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Blockchains Unlock Institutions with Internet Scale

Reading Time: 4 minutes From Promises Enforced by Law to Promises Enforced by Code Blockchains are the first technology ever invented that gives software systems the ability — without trusted intermediaries — to make highly credible promises. These promises are enforced by a novel combination of technological innovations spanning peer-to-peer networking, encryption, and consensus mechanisms. The first blockchain was […]

The post Blockchains Unlock Institutions with Internet Scale appeared first on BlockchainCapital.



Reading Time: 4 minutes

From Promises Enforced by Law to Promises Enforced by Code

Blockchains are the first technology ever invented that gives software systems the ability — without trusted intermediaries — to make highly credible promises. These promises are enforced by a novel combination of technological innovations spanning peer-to-peer networking, encryption, and consensus mechanisms.

The first blockchain was created in 2009 by Satoshi Nakamoto as a solution to the long-standing problem of how to create a digital currency that operates outside of the control of banks and governments. This solution was named Bitcoin, and it successfully coordinated the establishment and maintenance of a new, independent system of money that is native to the internet. Bitcoin works and has grown magnificently because it makes several very important promises that are deemed highly credible by the individuals and businesses who use it.

The invention of blockchains represents a paradigm shift because the institutions that coordinate resources and activities in human society are fundamentally built on promises.

Take for instance the banking system, which we fund in exchange for promises to help us save and invest, operate businesses, and manage financial risks; or the legal system, which we fund in exchange for a promise to enforce a set of societally and economically beneficial rules; or the institution of the US Dollar, which we fund in exchange for promises to facilitate trade and maintain economic stability.

With blockchains, we can represent many of these promises in software. But why would we want to do that?

Today’s Institutions Will Not Scale for the Internet Age

The aforementioned institutions (along with many others) have pushed society forward immeasurably and have greatly improved our standard of living, but they have critical limitations that have only become clear over the last several decades — namely, in an increasingly global world, their promises don’t extend across borders, and too often those promises are broken altogether, in ways that irreversibly destroy trust and hinder progress.

This insight leads to the understanding that blockchains, by providing a means of making stronger promises, are an institutional innovation that has arrived at a most opportune time. They are a technology that enables us to architect new types of institutions that are purpose-built for a global, internet-connected society.

The World Needs Scalable Institutions

As we continue to transition from life driven by analog institutions and fragmented across national boundaries, to an internet-based, digital-first society, the need for globally scalable institutions has never been greater.

The internet sector made up over 10% of US GDP in 2018 and grew 9 times faster than the US economy as a whole from 2012 to 2018. It is likely that the GDP of the Internet will far surpass that of any individual nation-state within the next decade or two.

This underscores the potential gravity of the opportunity presented by blockchains: in a world defined by instant, global communication and global markets, what types of institutions will people use to coordinate resources and economic activities?

Bitcoin Exposed Latent Demand for New Institutions

The growth of Bitcoin and the ecosystem surrounding it serves as evidence that blockchain-based institutions have the potential to fill in the gaps left by our analog institutions and allow the internet economy to thrive. In its first 10 years of life, Bitcoin has facilitated over $2 trillion worth of money transfers and has spawned one of the most liquid, global marketplaces in the world.

On the back of its growth, some of the world’s fastest growing startups in history have flourished — the crypto brokerage Coinbase grew from 0 accounts to more than 30 million in 5 years, vastly outpacing the reach of traditional brokerages, and the crypto exchange Binance generated over $1 billion in cumulative profit less than 3 years after launching.

These are not merely vanity stats; the first use case of blockchain, internet-native money, offers tangible benefits that no other form of money has ever been able to offer. In particular, Bitcoin is the first form of money that is resistant to inflation, censorship, and involuntary seizure, and it is accessible to anyone in the world with an internet connection.

These properties make it attractive to a number of different parties:

1) to investors, as a form of digital gold;

2) to people that reside in countries with weak or restrictive monetary systems, as a means of participating in the global economy; and

3) to businesses that facilitate large amounts of cross-border trade, as a cheap and efficient means of settlement.

The use case for money alone has a total addressable market in the tens of trillions, and the growth of internet-native money will propel blockchain startups to a much greater scale than they have already achieved.

