Yes, you read that right. Historically, crypto has repeatedly undergone cycles of dramatic rises and abrupt falls. At one point in 2017-18, Bitcoin slumped by an astonishing 84 per cent after attaining a peak of US$20,000. And now, we have experienced another major crypto collapse.
First came the devastating Terra Luna crash. Then, major crypto hedge fund Three Arrows Capital was assuaged with major liquidity issues. This double whammy consequently led to a massive sell-off in crypto assets, causing crypto to enter a bear market territory, with Bitcoin (BTC) slipping by more than 65 per cent and Ethereum (ETH) by 75 per cent.
“Crypto winter is here”, so the word goes on the streets. Some investors are even predicting that the slump could persist for at least two years.
But the present situation doesn’t spell the beginning of the end for crypto. The cogs are already shifting, poised to introduce a wave of change that will positively transform and strengthen the crypto ecosystem. Furthermore, major crypto companies Binance, Kraken, and Polygon are actually accelerating their hiring efforts with over 3,000 open jobs amidst the madness of layoffs and selloffs.
To understand why crypto remains firmly entrenched in the fintech ecosystem, let’s go back to the fundamentals of why crypto was created.
The guiding principle of crypto
The year was 2008. The world was reeling from the shock of the Global Financial Crisis, which triggered several bank failures and caused many economies worldwide to slow down.
Crypto was created on the coattails of this disaster, as people began to question and doubt centralised institutions like banks and their involvement in the financial system. Bitcoin was the first cryptocurrency to be created, serving as a means for people to directly control their money without relying on said central authorities.
Herein lies the key draw of crypto: it is decentralised. It speaks to and encourages the notion of a free world where power is returned to the users, allowing payments to be made swiftly and securely without being hampered by regulatory roadblocks. The 21st-century version of ‘Power to the People’, so to speak.
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Let’s not forget this even as crypto nosedives into its current bear market situation. As with every other market that carries some measure of risk, crypto’s core values remain unchanged despite its ups and downs.
And it is these very core values that have spurred crypto to develop interesting use cases beyond just being a vehicle for investments. These use cases ensure that crypto endures well into the future. As more use cases are devised as answers to new problems, the longevity of crypto will be further prolonged.
Without further ado, let’s move on to examine some of the known use cases of crypto.
The use cases of crypto
While it’s easy to write crypto off as just an asset and occasional payment method, the reality is that it’s more than that: it has been used for other innovative purposes, ranging from lending platforms to non-fungible tokens (NFTs). Let’s consider three distinct use cases of crypto below:
Lending
Crypto lending is one of the more popular DeFi use cases that have been around in the market for years, with billions of dollars of crypto assets secured across various lending platforms. Decentralised lending protocols like AAVE and Compound Finance allow users to lend, borrow and earn interest on crypto assets without the requirement of a third party or an intermediary.
While crypto lending started out as a vehicle for crypto users operating in the decentralised space, both AAVE and Compound Finance have launched products to drive more institution adoption into the DeFi ecosystem. Known as AAVE Arc and Compound Treasury, respectively, these products serve as conduits for financial institutions and non-crypto native businesses to directly access decentralised markets.
Even amid the crypto bear market, lending continues to be a popular use case in the world of crypto. Recently in May 2022, Siam Commercial Bank (SCB) entered the DeFi space via its digital venture arm SCB 10X, where it will use Compound Treasury for conversions between USD and the USDC stablecoin.
According to Mukaya Tai Panich, chief investment officer at SCB 10X, this is a key step in the right direction for SCB 10X’s institutional DeFi efforts. Despite the recent events, Panich believes that the accelerated education of regulators, board members, and top-level management has helped to mitigate panic reactions.
SCB 10X isn’t the only financial institution to venture into the DeFi space too. Crypto custody firm Fireblocks’ CEO, Michael Shaulov, noted that more high-end institutional clients are exploring DeFi, with AAVE Arc and Compound Treasury helping to ease their transition into this space.
Commodity storage
Centralised cloud storage services are a fantastic idea and have enabled businesses and digital services to scale effectively and efficiently. They store users’ data on the cloud, freeing them from the shackles of external hard drives.
However, this service often comes with a caveat: cloud services are monopolised by a few companies, who control prices, legislation, and even those who use these services.
Enter decentralised storage networks like Filecoin. These systems work to eliminate bad monopoly practices by incentivising storage providers to securely and transparently store their clients’ files. Now, this system may not sound feasible at first, but it actually works.
For Filecoin, it rewards storage providers with Filecoins when they store data securely. Filecoin verifies such good practices via cryptographic methods. By earning these Filecoins over time, storage providers stand to benefit from block rewards doled out by Filecoin.
Non-fungible tokens (NFTs)
And now we come to our last but most probably best-known use case, non-fungible tokens. You’ve probably seen these around on Instagram and Twitter, with owners and notable celebrities showing off their NFTs (ranging from Pudgy Penguins to Bored Apes) by using them as profile pictures. And NFTs are closely intertwined with crypto.
