How crypto can become indispensable

Bloomberg columnist Leonid Bershidsky recently opined that if we were to wake one morning to find that crypto had disappeared forever, most of our lives would be practically unchanged. For although 13 years have passed since the first Bitcoin was mined, cryptocurrencies – as distinct from the underlying blockchain technology – still have precious few real-world applications.

By contrast, in 2004–13 years after the release of Tim Berners-Lee's first public web browser – many of us were already heavily reliant on Web 1.0 for our day-to-day information and communications needs. Back then, Google, launched in 1998, was already synonymous with search, and Amazon, founded in 1994, had clearly demonstrated e-commerce's potential.

Today, the biggest cryptocurrency by market capitalisation, Bitcoin, functions largely as a speculative asset with limited use in real-world transactions – despite efforts by the likes of El Salvador to promote it as a medium of exchange. Dubbed “digital gold,” if the Bitcoin protocol suddenly ceased to function, it would perhaps be equivalent to the world’s stock of gold held purely for investment suddenly evaporating. Given that even the most optimistic estimates put the number of global crypto owners at about 200 million and how highly concentrated those holdings are – 0.01% of Bitcoin holders control 27% of the currency in circulation, compared to the top 1% of US households holding a third of all wealth – it wouldn’t even leave a hole in that many pockets.

Moving beyond speculation?

For now, Bitcoin doesn’t serve a practical purpose. Its volatility undermines its use as a medium of exchange, even if businesses were to begin accepting it widely. The president of El Salvador touted cheaper remittances as a major benefit when his country adopted Bitcoin as legal tender last year. But the fact is, crypto transfers, which currently make up less than 1% of global cross-border remittances, simply aren’t a cheaper, faster or easier alternative to sending cash. Even disregarding the inherent volatility, there are considerable off-ramp costs when converting crypto back into local currency. And although Bitcoin can now be spent without being converted in El Salvador, the move has been plagued by a series of technical problems, leading to vocal calls from both citizens and the IMF to drop its use as a currency.

The next biggest crypto, Ethereum, offers more utility than Bitcoin by supporting programmable smart contracts, which enable the creation of a variety of decentralised applications (dApps). Although other protocols like Solana, Cardano, Avalanche and Polkadot also support dApps, the majority exist exclusively on Ethereum. It’s worth noting, however, that for now, most people also seem to hold Ethereum for the sake of speculation. While there are more than 70 million non-zero-balance Ethereum addresses, there are just 2.5 million unique active wallets connected to dApps.

Almost all these dApps involve either gaming (GameFi) or decentralised finance (DeFi). Both segments have grown tremendously over the past two years, but their real-world utility remains tenuous.

As noted in a recent Financial Times article explaining why players are turning their backs on it, crypto gaming is largely driven by a "small, frenzied community of cryptocurrency investors," though it has generated sufficient hype that the industry's biggest game developers have announced plans to incorporate non-fungible tokens (NFTs) into their ecosystems.

To be sure, NFTs could offer utility in games by allowing players to become sole owners of unique in-game assets, such as skins, weapons or land. But growing evidence suggests the players themselves seem to think the games are just fine without NFTs. While play-to-earn crypto games such as Axie Infinity have generated a great deal of publicity, serious questions remain about the sustainability of their business models. And despite the buzz surrounding it, crypto gaming remains decidedly niche, with 1.2 million daily active wallets interacting with blockchain games, compared to the wider global gamer population of 3.2 billion, the majority of whom are more interested in the quality of games and having fun than earning money.

As for DeFi, despite its formidable growth, the more than US$200 billion worth of assets committed to the ecosystem – up from less than US$10 billion in early 2020 – serve largely to facilitate or leverage speculation on various cryptocurrencies, underpinning an “incorporeal casino” as The Economist describes it. While large segments of traditional finance are also devoted to speculation unrelated to tangible economic activity, for now, DeFi's failure to make possible real activity that could not otherwise occur is clearly more glaring.

Delivering real-world solutions

Bloomberg’s Bershidsky argues that regardless of sanguine predictions for growth in adoption, crypto's real breakthrough will only come when the world is unimaginable without it. Although he questions whether that scenario is achievable, some of the more enlightened and self-aware members of the crypto community argue it’s just a matter of shifting their collective focus to empowering everyday people and businesses.

These voices acknowledge that GameFi and DeFi have become playgrounds for the crypto rich and a means for the industry to enrich itself. As disillusion mounts, pressure will build for both crypto gaming and DeFi to deliver positive real-world impact. This was always part of crypto’s vision – one there is good reason to believe could be realised following the much-needed recalibration of priorities and principles set to take place during the anticipated crypto bear market over the coming months.

In gaming, that will require developers to come up with implementations of NFTs that actually make the games more interesting and fun, rather than merely filling the developer’s coffers or fuelling speculation. In DeFi, it could take the form of merging with traditional finance to bring real-world assets, such as shares and real estate, on-chain. Or perhaps it might involve redoubling efforts to develop real economies involving wholly digital media, such as images, video, music and text, on top of blockchain protocols, creating decentralised alternatives to the dominant platforms controlled by tech giants.

Although blockchain-based media platforms already exist, some of which predate the 2018 crypto winter, their growth thus far has been limited in light of their lack of critical mass and the distraction provided by speculative activity over the past two years. With investors becoming significantly less exuberant and more focused on fundamentals, there is a good chance that 2022 will go down as the year that crypto finally creates widespread real-world utility on the way to gaining mainstream adoption. It would then unequivocally be too big to vanish.