DLT and the Role of Crypto Currencies
After the successful IPO of Coinbase on 14th April 2021 valuing the company around USD 85 billion, digital assets found their inroads into the mainstream. Not only does it take away pressure from ever-lasting discussions whether digital assets are “real” or a phenomenon doomed to disappear again, but it also opens the curtain for the broader experimentation with its underlying technology, i.e. DLT = digital ledger technology and new business models based thereon.
The two most prominent coins, Bitcoin and Ether, increased in market value almost 10-fold over the past year. The volatility of their prices during 2021 however shows that despite the entrance of institutional money (incl. ETFs resold via banks to retail investors) and alternative payment services accepting these crypto currencies as a form of payment for products or services (the most prominent being Tesla’s announcement of accepting Bitcoin as a means of payment in the future) there is still a lot of uncertainty as to which coins will play what role and when. Over the weekend of 17th-18th April most digital assets dropped in value by more than 15% just because of increasing fear that regulators may ban certain or all crypto currencies from their geographic jurisdictions as a legal means of payment, which would obviously hamper the hoped-for market penetration of certain such coins. In particular, the markets respond very nervously to announcements or statements made by the US treasury and FED in this regard.
But going back to the underlying technology: DLT is here to stay and will grow its system and solution penetration for all sorts of digital transactions, similarly to how mushrooms grow their far-flung mesh underground. It’s only about half a year that DeFi started to be used in various white papers for DLT-based systems. To provide two examples of such new systems: (i) Aave – market cap: USD 4.2 bn, a DeFi protocol to lend digital assets for derivative trading embedded in smart contracts, (ii) Tezos – market cap: USD 3.9 bn, a CBDC (central bank digital currency) development environment used for experiments coordinated by Société Générale. Many other tokens are related to specific infrastructure topics, such as Stellar (digital payments with little “gas costs”), Theta (decentralized streaming), Filecoin (decentralized storage), or Polkadot (interoperability protocol between various blockchains). In the short run, the focus might be more on scalability boosters though for existing and growing crypto currencies, such as Zilliqa – market cap: USD 1.9 bn or Ontology – market cap: USD 1.6 bn. These tokens should help to facilitate crypto trading by the likes of Coinbase through more efficient and less expensive block management (mining and staking).
Finally, for the more creative folks amongst us, there are NFTs (non-fungible tokens) that digitize individual “promises” (music tokens linked to future concerts and memorabilia) or act as proof of ownership for digital art (Mike Winkelmann’s “Everydays: the first 5000 days” sold at Christie's for over USD 69 m).
Conclusion: With Coinbase (a “simple” broker for digital assets) going public and various other DLT business cases only being in the making, the M&A frenzy with DLT-based automation services will gradually grow over the next 5-10 years. CDI Global’s most recent such deal in Europe was the support of Japan-based SBI Digital Asset Holdings in its investment in the first digital asset bank Sygnum regulated by FINMA, the Swiss financial markets authority. Living in the midst of Crypto Valley, home of the Ethereum foundation and a small town called Zug, which meanwhile accepts tax liabilities to be paid with Bitcoin, makes me believe that Coinbase is to process automation and DeFi, what Netscape was in 1995 to web access and later Internet search.
CDI Global Partner & TMT Industry Co-Leader