You have a lot to be thankful for this year if you were an early investor in Bitcoin, Ethereum, Solana, or CryptoPunk NFTs.
However, when I was putting together this special Thanksgiving edition of “Money Reimagined,” the concept of celebrating rising crypto prices didn’t appeal to me.
The good news is that other advances in the crypto sector harness its revolutionary economic and social potential without requiring a willingness to embrace a few speculators’ nasty “have fun staying poor” mindset. Here are five things I think the crypto community may be thankful for, based on CoinDesk’s coverage over the last 12 months.
1. The progression of “Layer 2” scaling
I started with this esoteric topic because, in the end, whether crypto can one day be a viable option for the global economy is mainly dependent on its ability to scale.
It requires the ability to settle a large number of transactions quickly and without imposing high fees on customers.
Some people, such as those at Bitcoin Cash, who led a mostly unsuccessful effort to raise the data storage capacity of Bitcoin blocks, feel that scaling requires changes to the blockchain protocol’s foundation layer. However, this may jeopardize network security and lead to more centralization. “Layer 2” middleware, which pushes processing power “up the stack,” holds the most potential. Transactions and software commands are carried out “off-chain,” while the main blockchain serves as a validation anchor to avoid double-spending.
The Lightning Network, which was first fleshed out by Thaddeus Dryja and Joseph Poon in a January 2016 white paper, is the most well-known layer 2 product. Lightning has only recently come into its own as the foundation for El Salvador’s adoption of bitcoin as legal cash, in 2021. President Nayib Bukele isn’t exactly the international community’s sweetheart, and the country’s Chivo wallet is still plagued by flaws. Nonetheless, the fact that Lightning allows many poor Salvadorans to make tiny payments without facing exorbitant processing fees is a measure of the technology’s progress.
Decentralized finance, or DeFi, has seen other layer 2 advancements in the past year. Tools like zero-knowledge rollups and Plasma are being used by protocols like Polygon and Arbitrum to boost transaction throughput on Ethereum and another smart contract layer 1 chain, while also allowing for better cross-chain interoperability.
These advancements are critical if DeFi is to seriously disrupt the global economy’s old banking model.
2. Encouraging global crypto innovation
While the rush of institutional investors into crypto assets has received a lot of attention in the United States and other affluent countries (see point 3), there is an equally major trend of adoption in the developing world. Cross-border remittances based on bitcoin and stablecoins are on the rise in many developing nations, crypto payments have exploded inside problematic economies like Turkey and Argentina, and, most intriguingly, new hotspots of distinctive innovation have sprouted up in the developing world.
In separate episodes of the “Money Reimagined” podcast, we discussed the expansion of DeFi projects in Nigeria, the Philippines’ outsized role in the global advance of “play to earn” crypto gaming models, and Cambodia’s leadership in using a blockchain system for internal payments to improve financial inclusion without requiring a formal central bank digital currency.
3. The establishments have arrived
Hedge funds, big-name investors like Ray Dalio and George Soros, and even pension funds have all invested in bitcoin and crypto in the last year. A handful of more daring crypto-ready hedge funds are now making their way into DeFi.
A skeptical eye would see the influx of institutional investors, which has pushed up the price of tokens, as pushing out smaller players and undercutting the dream of a decentralized financial system that is open, accessible, and inclusive. However, if we assume that layer 2 projects like those mentioned in point 1 would make transactions more affordable and efficient, there is a more positive way to look at this trend: it will make the crypto ecosystem more secure for two reasons.
For starters, the more money locked up in these systems, the more difficult they are to penetrate because it costs an attacker a lot of money to take over the network. Second, the more Wall Street and its wealthy investors are exposed to cryptocurrency, the more difficult it will be for Washington regulators to shut it down.
4) A flash of NFT creativity
Non-fungible tokens have suddenly become commonplace. “NFT” has even been named the word of the year by Collins dictionary. Cynics (and snobs) are concerned that profit-driven obsessions with collector avatars like the Bored Ape Yacht Club series are tarnishing art. However, the numerous commercial and non-commercial NFT art and entertainment enterprises constitute a creative explosion, combining money, technology, community, and art into a perplexing but fascinating mix of forces.
It’s undeniable that the boom’s biggest financial beneficiaries are a small group of early-adopting collectors and big-name artists like Beeple, who established a new record with his $69.3 million Christie’s sale in March. However, some hints previously marginalized digital artists are discovering new ways to express themselves and sell their work directly to collectors. In February, we featured Lethabo Huma, a South African artist, in a “Money Reimagined” podcast that doubled as a special Clubhouse episode and attracted inventive NFT artists like Micah Johnson.
5) Protocol upgrades: Taproot for Bitcoin and the London hard fork for Ethereum
I’ll end with another nerdy topic because I started with one. This one appears to contradict the premise that developing layer 2 products that sit on top of the base protocol is preferable to trying to add new bells and whistles to the base layer.
However, the truth is that some issues can only be solved at the protocol layer. In a decentralized system, those modifications are extremely difficult to implement because they require community approval or the chain will split.
As a result, it was exciting to see two major upgrades for the two largest blockchains pass in 2021. The long-awaited Taproot upgrade for Bitcoin, which increases privacy, efficiency, programmability, and security, was one of them. The other was Ethereum’s London hard fork, which helped reduce volatility in the blockchain’s “gas price” transaction fees (among other things) and provided the possibility to reduce long-term ETH supply in a way that raised its market value. Both updates are significant, meaningful enhancements that will help to advance the crypto ecosystem as a whole.