From Money to Other Institutions

Outside of money, a generation of entrepreneurs are asking what other blockchain-based institutions might be able to flourish in the internet age, and there are exciting early developments spanning the fields of financial services, identity, cloud computing, social networks, and more. In financial services, new institutions are being created to fundamentally rethink how lending, trading, investing, and insurance could be architected for the internet economy.

The promise of these institutions is to offer similar benefits to Bitcoin: highly secure, tamper-proof services that mitigate counterparty risk and are accessible to all people with an internet connection.

These new institutions are not replacements for our analog institutions. Rather, they augment their capabilities and extend the places that we are able to do business with the comfort that promises will be delivered on. Simply put, these developments have the potential to expand the size of the internet economy by orders of magnitude.

Where Are We Today?

Today we’re at a critical juncture in this technology’s arc of evolution. Only in the last several years has it become clear that Bitcoin has been a successful experiment, but the tools to make it widely usable have not yet reached maturity, making apt an analogy to the internet before Netscape.

However, all future blockchain-based applications benefit from the infrastructure build-out that Bitcoin has catalyzed, and vice versa. This is particularly relevant in light of major new entrants to the space both from the financial world (Fidelity, Square), Big Tech (Facebook/Libra) and governments (China’s central bank digital currency), who will contribute to this infrastructure build-out and may ultimately serve as massive on-ramps to a blockchain-powered digital economy.

If Bitcoin’s growth so far is any indication of the potential of internet-centric institutional innovation, the blockchain space is positioned to offer many attractive investment opportunities with asymmetric return profiles, both in new institutions directly and in the ecosystems that form around them.

Thanks to Spencer Bogart and Kinjal Shah for reviewing.



‘Bitcoin maxis’ like Solana, but is there sound logic to that



Recent changes in cryptocurrency market dynamics have fueled the popularity of altcoins like Solana [SOL]. It recently became one of the most trending blockchain platforms around on the back of its surging price.

The cryptocurrency, in fact, had a 1-year ROI of over 4,200%, despite dropping by 34% since its peak in early September. Despite the latest hiccup in value, however, market observers believe the project has managed “winning over a significant number of Bitcoin Maxis or near-maxis.”

Ikigai Funds’ Travis Kling offered this observation on Twitter when he said,

“After talking to a bunch of folks over the last couple months, it’s pretty clear that SOL is successfully winning over a significant number of BTC Maxis or near-maxis, which have previously owned zero ETH or very little ETH.”

While the crypto-space is competitive, the tech-twist to the age-old saying – “competition of your competition is your ally” also holds true. Solana is not competing with Bitcoin. Instead, it is competing with Ethereum’s position in decentralized finance, NFTs, and smart contract offerings. Given the fact that transacting on Ethereum is still a pain for some users, Solana’s cheap and fast transactions provide a better alternative to many.

Solana’s DeFi projects recently crossed $3 billion, despite Ethereum hosting the maximum number of DeFi and NFT projects. While Bitcoin “maxis” are also opting-in for smart contracts, they prefer SOL over ETH, according to Kling.

Why? According to the exec,

“I think maxis look at ETH vs SOL and think –

Well as long as its not going to be all that decentralized, might as well have a smart contract platform that can actually handle enough throughput with cheap enough fees where it can really scale, instead getting choked up like ETH.”

However, not everyone agrees with Kling’s opinions. Many believe the decentralization narrative to be wrongly used by Kling, with another Twitter user @mikemcg0 noting that Ethereum is “more decentralized than BTC.” Anyone can run an Ethereum validator,” he said, “but only a select few oligopolies can mine BTC.”

Even so, Bitcoin mining has spread out even more after the recent China crackdown. Although the process is extensive in terms of effort, time, and money, according to another user, “anyone can” mine BTC “if they have the entrepreneurial mindset.”

Now, the latest outage faced by Solana did raise questions about the level of centralization. However, that has not really discouraged those who want to indulge in DeFi, NFTs, and smart contracts. As Solana forges new contracts with Hacken Foundation and, others institutions like Osprey Funds and Grayscale are in a race to include Solana in their respective bouquet of products.

