Crypto prices are at their lowest not only since the crash of TerraUSD. The crash may have acted as a catalyst, but cryptocurrency prices have been falling for some time. The price of Bitcoin has fallen from its November 10, 2021 high of around $68,000 to $21,000 now. It was no different for other crypto assets. The reasons are complex and a particularly important point could be that massive amounts of liquidity have been drawn from the tech market in recent months. Even though many commentators are already certifying the end of crypto, this might be too hasty. The added value, especially in DeFi and NFT, is unmanageable.
TerraUSD – What happened?
Since early May, crypto assets have seen a drop, primarily the TerraUSD stablecoin. Unlike deposit-backed stablecoins, TerraUSD is an algorithmic stablecoin. TerraUSD is paired with another cryptocurrency Terra (LUNA) and there is always the possibility of destroying one for the other currency. However, stability must be achieved via arbitrage: if a TerraUSD falls below US$1, the supply of TerraUSD must be tightened in order to bring the price back to US$1. TerraUSD will be “burned” and new LUNA tokens will be created.
Of course, it should also work the other way around. In early May, however, confidence in the Terra ecosystem was dramatically lost and investors massively withdrew capital from TerraUSD. The Terra Foundation tried to support the LUNA course with the massive sale of Bitcoin reserves, but without success. TerraUSD is currently at 1.2 cents, LUNA at nearly US$120 is now at a measly US$2.60. Stablecoins such as USD Circlecoin, which are backed by bank deposits, are relatively stable. This is precisely why it is so abstruse that the ECB’s low interest rate policy makes a euro-backed stablecoin impossible.
Decentralized finance (DeFi) represents an alternative to the centralized banking system: financial services must be mediated directly via protocols without intermediaries and without discrimination. Decentralized coordination is done through smart contracts or a combination thereof, called decentralized applications (dApps), on a blockchain. Now there are decentralized markets, credit markets, derivatives exchanges and even decentralized insurance. While 90% of all DeFi protocols have so far run on the Ethereum blockchain as it has the largest community of developers, this may change after the Bitcoins Taproot update. As a Layer 2 solution, Lightning now enables fast and inexpensive transactions. Sovryn or Stacks want to integrate decentralized applications into Bitcoin. Raretoshi is even trying to bring Bitcoin-based non-fungible tokens (NFTs).
NFT – is it just hype?
Non-fungible tokens (NFTs) could play an important role in the art market in the future. While fungible (tradable) tokens like Bitcoin can be traded one-to-one, this is not possible with non-fungible tokens. They can thus be a unique digital representation of a work of art on a blockchain. It remains to be seen which blockchain solution will ultimately prevail in the DeFi or NFT domain. By the way, it is not enough to think of art with NFTs: the land register could also have a digital representation, the entries being NFTs. In Georgia, there is already a prototype land registry on blockchain and the traffic light coalition wants to have one verified as well.
Blockchain and cryptos – long-term success
Admittedly, the bitter losses that many cryptocurrencies have suffered over the past nine months are difficult for investors. Nevertheless, cryptos have been by far the most lucrative investment in recent years: five years ago, Bitcoin was worth around US$2,800 and is currently listed at around US$21,000. However, it is less about market prices, which are often driven by speculation, and more about the fundamental value of currencies and decentralized networks.
We are currently experiencing inflation rates of 8% and our fiat currency is being devalued drastically and rapidly. In these times, it is important that people can take advantage of an exit option and that parallel monetary systems exist. It is important that the world’s central banks increasingly face currency competition, including from private sources. And it’s important that cryptocurrencies enable cross-border payments at low transaction costs, freeing migrants sending remittances home from the burden of fees.
Trust through transparency and privacy through zero-knowledge proofs
Not only that: entire supply chains can also be mapped on decentralized networks and production processes can be traced transparently. Government and administration can also use blockchain for themselves by enabling submission of documents via blockchain. First, data stored on multiple nodes would be tamper-proof. Second, bureaucratic costs could be drastically reduced and processes automated.
Third, privacy could be better preserved than today. Today, the entire identity must generally be disclosed if only certain attributes need to be proven. However, so-called zero-knowledge proofs, increasingly implemented in the field of blockchain, make it possible to reveal the existence of attributes without revealing the identity itself. Thus, the age of majority could be proven without revealing the age. . A minimum income could be justified for a mortgage without making its financial situation completely transparent.
These and other examples show that those who are declared dead live longer because blockchain is more than “just” cryptocurrencies.
About the authors
Frank Schäffler is a member of the Bundestag for the Liberal Democratic Party (FDP) and managing director of the Berlin think tank Prometheus – The Freedom Institute. Mr. Schäffler is a member of the Budget Committee, the Digital Affairs Committee and Spokesperson for FinTech and Blockchain Innovations of the FDP Parliamentary Group.
The simplified cryptocurrency tax return
In our BTC-ECHO comparison portal, we show you the best tools for the automatic and easy creation of crypto tax declarations.
To the tax software comparator
The latest issues of BTC-ECHO Magazine
You might also be interested in