In 2021, so much of the attention was focused on collectible NFTs, gaming and the metaverse. Their popularity took many by surprise and benefitted tokens that are linked to these powerful trends. In 2020, decentralised finance was the star of the show before NFTs stole the limelight. The DeFi ecosystem continues to expand and new opportunities open up, despite token performance not being on par with some of the newer use cases.
by Martha Reyes, Head of Research, BEQUANT
There are several compelling protocols that should not be ignored, such as those that bridge the real-world economy to the blockchain. This can include financing for SMEs or facilitating global trade transactions. While perhaps less attention-grabbing than other token-backed protocols, the total addressable market is vast.
Remittances are one of the most widely known applications
One better-known use case that has risen to prominence is the trillion-dollar money transfer industry. Tokens’ ability to on-ramp any global fiat currency and off-ramp it into another at lower rates than the traditional transfer methods, securely and almost instantly, makes them a real disruptor in an archaic corner of finance. Strike, the company using the Lightning Network on Bitcoin rails, is one of the most successful examples, with entities as disparate as Twitter and El Salvador relying on the technology for international payments and remittances.
Global trade is an even larger market ripe for improvement
The technology can extend to other areas of the old economy. Global trade, a $5.6 trillion market and growing, is one such segment and it’s larger than remittances. Buying goods and services across borders is complex, with lengthy processing times and high transaction fees. It also requires financing, creating barriers for small and mid-size companies.
Businesses can utilize smart contracts on the blockchain, storing agreements and documents and guaranteeing traceability. Smart contracts allow the two parties to specify the terms of an agreement and ensure that those are transparent by virtue of being on the blockchain.
Many other possibilities being explored
In the NFT space, applications are not limited to digital objects but also to physical ones, hence the birth of NFT mortgages backed by real assets or tokenized ownership of real estate and expensive artworks.
Blockchain’s potential is by no means limited to these examples. Others include secure sharing of data such as medical data, music royalty tracking, real-time IoT operating systems, personal identity security, anti-money laundering tracking systems, supply chain and logistics monitoring, voting mechanism, advertising insights, original content creation, and real estate processing platforms.
What makes for a successful project?
When evaluating a project, retail and institutional investors sometimes focus on different properties of a project. Key metrics to keep in mind are the strength of the underlying technology, use cases, total addressable market and adoption trends.
One example is the XDC Network, a hybrid, delegated proof of stake consensus network, with developer-friendly architecture. As a third-generation blockchain, the technology is more advanced than some of the more established blockchains. Bitcoin can handle between 3 and 6 transactions per second, Ethereum’s blockchain can handle 12 to 16, while XinFin’s can handle more than 2000.
A use case is reducing friction and expanding access to trade financing for SMEs and creating yield opportunities for investors. Agreements and documents are stored in interoperable smart contracts, and transactions are settled on the blockchain more efficiently than in the legacy systems. There is also higher security as there is clear evidence and traceability of ownership. The smart contract transactions feature digital tokens, which represent the value of off-chain, the bank originated assets and can generate yield for investors.
This means that when individual purchases and makes an investment into the XDC token, they are investing in the underlying technology which can be used to develop payment solutions and other blockchain apps.
Fees have also greatly reduced over the span of three generations, from $15 to $0.00001 per transaction, with confirmation speeds cut from 1-60 minutes to around 2 seconds. With an increased capacity and lower fees, the barriers to access the technology fall away. Energy consumption has also been reduced from 71.12TWh on Bitcoin to 0.0000074TWh on the XDC Network.
Many alternative Layer 1’s such as XinFin’s XDC Network, have been developed or are in development to challenge those popular in the NFT and DeFi space that have struggled with scalability issues. Developers are working to increase the number of transactions processed and reduce gas fees, as users have been stung by high costs on the Ethereum blockchain.
Now, blockchains are being developed to be cheaper, faster and more energy-efficient, albeit with compromises on decentralization, to address growing demand. Thus, they are generating interest from individual and professional investors alike. Scalability will unlock important avenues of growth in the digital economy as well as the physical one. It will be an important theme in 2022.