The role of blockchain technologies and tokenization in creating a new and fairer paradigm
The financial world is undergoing the most significant transformation in at least a century. The money supply and national debts are skyrocketing. The US national debt is now over $26 trillion, representing over $80,000 for every man, woman, and child in the United States, or over $200,000 per taxpayer. And for the first time in history, we face the prospect of long term zero or even negative interest rates. These are uncharted waters that seem increasingly unlikely to end well for the average global citizen.
People have, in general, been poorly served by the banking sector. People were once rewarded for saving by receiving interest on their holdings. But even before dropping into negative interest rates, savers are already being punished by close-to-zero interest rates that are already below zero when factoring in banking fees and real-world inflation rates.
Money is a commodity, where the borrower has historically always paid interest to the lender due to money’s capability to generate new revenue by, for example, starting or expanding a business. A world of negative interest rates fundamentally undermines the economic principles upon which our global financial systems were built. How have central banks and governments allowed this situation to develop? How can this balance be returned?
The Bitcoin paradigm shift
With the initial introduction of Bitcoin in 2008, the world saw the first glimpse of novel digital technology with profound potential. This potential spanned not only its use as a viable alternative to freely printed fiat currencies, but also offered a whole host of other potential applications due to its ability to improve transparency and privacy while reducing an over-reliance on centralised authorities and payment networks.
The blockchain technology underpinning Bitcoin offers an entirely new approach to transparency, managing and protecting identities, and data movement. It also presents new ways to make rapid and low-cost borderless payment transactions. It enables individuals and companies of any size to use blockchains as a cheap, verifiable, and near-instant settlement system or currency exchange.
For financial customers, blockchains offer greater financial inclusion for the unbanked. This is especially the case in Latin America, Africa, and South Asia, where many people do not currently have access to traditional banking services or a verifiable online identity. Blockchain technologies increase the number of people with access to the global economy and give people more significant business and personal opportunities to improve their financial standing.
It is time that we move finance away from the existing structure where all transactions are funneled at one point in time via one or several major banks. Blockchain technologies enable a new world of direct person to person payments, at minuscule or zero cost, to anyone worldwide.
The network effect
One of the greatest areas for innovation and genuine change for the better lies in the ability to shift focus from large tech or financial institutions towards community-minded platforms. Platforms create value by forging connections between any number of individuals participating in a marketplace. Without a central authority or controlling company with a vast amount of power and influence such as Google or Facebook, a community of platform users can transact and innovate together. This value benefits enormously from the network effects generated by the platform or multiple platforms.
Network effects can be direct (same-side) effects or indirect (cross-side). Direct network effects occur within a common user group, such as users within a single messaging platform. Indirect effects arise between multiple groups of people, such as buyers and sellers on an e-commerce platform.
The tokenisation inherent in operating blockchain technologies and platforms has enormous potential to spur both direct and indirect network effects. In a direct context, tokens are primarily used as a payment token, but their utility is far more impactful when generating indirect network effects. This is because cross-chain networks increase in complexity as the activities of multiple user bases must be coordinated. In this way, tokenisation is a highly efficient and effective way to incentivise producers to participate in a network and, in doing so, collaboratively generate value to the benefit of all participants on the network.
The opportunity now exists to rewrite the future of financial systems and community-focused networks. Developments in the Defi space offer people the ability to again earn real interest rates on savings moved to digital stablecoins or by directly staking their cryptocurrencies. People no longer need to be bound to decisions of central banks that are clearly not made in the wider public’s interests.
Community-minded networks will allow people to maximize the value of their earnings and revenue streams, collaborate more effectively within global peer networks they help create, and innovate to develop financial systems and models that favour the 99 percent.