Blockchain technology, the foundation of cryptocurrencies, will transform how we invest, pay, or consume.
Why will blockchain change our lives? Blockchain’s practical application is more challenging for ordinary citizens to visualize than the metaverse or Artificial Intelligence. And yet, it promises a major economic revolution. However, before discussing its potential, it is worth defining what we are talking about when discussing blockchain. Its beginnings link to cryptocurrencies, especially Bitcoin. Still, its scope is much broader and will produce significant changes in payment systems – most central banks are already working on their digital currencies – logistics, the video game industry, and the world of investment thanks to tokenization (making a digital replica of a tangible asset).
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Blockchain as a Value Transfer Tool
Blockchain technology is not just a database; it is a group of technologies allowing value or asset transfers without the intervention of third parties. It offers a new model in which a central entity does not verify authenticity but uses a network of nodes -computers connected to the web- involved in blockchain. Hence, no transfer of value – be it money or any other asset possessing some value – is made through an intermediary but through consensus, allowing information to be stored transparently. A blockchain is a chain of blocks with encrypted transaction information on the network. Being interlinked (hence the word chain), they allow data transfer (or value) with secure encryption through cryptography.
“Information transfer is decentralized, validated by multiple nodes without knowing each other. Once added, data cannot be deleted or modified due to cryptographic encryption connecting blocks.”
BBVA.
The big banks are already making accounts of what lies ahead. Citi, for example, has published an extensive report on the economic impact of blockchain. Digital currencies (CBDCs) issued by the world’s biggest economies alone would have a valuation of $5 trillion by the end of this decade and occupy the cell phones of 2 billion people. Ninety percent of central banks run pilot programs using virtual currencies. However, the ECB thinks the new euro will only be available for up to three or more years. There remain unknowns to be cleared up, for example, its effect on privacy.
Blockchain and Payments
Manisha Patel, an IMF finance expert, has some answers. First, the social sense: “Many developing economies are exploring these new digital formats because of their potential to increase financial inclusion. They will achieve this if they are an affordable and widely accepted payment instrument.” But they need extensive internet infrastructure and access to cell phones. That’s the way to overcome the barriers. That remains time and its logic. “Customized proposals in each country may take several years.”
And what will happen to crypto assets if official digital currencies become popular? “Cryptocurrencies will survive as a form of payment within the shadow economy, illegal activities, and tax evasion. They compete with $100 bills,” predicts Kenneth Rogoff, former IMF chief economist. “They will use them for speculation and crime,” corroborates Emilio Capela, partner at McKinsey & Company. But some believe in redemption. Enrique Dans, a professor at IE Business School, values the freedom that comes from not depending on a central bank. And he is enthusiastic when talking about its eight-year-old little brother, ethereum, “an open-source community that, unlike bitcoin, consumes much less energy when mining [manufacturing] them,” he says. “With this technology, the 2008 crash would not have happened″.
Blockchain and Videogames
Another business that sees mountains of money with the blockchain is video games. Last year some 3.2 billion gamers used the blockchain. These guys don’t usually wonder what technology is behind their video games. Still, together with the Web3 ecosystem (investor Packy McCormick defines it as “an internet owned by devs and users, coordinated with tokens”), they will improve the experience when sitting in front of the computer. The consulting firm specializing in this intangible space, Newzoo, estimates that they generate $184 billion. Everything was more or less on track until Bitcoin began to be surrounded by controversy. Fraud, theft, and the bankruptcy of the FTX platform are memories that damage the memory of the crypto world.
Although the consumer sector also has a hand in this game (the world of distribution will gain efficiency with the massive use of blockchain systems), the two technologies (blockchain and tokenization) want to share the future. Tokenization changes everything because almost everything is tokenizable. A line of credit, the minimum investment in venture capital, the purchase of a house, the rights to songs, image rights, shares, currencies, gold, a painting by Picasso… Digital assets democratize – argue their advocates – investments created for the elites or that did not even exist in the financial markets.
“Tokenization can transform financial and non-financial infrastructure and public and private markets over the next 5 to 15 years,” estimates Alkesh Shah, head of digital asset strategy at Bank of America Global Research. The tokenized digital equity market is estimated to reach $4T to $5T by 2030. “It already makes it possible to reduce credit risk, increase the liquidity of previously illiquid assets, or allocate capital more efficiently,” says the analyst. There is even a painting circulating these days, valued at more than $50 million, and its owner is studying the possibility of tokenizing it through NFTs (non-fungible tokens). In other words, unique and unrepeatable.
