Crypto: after winter, spring

Blockchain Chronicle. Three themes could emerge winners from the crisis: regulation, NFTs and web3. Not to mention second level (or L2) speed solutions.

The Bitcoin price has fallen below $20,000. In the crypto world, it’s winter. Two scenarios present themselves. Either winter continues, the temperature drops again and it’s white death, or spring returns, as it always returns after winter.

Every winter is different. This is unique in that it coincides with a bear market for traditional assets. The drop in the price of bitcoin and all cryptocurrencies is linked to the global macroeconomic and financial environment. War in Ukraine, inflation, economic slowdown, energy shortage, rising policy rates and reduced overall liquidity have precipitated both traditional and digital markets.

It’s hard to know when this winter will end. An improvement in the global environment, a softening of the rhetoric of central banks, could turn the situation around. We are not there.

Let’s take advantage of this gloom to project ourselves into the future and imagine what spring might look like.

Three themes could come out ahead of the crisis: regulation, NFTs and web3. Without forgetting in addition the second level speed solutions (Layer 2 scalability solutions in English) which we will abbreviate by L2 for simplicity.

The regulation

Regulatory pressure is palpable at all levels in the world of digital assets. The Bank for International Settlements has just published its recommendations on the treatment of digital assets for banks. By the end of the year, the European Union should implement a new regulation known as MiCA for Market in Crypto Asset. Great Britain started the regulatory work in 2019 with the publication of a guide which is continuously adapted. Finally, the President of the United States signed an executive order in March aimed at ensuring the responsible development of digital assets.

In addition to this substantive work, lawsuits have been launched against Do Kwon, founder of Terra Luna, the ecosystem whose algorithmic sandcoin UST imploded, and against Tornado Cash, a decentralized application whose purpose is to protect the identity of cryptocurrency users.

These actions show that investor and consumer protection as well as traceability such as origin of funds (anti-money laundering) and know-your-customer are topics that will define the blockchain world of tomorrow.

Regulated players, stablecoins whose reserves are audited, and digital asset service providers applying strict rules as to the origin of funds and customers are well positioned. We should thus observe an institutionalization of the industry.

In this context, NFTs (non-fungible tokens) could also play a central role because they combine identity and confidentiality.

NFTs in the context of the web3

Linked to the delicate notion of traceability, NFTs have unique properties, making this technology an ideal candidate for this function. Indeed, NFTs are intended to list unique digital values, such as identity. Also, one of the valuable features that comes with cryptography is being able to simultaneously prove identity without revealing it. In other words, an NFT combines identity and confidentiality.

So it is possible to create a digital identity that lists your data and defines you. Thanks to this identity, you can access regulated services, without disclosing your name and therefore carry out transactions anonymously in a secure environment.

There is a category of NFT called SBT for Soulbound Token and which has the particularity of not being transferable. This particularity is essential for everything that concerns identity. Indeed, a non-transferable identity is a prerequisite for high data quality.

In a broader context, that of web3, the web of tomorrow in which the user owns his data, NFTs could play the role of identifier. For example, instead of your usual coffee vendor’s loyalty card, you could have a “bored coffee been NFT” that represents you and contains data that corresponds to you. If the NFT is associated with super latte type coffees for example, this NFT will allow you to taste the new super latte double cream, skimmed milk. It brings you into the closed club of lovers of a certain type of coffee and gives you access to tastings by the best baristas.

Second Tier Speed ​​Solutions: L2

Finally, another promising theme on which blockchains work is that of the speed of execution of transactions and the cost of these transactions. In the case of bitcoin, you have to wait for a block to be attached to the chain for the transaction to be validated. With bitcoin, a block is attached every ten minutes on average. In addition, the size of the block being fixed, it is sometimes necessary to wait to see its transaction carried out, or to pay more to position it at the top of the list of the next transactions.

Thanks to L2, transactions are carried out quickly and at a lower cost. There are a large number of solutions called rollups that are emerging.

Imagine blockchains capable of completing tens of thousands of transactions in less than a second, 24/7, all year round. This implies that any digital (bitcoin, stablecoin) and digitized (paper-value) value can be transferred at any time and instantly to the four corners of the planet and at a derisory cost.

in conclusion

Innovation and development continues despite the difficult environment. Three themes could emerge a winner from the crisis: regulation, NFTs and web3, and finally second level speed solutions (Layer 2 scalability solutions) which we will abbreviate as L2 for simplicity.

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Crypto: after winter, spring

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