Crypto prices have not only been on the ground since the TerraUSD crash. The crash may have acted as a catalyst, but the prices of cryptocurrencies have been declining for some time. For example, Bitcoin halved from its peak on September 11, 2021 from about $ 66,000 to now $ 21,000. Other crypto values were no different. The reasons are complex and a particularly important point may be that liquidity has been massively withdrawn from the tech market in recent months. Even if many commentators are already certifying the end of cryptos, this could be too hasty. The added values, especially in the DeFi and NFT areas, are unmanageable.
TerraUSD – What happened?
Since the beginning of May, crypto values have experienced a slide, mainly the stablecoin TerraUSD. Unlike deposit-backed stablecoins, TerraUSD is an algorithmic stablecoin. TerraUSD is coupled with another cryptocurrency Terra (LUNA) and there is always the possibility to destroy one for the other currency. However, stability should be achieved through arbitrage: if a TerraUSD falls below 1 US dollar, the supply of TerraUSD must be reduced in order to bring the price to 1 US dollar. TerraUSD will be “born” and new LUNA tokens will be created.
Vice versa, of course, this should also work. At the beginning of May, however, confidence in the Terra ecosystem was dramatically lost and investors massively withdrew capital from TerraUSD. The Terra Foundation tried to support the LUNA course with the massive sale of Bitcoin reserves, but unsuccessfully. TerraUSD is currently at 1.2 cents, LUNA from almost 120 US dollars now at a meager 2.60 US dollars. Stablecoins such as USD Circlecoin, which are deposited with bank deposits, on the other hand, are comparatively stable. This is precisely why it is so absurd that the ECB makes a stablecoin backed by the euro impossible due to the low interest rate policy.
Decentralized Finance (DeFi) is an alternative to the centralized banking system. Financial services should be mediated directly via protocols without an intermediary, without discrimination. Decentralized coordination takes place via smart contracts or a combination of their so-called decentralized apps (dApps) on a blockchain. Meanwhile, there are decentralized marketplaces, credit markets, derivatives trading and even decentralized insurance. If 90 percent of all DeFi protocols were running on the Ethereum blockchain so far, because it has the largest developer community, this could change after the taproot update Bitcoins. As a layer 2 solution, Lightning now allows fast and cost-effective transactions. Sovryn or Stacks want to integrate decentralized apps into Bitcoin. Raretoshi even tries to bring non-fungible tokens (NFT) on a Bitcoin basis.
NFTs – all just hype?
Non-fungible tokens (NFTs) could play an important role in the art market in the future. If fungible (exchangeable) tokens such as Bitcoin can be exchanged one-to-one, this is not possible with non-fungible tokens. They can thus be a unique digital representation of a work of art on a blockchain. Since many NFTs today are based on so-called ERC-721 tokens and thus the Ethereum blockchain, NFTs are often paid for and traded against each other in the cryptocurrency Ether. Which blockchain solution will ultimately prevail in the DeFi or NFT area will become clear. By the way, you don’t just have to think about art at NFTs: the land register could also have a digital representation, with the entries being NFTs. In Georgia, there is already a prototype of a land register on blockchain and the traffic light coalition also wants to have such a tested.
Blockchain and Cryptos – successful in the long term
To be sure, the heavy losses that many cryptocurrencies have suffered over the past nine months are hard for investors. Nevertheless, cryptos have been by far the most lucrative investment in recent years: five years ago, Bitcoin was still around 2,800 US dollars and is currently trading at around 21,000 US dollars. However, it is less about market prices, which are often driven by speculation, but about the fundamental value of decentralized currencies and networks.
We are currently experiencing inflation rates of 8 percent and our fiat money is being devalued drastically quickly. In these times, it is important that people can perceive an exit option and parallel money systems exist. It is important that the world’s central banks are increasingly exposed to currency competition, including from the private side. And it is important that cryptocurrencies enable cross-border payments at low transaction costs and thus free migrants who send remittances home from the burden of fees.
Trust through transparency and privacy through zero-knowledge proofs
Not only that: entire supply chains can also be mapped on decentralized networks and production processes can be tracked transparently. The government and administration can also use the blockchain for themselves by enabling the submission of documents via the blockchain. Firstly, the data stored on several nodes would be tamper-proof. Secondly, bureaucracy costs could be drastically reduced and processes automated.
Thirdly, privacy could be better preserved than it is today. Today, the entire identity usually has to be revealed if only the proof of certain attributes is necessary. However, so-called zero-knowledge proofs, which are increasingly being implemented in the blockchain area, make it possible to reveal the presence of attributes without revealing the identity itself. Thus, the age of majority could be proved without revealing the age. A minimum income could be proven for a mortgage without making his financial circumstances completely transparent.
These and other examples show: Dead people live longer, because blockchain is more than ”just” cryptocurrencies.
About the author
Frank Schäffler is an FDP member of the Bundestag and managing Director of the Berlin think tank Prometheus – The Freedom Institute. Mr. Schäffler is a member of the Budget Committee, the Digital Affairs Committee and spokesman for FinTech and blockchain innovations of the FDP parliamentary group.