Those declared dead live longer – A comment from guests

Crypto courses have been at the bottom not only since the collapse of TerraUSD. The crash may have acted as a catalyst, but cryptocurrency prices have been plummeting for some time. For example, Bitcoin has halved since its peak on September 11, 2021 of around $ 66,000 to $ 21,000 today. It was no different for other crypto assets. The reasons are complex and a particularly important point could be that huge amounts of liquidity have been withdrawn from the tech market in recent months. While many commentators are already certifying the end of cryptocurrencies, it may be too hasty. The added value, especially in the DeFi and NFT fields, is unmanageable.

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TerraUSD – What happened?

Since the beginning of May, cryptocurrencies have experienced a decline, mainly the stablecoin TerraUSD. Unlike deposit-backed stablecoins, TerraUSD is an algorithmic stablecoin. TerraUSD is paired with another Terra cryptocurrency (LUNA) and there is always the option to cancel one for the other currency. However, stability should be achieved through arbitrage: if a TerraUSD falls below US $ 1, TerraUSD’s supply must be reduced to bring the price down to US $ 1. TerraUSD will be “burned” and new LUNA tokens will be created.

Of course, this should also work the other way around. In early May, however, confidence in the Terra ecosystem was dramatically lost and investors massively withdrew capital from TerraUSD. The Terra Foundation tried to support the LUNA course with the massive sale of Bitcoin reserves, but without success. TerraUSD is currently 1.2 cents, nearly $ 120 LUNA is now a paltry $ 2.60. Stablecoins like USD Circlecoin, which are backed by bank deposits, are relatively stable. This is exactly why it is so abstruse that the ECB’s low interest rate policy makes a euro-backed stablecoin impossible.

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Decentralized Finance

Decentralized Finance (DeFi) represents an alternative to the centralized banking system: financial services must be mediated directly through protocols, without intermediaries and without discrimination. Decentralized coordination takes place via smart contracts or a combination thereof, so-called decentralized apps (dApps), on the blockchain. There are now decentralized markets, credit markets, derivatives trading, and even decentralized insurance. While 90 percent of all DeFi protocols have been run on the Ethereum blockchain so far because it has the largest developer community, this may change after the Bitcoins Taproot update. As a Tier 2 solution, Lightning now allows for quick and cheap transactions. Sovryn or Stacks want to integrate decentralized apps into Bitcoin. Raretoshi is even looking to bring Bitcoin-based non-fungible tokens (NFTs).

NFT: is it all just hype?

Non-fungible tokens (NFTs) could play an important role in the art market in the future. While fungible (exchangeable) tokens such as Bitcoin can be exchanged one-to-one, this is not possible with non-fungible tokens. They can therefore be a unique digital representation of a work of art on a blockchain. Since many NFTs today are based on the so-called ERC-721 tokens and thus the Ethereum blockchain, NFTs are often paid in the cryptocurrency ether and traded against each other. It remains to be seen which blockchain solution will ultimately prevail in the DeFi or NFT area. By the way, you don’t just have to think about art with NFTs – the land registry could also have a digital representation, with NFT entries. In Georgia there is already a prototype of a cadastre on blockchain and even the traffic light coalition wants to have one checked.

Blockchain and cryptocurrencies: long-term success

Of course, the bitter losses that many cryptocurrencies have suffered over the past nine months are difficult for investors. However, cryptocurrencies have been by far the most profitable investment in recent years: five years ago, Bitcoin was around US $ 2,800 and is currently priced at around US $ 21,000. However, it is less about market prices, which are often driven by speculation, and more about the fundamental value of currencies and decentralized networks.

We are currently experiencing inflation rates of 8% and our fiat money is devalued drastically quickly. In these times it is important that people can take advantage of an exit option and that parallel monetary systems exist. It is important that the world’s central banks increasingly face currency competition, including from private sources. And it is important that cryptocurrencies allow cross-border payments at low transaction costs, thus freeing migrants sending remittances from the burden of fees.

Trust through transparency and privacy through zero-knowledge proofs

Not only that: entire supply chains can also be mapped on decentralized networks and production processes can be traced transparently. The government and administration can also use the blockchain for themselves by allowing documents to be sent via the blockchain. First, the data stored on multiple nodes would be tamper-proof. Second, bureaucratic costs could be drastically reduced and processes automated.

Third, privacy could be better preserved than today. Today, the entire identity usually has to be revealed if only certain attributes need to be proven. However, the so-called zero-knowledge tests, which are increasingly being implemented in the blockchain area, allow to reveal the existence of attributes without revealing the identity itself, in this way one could prove the age of majority without revealing the age. A minimum income could be demonstrated for a mortgage without making his financial situation completely transparent.

These and other examples show that those who are declared dead are living longer, because the blockchain is more than “just” cryptocurrencies.

About the Authors

Frank Schäffler is a member of the Bundestag for the Free Democratic Party (FDP) and CEO of the Berlin think tank Prometheus – The Freedom Institute. Mr. Schäffler is a member of the Budget Commission, of the Digital Commission and spokesperson for FinTech and blockchain innovations of the parliamentary group FDP.

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