Outlook for Digital Asset Trends

February 16, 2022

By Walter Zinenko

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Introduction

Interest and innovation in the world of digital assets and cryptocurrencies has exploded in recent years.
The dramatic shift in perception of crypto as a fringe cypherpunk experiment to a viable alternative to the current financial system has left many wondering what the next crypto disruption could be. While speculation is rampant, it’s important to remember that some of the largest changes have occurred quickly and without warning. Even the founder of Ethereum, Vitalik Buterin, admitted that he did not expect the non-fungible token (“NFT”) craze when he theorized his new blockchain’s potential applications.1 The best prediction for the future of digital assets may thus be to expect the completely unexpected. 

Market Adoption

The growing interest and awareness of cryptocurrency by the public has been the catalyst for all subsequent trends we will discuss.

Continued public appetite and adoption of cryptocurrency may cause a spill over into other industries, markets, and even day-to-day life. As token prices rise and crypto becomes a larger part of investment portfolios, merchants will be incentivized to accept cryptocurrency as payment, or risk their competitors getting first-mover advantage. Capturing this new consumer market while decreasing transaction fees (depending on the blockchain) poses a major opportunity for merchants.

However, accepting crypto also raises several issues including tax implications, reporting and valuation, as well as ensuring secure custody of the digital assets. These issues have created a new service market for payment processors and custodians who can ease those burdens and even offer crypto-to-fiat conversion.

Decentralized Finance

Since 2020, there has been a parabolic rise in investment on decentralized finance ("DeFi") platforms, from less than $1 billion to over $100 billion in total value locked in DeFi protocols. In order to map out the trajectory of DeFi, it's important to understand the crypto ideology underlying it.

Satoshi Nakamoto, the anonymous founder of Bitcoin, envisioned a financial system where participants weren't forced to go through an institution to hold or spend their assets. With that in mind, Satoshi created a peer-to-peer decentralized ledger secured by cryptography and proof of work (yes, it’s a mouthful, suffice it to say that Satoshi created a currency that works on the cooperation of participants without a designated middleman). A defining characteristic of cryptocurrency ideology revolves around reducing centralization as much as possible, putting the power and responsibility into the hands of the users.

The next logical step in Satoshi's utopia would therefore be a system where users could loan, borrow, trade, or otherwise interact in the economic system without the fees and friction caused by centralized institutions. Buterin took this next step when he created Ethereum, which revolutionized cryptocurrency by layering logic into its blockchain via “smart contracts.” Smart contracts have transformed cryptocurrency from a simple tool to make and receive payments into a system capable of replacing a portion of our current financial system.

Decentralizing a blockchain ledger allows the costs to maintain and secure the ledger to be distributed, which eliminates the need for a central authority and its often-exorbitant fees. In the same way, decentralizing a financial system eliminates intermediaries who charge fees and capture the spread between interest they charge for loans and interest they pay on deposits.

The difference in returns is obvious when comparing DeFi instruments to their traditional counterparts, and investors have flocked to DeFi as a result. However, the risks associated with DeFi are not so obvious. While volatility and liquidity can drastically reduce crypto gains in an instant, the larger, more omnipresent danger lies in the smart contracts that run the DeFi protocols. There have been hundreds of millions of dollars lost in the last two years alone due to hackers exploiting flaws in smart contracts and with crypto regulation being almost non-existent, investors have little to no recourse in retrieving their stolen funds.

For most, the rewards of DeFi still outweigh the risks, and for that reason, we anticipate continued adoption of DeFi as an alternative to traditional investment and innovation in both blockchain technology and DeFi protocols as consumers search for the most lucrative, secure, and dependable use of their capital.

Tokenization

The first foray into this emerging area was the tokenization of digital art. While the interest in NFT art only seems to be growing, we predict tokenization will proliferate into a much wider set of use cases.

Tokenizing concert and event tickets, for example, offers attendees a unique digital asset memorialized and authenticated on the blockchain. Adidas, the UFC, and the NBA have begun using NFTs to more deeply engage with their audiences and even offer unique experience to token holders. The NFL recently announced that all 2022 Super Bowl tickets would come with a unique NFT that displays the attendees' seat number.2 Looking forward, a decentralized ticket marketplace could offer fans a secure and cheaper alternative to purchase tickets for upcoming events or trade tickets to past events.

The tokenization of real-life assets within supply chains would allow consumers more insight into their products origin and authenticity while at the same time giving companies a more granular understanding of their production process.

Tokens can also represent ownership in physical assets or organizations. Tokenizing rental real estate has the potential to offer easier access to capital for the real estate industry by reducing the cost and complexity of entry.

Decentralized autonomous organizations (“DAOs”), which are formed and governed via smart contracts, are making headlines for their unprecedented ability to coordinate a large group of individuals for a single cause such as buying a rare copy of Alejandro Jodorowsky's adaptation of the book 'Dune' (Spice DAO) or trying to buy a copy of the U.S. Constitution (Constitution DAO).

It's not clear where the tokenization trend is headed, but we're confident that different use cases and industries will continue to be tested.

Web 3.0

Web 3.0 is a difficult trend to predict because it has yet to be clearly defined and is more of a placeholder term for the next age of the internet. Web 1.0 can be thought of as the static webpages and message boards we surfed in the 1990s and early 2000s; these pages were completely unaware and uncaring of who was visiting them. Web 2.0 is defined as the period where websites became more interactive; specifically, more individualized to each user. In the current era of Web 2.0, companies monetize user data and own all content published on their site.

Web 3.0 takes the ideas and values of crypto and applies it to the internet. Users would own and control their content while profiting from the advertising revenue it generates. There have already been innovations in this space, with new internet browsers and search engines that reward users for their activity. As market adoption continues, we believe this will be a rapidly growing area of opportunity.

Regulation

One of the hardest predictions to make is what lies ahead for crypto regulation. The current regulatory framework around digital assets and cryptocurrencies is at best a work in progress. There have been suggestions that U.S. President Joe Biden will issue an executive order to assess cryptocurrency in an effort to make effective policy, but no official statements have been released yet.3 Until then, investors, innovators, and other market participants will have to operate under the current patchwork of regulations and guidance.

Conclusion

Digital assets and blockchain technology still seem to be in their infancy. Of course, there will be challenges ahead, but the rise in the aforementioned crypto trends indicate a burgeoning industry aimed at disruption. The rate of change in the crypto world has far outpaced regulation, allowing innovators to play and experiment in a digital no man's land… at least for the moment. Stakeholders await decisions by governments with bated breath as they could drastically impact the trajectory (and legality) of crypto. Accordingly, we are only certain that the crypto landscape will look much different in the next 12 months.

1 Ethereum white paper predicted DeFi but missed NFTs: Vitalik Buterin
2The National Football League to Offer Limited Edition NFTs to Celebrate Super Bowl
3White House Is Set to Put Itself at Center of U.S. Crypto Policypolicy


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About Walter Zinenko

Walter Zinenko is a Manager in the Audit and Assurance Group. He has experience in SEC reporting, SOX compliance, revenue recognition, equity-based compensation, and international operations.