in the Metaverse. Nevertheless - as it was mentioned before several times - one must take extra precautions when they enter this new fully-digital universe as there are still a lot of ways to lose money. However, if someone invests its time and energy to thoroughly research this market, it will definitely pay off in the long run.
We hope that you found this blog post useful! Do not hesitate to follow us, so you won’t miss interesting stories in the future either. This article was provided by Bence Siklós, Business Analyst at ff.next. Melinda Havas, Head of Business Development revised the content.