From the period of 2019-2022, blockchain technology was having its ‘moment’.
The biggest application of the technology, cryptocurrencies, had finally made an impact on the public consciousness. The NFT market, where people could buy, trade and sell unique digital assets on the blockchain, experienced exponential growth in 2020, tripling its value to US$250 million. So popular was the NFT craze that we had celebrities, from Snoop Dogg to Paris Hilton, jumping on the bandwagon, and a total of US$200 million was spent on NFTs in 2021 alone.
For those who championed blockchain and how it would herald the next phase of the web i.e. web3, this period of growth was justification for their faith in the technology. In 2019, around $2.9 billion had been invested into blockchain as various companies and governments began to see the potential of it. Blockchain was having its renaissance but could it last?
Unfortunately, a series of significant setbacks and scandals this year has taken the wind out of blockchain’s sails.
To say the last quarter of 2022 and the start of 2023 were a period of reckoning for the blockchain space would be apt. The collapse of FTX at the end of 2022, arguably the largest cryptocurrency exchange, had severely reduced liquidity in the blockchain market. It was essentially the equivalent of the 2008 financial crash for the crypto sector.
The FTX implosion was so severe that the capitalisation of the crypto market has tumbled from its peak of $3 trillion to nearly 8 billion in just 12 months and the crypto market is still licking its wounds from the fallout. Trading volume for bitcoin at the start of this year is 31% below its level in the same quarter last year.
Unsurprisingly, the FTX incident has been a catalyst for other woes now impacting the beleaguered crypto market. As expected, there has been an even louder demand for regulation of the crypto space this year from both the UK and US. The NFT market has all but fizzled out from the peaks of last year, with daily sales of NFTs having declined by 92% in September 2021 and the number of active wallets in the NFT market falling a whooping 88% from November 2021. The hype that was once surrounding blockchain technology seems to now have transferred over to AI technology, with tech analysts, writers and consumers in awe of the AI chatbot, ChatGPT.
Despite all the gloom and doom facing the blockchain world as described in the aforementioned paragraphs, not all hope is. Blockchain technology still has so much potential to be the transformative technology it can be. But there are a few challenges that need addressing first.
Challenges facing the blockchain industry
The traditional banking sector is going through its own reckoning. The collapse of The Silicon Valley Bank in March and the sale of Credit Suisse to UBS, mere days apart, has rocked the financial system. Centralised banking, where customers deposit and hold their money within a single entity (i.e. a bank), is not such a safe bet given the aforementioned events.
This development presents an opportunity for blockchain, in the form of decentralised finance (DeFi) to stake its viability as an alternative way for people to deposit and transfer money. DeFi is so disruptive because there is no centralised authority to control or dictate when someone can take out their money like in traditional finance. Khofiz Shakhidi, chairman at Alif Bank, has already spoken about how the use of blockchain technology can enhance efficiency and transparency of Sharia-compliant transactions. Even now, despite the instability in the banking sector, bitcoin surprisingly climbed 4% a few days ago because traders are viewing cryptocurrency as a hedge against the traditional banking system.
If there was ever a strong case for DeFi, there is no better time than now, while the traditional finance sector finds itself on another cliffedge with rising interest rates and stubborn inflation rises. But the collapse of FTX still casts a long shadow over DeFi and crypto trading. One of the biggest challenges the blockchain industry needs to overcome is the security pitfall that it is too often a victim of. Approximately $3.2 billion worth of cryptocurrencies was stolen in 2021. Of that, $2.2 billion (72%) were stolen from DeFi applications. DeFi protocols need more robust security measures if they are to be trusted and seen as true successors to the current banking and finance sector.
The other big challenge that blockchain technology faces, particularly crypto assets, is regulation. Governments, particularly the UK and US, have doubled down on regulation following the FTX debacle. Naturally, blockchain companies, especially those in the DeFi space, are against regulation but it is inevitable at this point. However, lawmakers do need to make sure that proposals are robust and bold. Sentiments shared in Tech Monitor by Alan Vey, founder of crypto firm Aventus:
“Stablecoins and decentralised finance should not be where this all halts. An industry advisory board should be established and consulted with to deal with the tricky task of including different types of assets going forward.”
Exciting technology eventually ceases to be as exciting as it once was when it first enters the market and captures people’s attention. NFTs and crypto coins were driving a lot of discussion around the future of money and finance two years ago. The hype around blockchain has diminished as people naturally move onto the next tech craze – AI technology.
Now that the blockchain industry has moved on from its ‘hype’ phase, it is in a far more interesting and beneficial place. It needs to mature and prove itself as the true evolution of the web. Blockchain, Defi and crypto assets are here to stay. But they must all make the transition to becoming safe, secure and sustainable. To do so, this means regulation, of some kind, needs accepting and security weaknesses smoothing over. The blockchain industry may be going through a difficult period. And to be honest which industry isn’t in these uncertain times, but blockchain is far from being just yesterday’s craze.