In fact, Osprey Funds has already registered Osprey Solana Trust with the SEC.

‘Ethereum killer’ or not, Solana is en route to gaining more interest from the booming crypto-market. Even turning so-called BTC maxis in the process.

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Europe Now World’s Biggest Crypto Economy: Boasts Over $1T Worth of Transactions



Central, Northern, and Western Europe (CNWE) has grown into the world’s largest cryptocurrency economy since July 2020. The region experienced a massive increase in trading activity since then– particularly in the DeFi space.

The European DeFi Boom

Data from Chainalysis shows that CNWE received over $1 trillion in cryptocurrency over the last year alone. This represents 25% of global trading activity. Furthermore, it is responsible for at least 25% of all crypto value received by other regions, including 34% of the value received in North America.

This makes the EU the most concentrated in the world in terms of cryptocurrency trading volume. This is partially due to increases in all forms of trading activity over the past year, coming mostly from institutional investors.

Large institutional transaction value grew from $1.4B in July 2020 to $46.3B in June 2021, coming to take up half of all CNWE trading activity. The most pronounced increases were seen on DeFi protocols, where over 80% of these large institutional transactions were sent in June.

The impact of DeFi is further established when ranking coins in terms of transaction activity in the region. Despite being the largest cryptocurrency by market cap, Bitcoin heavily trails Ethereum in transaction volume among large institutional investors. Additionally, DeFi protocols took up a majority share of funds received by cryptocurrency services in CNWE in June 2021.


The Decline in Eastern Asia

CNWE has seen significant absolute increases in its crypto trading volume. However, its new place as the world’s largest trading hub is partly due to a sharp decline in market share held by Eastern Asia– the previous world leader.

In early 2019 the region held over 30% of global transaction volume. This figure has since fallen sharply to about 15% – less than CNWE, North America, and even Central and Southern Asia.

This may be related to China’s continued push to prevent and discourage crypto trading within its borders. China re-announced their ban on crypto trading in the country days ago, and have been moving to prevent all access to exchanges within the country.


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Here’s why a multi-CBDC bridge is being tested on Ethereum



The race to launch the first CBDC is one the world is following intently. While most have their eyes fixed on China’s digital yuan pilot, a group of countries has come together to take CBDCs a step further.

Phase 3 of Project Inthanon-LionRock saw BIS Innovation Hub Hong Kong Centre, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates experiment with a multi-CBDC bridge or an mBridge.

What does this mean?

The mBridge initiative would ideally allow central banks in different countries to issue and redeem their own CBDCs across borders on a common platform – without having to depend on correspondent banks.

Meanwhile, commercial banks would be able to “submit peer-to-peer CBDC push payments.”

The BIS September 2021 report stated,

“If successful, an efficient, low cost, compliant and scalable multi-currency, multi-jurisdiction arrangement can provide a network of direct central bank collaboration, greatly increasing the potential for international trade flows and cross-border business at large.”

The report further clarified,

“The prototype demonstrates a substantial improvement in cross-border transfer speed from multiple days to seconds, as well as the potential to reduce several of the core cost components of correspondent banking.”

Here, it is also interesting to note that the project’s Phase 2 prototype was built on Ethereum. This was because the core layer of the prototype contained the blockchain ledger and smart contracts.

Notes on features

As a multiple CBDC project, regulation and compliance were functional requirements. Central banks would be able to monitor transactions in real-time, set balance limits, control the balance held by their commercial banks, and use data for surveillance.

Scalability was also part of the design to later onboard more participants and jurisdictions.

However, one complication was the wide difference in remittance charges across countries. While the global average was calculated to be 6.38% of the remitted sum, the report observed that even a percentage as low as 1% would be costly for payments in the millions of dollars.

An update from China

Alongside the mBridge project, China has also been steamrolling ahead with its CBDC program.

Changchun Mu, Director-General of the DCI of the People’s Bank of China. confirmed that e-CNY pilots have been taking place in 10 areas.

Mu added,

“Payment methods such as QR code and tap-and- go have been well-supported and innovative services such as dual-offline payment and wearable device payment have been tested for safety and efficiency.”

Meanwhile, Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, suggested that an e-HKD could also be in the works.

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