Finance and Tokenization
And then, suddenly, someone wants to reinvent finance. “The next generation of markets, the next generation of stocks will be their tokenization,” advanced Larry Fink, chairman and founder of BlackRock, the world’s largest asset manager, in November 2022 in The New York Times. If Picasso reinvented painting by dispensing with the vanishing point, technological disruption is poised to reimagine finance. Helping, too, are two inseparable sciences: sociology and cryptography. Sixty-seven percent of the millennial generation (born after 1981) worldwide prefer to be guided by recommendations from a computer (robo advisor) when investing. In the coming decades – the Schroders management firm’s experts say – the former baby boomers (between the late 1950s and 1970s) in the United Kingdom will endow 5.5 trillion pounds to the millennials and Generation Z. A figure that in the United States ($68 trillion) resembles a new Independence Day. “Currently, tokens are not defined or regulated consistently across regions, but administrations will address this gap,” Schroders predicts.
Well, tokenization (blessed by the giants of Wall Street) has already reached the economy. Venture capital firms such as KKR, Hamilton Lane, and Apollo are digitizing some of their funds through blockchain platforms that many followers of this new algebra know: ADDX, Avalanche, or Polygon. On the same street, other giants – Goldman Sachs, HSBC, JP Morgan, Citi, and Société Générale – are designing their structures where to trade digital assets. “It’s an opportunity to develop the use of these services on a large scale,” notes John Gladwyn, manager of Pictet Digital. Indeed, Hamilton Lane has lowered the minimum investment for some of its funds from $125,000 to $10,000. And late last year, KKR tokenized its healthcare fund in Avalanche. Even the market value of tokenized gold topped $1 billion in March.
Constant innovation
Financials know they must constantly innovate or, like a repeated dream, will be worthless. Until now, crypto had a big problem of volatility. The way around this barbed wire is stablecoins. The currency is pegged to a currency like the dollar to bring stability. It was a market for $7.8 trillion (about seven trillion euros) in transactions last year. But hackers appear, who have never left, or speculators, who are remoras of any ecosystem where seas of money flow. Doubts emerge. “Stable versions are of little use as stores of value because it is never clear whether they have enough collateral [assets] to stabilize the currency in case of attacks,” warns Mr. Montalvo, professor of economics at Pompeu Fabra University (UPF).
Within the uncertainties of any technology, one of the areas where there is more consensus lies in Smart Contracts. They allow to execute a pre-established when a series of requirements occur. If “this” takes place, then “that” happens, guaranteeing a high level of accuracy and compliance,” says Mr.Casado, head of digital assets at KPMG. It works through the blockchain, so the agreement terms lie inside a distributed and decentralized database. You can view but not modify them. “A clear beneficiary will be international trade, which uses a huge amount of documentation and conditions and could be automated with standardized rules and simpler options for negotiation,” Montalvo.
Smart Contracts and the Supply Chain
With this type of contract and the tokenization of the supply chain, those who make a fortune by counterfeiting, for example, Louis Vuitton handbags, would have a hard time, “Dolce & Gabbana or Gucci have already launched experiments selling digital garments protected within that blockchain,” says Javier Molina, an analyst at eToro. He adds, “If, as a customer, I buy the NFT or, say, a digital scarf, I have the guarantee that only I am the owner.” Porsche and Mercedes are also getting in on this technology.
It’s not just money. In developing countries, adulterated drugs (between 10% and 30%) cost a million lives a year. Hence the value of tracing, of following the trail. “Walmart and IBM have managed to know the journey of orange juice from a farm in South Africa to the US consumer in just three seconds,” recalls Daria Krivonos, Copenhagen Institute for Future Studies CEO. Around 20% of the top 10 global food companies will use blockchain by 2025. There they coexist with entrepreneurs. BlockBar is a blockchain-driven platform allowing luxury beverage brands to issue NFTs on rare wines or spirits. The goal is to own and sell these exclusive bottles on the secondary market. “The company stores them in a state-of-the-art facility, and they can be shipped worldwide or picked up at more than 250 duty-free outlets,” clarifies its CEO, Sam Falic.