Digital assets that represent real-world objects like art, music, in-game items, fashion and videos, NFTs operate on the same blockchains that host crypto. Also known as Layer 1 platforms, these blockchains serve as ecosystems that cryptographically secure NFTs.
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Of all the blockchains that NFTs operate on, Ethereum is the best known. It pioneered the ERC-721 token standard, which is currently the most commonly used standard for NFTs.
While NFTs are typically used for art collectability, their potential doesn’t start and end there. Looking ahead, NFTs can be evolved for business use. This boils down to their ability to serve as immutable proof of ownership. Beyond art and games, NFTs could potentially be used to tie house ownership or even university applications to you.
Furthermore, a key feature of NFTs is that they are transparent, which means you can track their full journey when you get involved in any transaction. Couple this with the encrypted nature of NFTs and the risk of identity theft and other identity-related risks are greatly reduced.
Regulating the unregulated
Although the manifold use cases of crypto point towards its survival into the future, we mustn’t overlook the white elephant in the room: the lack of appropriate regulation. This might seem ironic since crypto was conceived to be unregulated.
Yet we can’t turn a blind eye to recent events that made it remarkably clear that some regulation is necessary; it’s pretty much a necessary evil. After all, during the Terra implosion, reports of people losing their entire life savings began to surface, causing them to rapidly lose faith.
At present, the material value of crypto is impaired by the abuse of a lax system, alongside the wider lack of trust that the public has in it. Hence, when I talk about regulation for crypto, I’m really looking at putting up robust safeguards that regulatory authorities manage to make the overall environment safe for all stakeholders involved.
Such regulation would theoretically serve as a safety net for investors when the wider crypto market undergoes an unfavourable downturn. This is especially important for less sophisticated investors or investors who have devoted a substantial sum of money towards crypto.
At the same time, we should use this opportunity to hold open talks with relevant stakeholders, educate users, and refocus the conversation on the intrinsic benefits that crypto provides.
It’s also helpful to remember that crypto has a history of being highly volatile, going through steep climbs and sudden slumps throughout its intense 13-year life cycle.
While seasoned investors would be unfazed by the volatility, the same cannot be said of inexperienced retail investors who were banking on a quick buck.
Singapore’s measures
Project Guardian
Singapore is taking the lead in piloting a project to explore viable methods of regulating the crypto market without being overly intrusive. Dubbed Project Guardian, this initiative is a collaborative effort between the Monetary Authority of Singapore (MAS) and the financial industry to explore the economic potential, harness the benefit of DeFi and value-adding use cases of tokenisation.
Under Project Guardian, a key objective is to manage risks to financial stability and integrity, precisely the core concern that arose following the Terra Luna crash. While nothing is set in stone yet, Project Guardian symbolises an enormous step in the right direction for the broader crypto ecosystem.
Currently, crypto is risky precisely because of the absence of tangible safety barriers to protect investors from losing their investments.
Also Read: Cryptocurrency, money laundering and KYC: Why are regulations important?
With initiatives like Project Guardian in place, we could potentially see the crypto ecosystem becoming less speculative and more secure for DeFi participants.
Tighter regulatory measures
At the same time, the MAS has also recently pledged to be “brutal and unrelentingly hard” on bad practices in the crypto industry. While this move has been called out for “not being friendly” by many crypto companies, I think it is, in fact, a step in the right direction.
I don’t disagree that such tight regulations may hamper the operations of crypto companies. But if the Terra Luna crash has taught us anything, it is that without a clearer regulatory environment, it inadvertently gives space to bad practices that will actually be more harmful to the development of the crypto industry in the long run.
The MAS’ recent stance may be harsh, but it bears mentioning that this is consistent with its opinion that crypto is not for retail investors. While accredited investors are armed with a robust understanding of market volatilities and how to respond to them, retail investors often lack this fundamental knowledge.
I, therefore, believe that the MAS’ crackdown on bad practices will mould the crypto industry to be a better and safer environment for all participants.
Crypto is not dead
While crypto’s bear market situation is undoubtedly a cause for concern, we shouldn’t mistake it as a sign that spells the end for the broader crypto-universe. Key stakeholders are already in conversation to work out viable solutions to better manage the system for everyone.
It’s also worth remembering crypto’s key selling point as a tool designed to empower the user. Swift and transparent, crypto transactions are not bound to the whims of a central authority; they are instead authenticated by the user.
That’s why crypto isn’t dead. Given how compelling its principle of decentralising and freeing the financial ecosystem is, it’s hardly any surprise that people aren’t quite ready to give up on it.
That said, crypto is going through a rough spot that could persist for years. While I can’t say for sure when things will pick up again, the crypto community continues to believe in HODL (holding on for dear life) and maintaining diamond hands (refraining from selling crypto investments despite downturns). To this, I’ll add a caveat: only do so if you’re financially able to!
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