A Deep Dive Into Blockchain, Crypto, NFTs and CBDCs
I have been following blockchain technology and its applications for about five years now. The news of the $69 million sale of a Non-Funglible Token [NFT] artwork by the artist Beeple [photo below] focused attention on the technology that is causing interesting and possibly profound disruptions in several industries, beginning with financial services. We are only at the very early stages of these disruptions: Think of the internet in the early 1990s. Perhaps due to this, there is a lot of BS and hyperbole floating around this space so I thought I would put together a primer of high-quality readings, podcasts, and videos in which, hopefully, everyone interested-from the novice to the professional-would find something useful.
Please do add anything I may have missed or criticize any of my choices that you disagree with. In the end, I have included a list of people who, in my view, give a clear-eyed view of the sector, beyond the hype and noise.
[Beeple’s collage, Everydays: The First 5000 Days, sold at Christie’s. Image: Beeple]
What is Blockchain [aka Decentralised Ledger Technologies or DLTs]? [via Mona Nomura]
IBM has a useful [and free!] publication entitled “Blockchain for Dummies”, which is now in its third edition.
What are cryptocurrencies [or crypto for short] and how many cryptocurrencies are there? “Cryptocurrency is a form of payment that can be exchanged online for goods and services [that use blockchain technology].” Many companies have issued their own currencies, often called tokens. Bitcoin is the most well-known example.
Venture capital firm a16z has a useful set of videos entitled “Crypto Start-up School”
This is a useful guide to all the crypto acronyms [via Finder]…there are a LOT!
The Coinbase “Beginners guide to the basics” is an excellent series of basic building blocks of crypto from “What is Bitcoin?” to “Crypto Slang”
So what is bitcoin? “It is a digital currency based on the first blockchain technology protocol created by a mysterious figure called Satoshi Nakamoto [more on him below] that dictates that only 21 million bitcoins can ever be mined -- about 12 million have been mined so far -- so there is a limited supply, like with gold and other precious metals, but no real intrinsic value.” [via CNET]
We Need to Know Who Satoshi Nakamoto Is: The identity of Satoshi Nakamoto, the computer programmer who created bitcoin, is one of the most compelling stories in technology. [via The New Yorker]
Bitcoin, and crypto generally, has been controversial for its volatility, the energy consumed for its mining [Bitcoin consumes more electricity than Argentina], and the toxic- largely male- culture around its trading has spawned its own meme-the “bitcoin bro”. Several countries have banned cryptocurrencies outright.
In a series of five articles, FT Alphaville’s Jemima Kelly has a wickedly clever and funny takedown of bitcoin bros and their hype. Her takedown of Dominic Cummings is a work of art.
In 2015, a 27 year-old Canadian Russian computer programming prodigy named Vitalik Buterin launched a blockchain platform called Ethereum that allows developers to build apps from games to payment systems on top of the blockchain platform. This Lunch with FT with Buterin is an interesting read. He is an exciting and unconventional thinker. His website is a regular must-read.
One of the key attributes of Ethereum is its ability to execute smart contracts. IBM defines these as “…programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.”
One big problem with most current blockchain technology is that it is very slow. Bitcoin processes 4.6 transactions per second. Visa does around 1,700 transactions per second on average. This is called the blockchain trilemma-between decentralization, security, and scalability [speed] you can only get two.
[Source: HANNA GRODZICKA, Fingo Blog]
So it this all hype or is this really something big? The Prophets of Cryptocurrency Survey the Boom and Bust: Inside the ongoing argument over whether Bitcoin, Ethereum, and the blockchain are transforming the world.[via the New Yorker]
This debate between Paul Krugman and a16z Crypto partner Katie Haun is worth a look. Krugman is a crypto skeptic.
Cryptocurrencies are all not necessarily bad. One promising area, ripe for disruption is migrant remittances. Remittances dwarf other financial flows like FDI or aid and have a huge impact on global poverty. However, the high cost of sending remittances limits their full potential. The global average cost of sending USD 200 is 6.9% of the remittance. the UN’s SDG 10 C aims to reduce the cost to less than 3% and to eliminate remittance corridors with costs higher than 5% by 2030. This OECD paper looks at how blockchain technology could potentially dramatically lower costs. There are several interesting pilots in Africa that are using blockchain to lower remittance costs. Ironically, climate change may be an area where blockchain technology may have a positive impact.
One of the more interesting developments has been the interest of Central Banks across the world in central bank digital currencies [CBDCs]. According to Investopedia, “The main advantages of CBDCs are that they can simplify the implementation of monetary and fiscal policy and promote financial inclusion in an economy by bringing the unbanked into the financial system. The main disadvantages of CBDCs is that they are a centralized form of currency and can erode the privacy of citizens.” The Bank for International Settlements [BIS] has a good overview paper on CBDCs and their benefits and risks. More than 60 countries are exploring launching their own CBDCs. PWC has created a 2021 CBDC Index which measures the maturity of each country CBDC project. Bahamas, Cambodia and China come out as the top three by this measure. This NBER paper puts CBDCs into historical perspective. The IMF has a good set of five policy papers on different aspects of fintech the most recent of which [The Rise of Digital Money] was published in July 2021. These take stock of a rapidly changing technological landscape and regulatory and legal frameworks that are struggling to keep pace.
Here is where it starts getting weird: What are NFTs-Trevor Noah explains
Then you have CryptoPunks, considered one of the first NFT projects ever launched. “CryptoPunks” comprises some 10,000 pixel portraits with randomly mixed traits and accessories.
Visa acquired a CryptoPunk NFT by Larva Labs for 49.5 ETH, or about $150,000, for the company’s collection on August 19, signaling a major entry into the NFT market by the financial services firm.
There are exciting blockchain applications across several sectors ranging from land registries to food safety to supply management.
[Source: 101 Blockchains]
Blockchain technology applied to financial services [sometimes called decentralized finance or DeFi] seems the most advanced of all sectors piloting the use of the technology. This WEF report shows the state of the DeFi sector.
Podcasts: Bloomberg’s Odd Lots podcast has done several good discussions on crypto
How Solana and Pyth Aim To Take DeFi to the Next Level
Sam Bankman-Fried and Matt Levine on How the Crypto Market Really Works
Vlad Zamfir on the Dangers of Unstoppable Software and What People Get Wrong About Blockchains
This Is the Vision for DeFi Built on Bitcoin
Tom Schmidt Explains What You Need to Know about DeFi
Who to follow-As I mentioned at the beginning, given the nascent stage of development, this is a field full of charlatans and hucksters pretending to be experts. For an unbiased and clear-eyed view, the @FTAlphaville team, and @jemimajoanna, in particular, are good. The current SEC chair @GaryGensler has a thoughtful and nuanced view of the sector. He taught a course at MIT on “Blockchain and Money” His talk on blockchain economics below is worth a listen. The folks at @a16z and @Katie_Haun know their stuff. Amongst other publications, @Coinbase and @Coindesk are good resources to keep tabs on the sector.