The brands’ commitment
An ecosystem is gradually taking root whose fertile soil is that of blockchain and where brands are building community. Adidas has created an NFT collection called In the Metaverse, Balenciaga has designed different outfits for the avatars of the Fortnite game, Gucci sold for $4,000 virtual handbags on the Roblox video game platform, and Nike acquired the digital sneaker manufacturer RTFKT Studios.
But this technology not only lives in that thin digital air, it also touches the ground. “The application of digital technologies and blockchain – if you adapt them to local needs and we ensure that small producers can also access them – could generate great benefits to the economy as a whole and achieve greater efficiency, productivity, resilience, and sustainability,” lists Máximo Torero, chief economist at the FAO (Food and Agriculture Organization of the United Nations). And he warns: “There is a risk of aggravating inequalities if this progress remains inaccessible to women, young people, or small producers.”
Tokenization and Music
All this is happening without forgetting that tokenization is a technology that also affects music. The sale of the music catalogs of successful artists to companies such as Hipgnosis – run by the Canadian Merck Mercuriadis – is generating billions. The singers earn a lot of money, frees them from any pressure for the rest of their lives, and the companies make money through reproduction rights. Universal Music Publishing has paid some $600 million to Bob Dylan to take over the catalog and recording masters, Bruce Springsteen has sold 300 songs, 20 studio albums, and 23 live albums for approximately $500 million, and Sting sold his entire output to Universal after receiving more than $300 million. Some 130 creators (Paul Simon, The Killers, Phil Collins, and Neil Young) have sold their works.
However, investing in intellectual property was only possible for some people. In this situation, blockchain technology, tokenization, and its ability to asset fragmentation hits in. The co-producer of Rihanna’s track Bitch Better Have My Money has raised $63,000 (€58,000) after tokenizing the rights to his song with NFT. He split them into 300 parts for $210 via the AnotherBlock platform, and 205 people purchased them.
Selling painting leftovers as art
Converting masterpieces into digital assets opens up a big business and raises ethical questions. Transforming work into a digital asset to exploit its value divides the art world. In the final months of 2021, NFT-based crypto art was going through its winter. After artist Beeple (Mike Winkelmann) bid an NFT (“Everyday: The First 5000 Days”) for $69.3 million at Christie’s, almost the entire industry thought the most absurd art orgy in history was over. “They are a scam just like cryptocurrencies,” qualifies independent curator Bartomeu Marí. “Right-wing anarchism was looking for a means to escape the financial control of the States and not pay taxes. I haven’t seen any fabulous works of art in that format.” But the pursuit of money by human beings is exhausting. Jackson Pollock’s studio has turned leftover paint staining the studio floor into NFTs. In partnership with the Web3 Iconic platform, it produced four in a run 100. He marketed them online on July 19. They sold out (in dollars and ethereum) in just three hours for about 400,000 euros. Pollock worked by letting the paint drip through the wooden handle of the brushes.
Art and NFTs
Some of the most prestigious galleries in the world, such as Pace, show Rafael Lozano-Hemmer’s works. One of his pieces fetches up to one million euros. The end of the conversation explains his principles. “I have ensured that my name is not associated with NFTs because of their intricate relationship with cryptocurrencies.“. He advocates that it can be a way of life for artists from underrepresented communities in the marketplace. “However, I’m less impressed with creators who have a privileged position – think myself – and still produce them,” he criticizes. In nine days in April, British artist Damien Hirst pocketed €19 million from selling 5,508 paintings from his artificial intelligence-generated spiral series. Three hundred ninety-nine were NFTs. Nevertheless, institutions such as Lacma, Castello di Rivoli, Buffalo AKG, and the Pompidou have included them in their collections. In the new, there is always the doubt between what will perish and what history will disdain.
But none could commit such a failure with old masters. In July last year, The Italian government stopped selling NFTs of masterpieces from the country’s museums. To get about 70,000 euros for the Tondo Doni (Uffizi, Florence), by Michelangelo, is a business failure. With the pandemic, many sought funds to survive. Italy will not sign any more contracts: it wants to protect its cultural heritage. The head of one of the great Spanish art galleries – who requests anonymity – claims physical possession. “The collection belongs to the whole country. It would devalue the works if we enter into these digital sales to specific individuals,” he reflects. However, the Thyssen Museum decided to use this tool with the canvas Les Vessenots en Auvers (1890) by Van Gogh. The institution sells 100 versions for 30,000 euros, which you can purchase on Telefónica’s NFT Marketplace.