11 min read
5 Crypto Sectors that Can Benefit from the Chaos
In this article, we’d like to take a look at the other side of chaos and see which sector in the burgeoning crypto industry might benefit from the hostilities of US regulators and banks.
The news of several US authorities beginning 2023 with a spate of regulatory crackdowns on crypto businesses is not a surprise to most by now. In recent months, the American SEC has sued Kraken, Paxos, Genesis, Gemini, Coinbase, all regulated entities and has sent Well Notices to dozens of crypto projects, mainly focused on DeFi and payments systems.
Simultaneously, banks are explicitly told that crypto is at risk of an industry to do business with. Custodia, a fully compliant neo bank, was denied a banking license , with no legal justification, and crypto-friendly banks Silvergate, Silicon Valley Bank and Signature are out of (the crypto) business. The cause of these banks going down had the potential to snowball into a second global financial crisis. This has been, temporarily, averted when Credit Suisse, one of the most revered financial institutions worldwide, was taken over by UBS.
We previously wrote about US-based projects at risk of the SEC’s wrath, a list that included projects like Ethereum, Lido, Uniswap, Terra, Compound, MakerDAO, Paxoz, Circle, Yuga Labs, and more. All these are reputed names in the crypto world who have earned their reputation for solution excellence globally.
In this article, we’d like to take the other side and see which sector in the burgeoning crypto industry might benefit from the hostilities of US regulators and banks. The underlying technology is quite literally built for this after all, as blockchains are decentralized, unstoppable, unchangeable, and uncensorable protocols for money and apps.
Custody and control requires no intermediaries in this industry and there are opportunities hidden in every apparent crisis. There are no dark tunnels in the world without lights at the end of them. Today, we look at five sectors in crypto that might benefit from the chaos around.
The Bitcoin Economy
Bitcoin has always undoubtedly been the representative entity of the crypto world as it was the first and has been the largest network ever since it was born in 2008. More than 45% of the crypto economy's more-than-a-trillion-dollar market capitalization is Bitcoin alone. However, only occupying a major chunk says little about Bitcoin's untapped potential.
The credibility and trust it brings with its name has probably never appeared as v as it valuable does now. It is Bitcoin's time to shine amidst the chaos, something that has led Balaji to bet that the price will reach $1 million soon.
A host of solutions have appeared in the market that can accelerate the Bitcoin game and spread its presence in areas where its application and penetration have been relatively low compared to its potential.
- Stacks: Much like what Ethereum does to the world of decentralized finance, Stacks - a Bitcoin layer for smart contracts, helps build decentralized applications on Bitcoin. It opens up a Bitcoin DeFi market worth more than US$300 billion.
- RIF: Another crypto protocol that helps build accessible DeFi products is RIF. Its robust toolkit of protocols and interfaces helps create products and services that cater to a user's everyday financial needs. Participation in the ecosystem through RIF tokens means broad interoperability and faster time-to-deployment - two qualities that are a must for blockchain solutions to fulfill mass adoption needs.
- Sovryn: Sovryn is a Bitcoin-based platform facilitating trading and lending. Developed on RSK, a Bitcoin sidechain governed by the community and backed by blockchain-powered merge mining.
- Lightning: Lightning Network offers scalable and instant Bitcoin/Blockchain transactions. It is again a decentralized protocol that leverages the benefits of Smart Contracts for low-cost, cross-blockchain payment solutions.
- Nostr: Nostr is an easy-to-use, resilient, and verifiable open protocol that enables global, decentralized, and censorship-resistant social media.
- Ordinals: Launched in January 2023, the Bitcoin Ordinals protocol helps inscribe digital content onto the Bitcoin blockchain. The purpose is to stand apart from the popular concepts of NFTs on Ethereum and other blockchains and gain momentum for a fresh notion of creating an immutable on-chain presence for a piece of art, text, or video.
It is now evident that Bitcoin is poised to capitalize on the potential of the largely unexplored decentralized economy. However, developers must ensure that solutions have to be non-custodial and distributed. Otherwise, it can fall prey to cyber breaches and malicious online attacks.
Truly Decentralized Blockchains
If Bitcoin is the representative asset of the crypto economy, Ethereum is the backbone of decentralized finance, as we have known so far. Its market capitalization is second to Bitcoin and occupies more than 18% of the crypto market value. With its community-run technology powering the cryptocurrency Ether, Ethereum has been instrumental in infusing the power of decentralization everywhere in the real sense of the term.
The alternative finance economy of DeFi that Ethereum empowers has powered stablecoins, non-fungible tokens, decentralized autonomous organizations, decentralized applications, decentralized identity, decentralized social networks, decentralized science, and much more.
The strength of blockchain tech is in distribution. Achieving decentralization is possible through the participation of members across a distributed network. The greater the span of the distribution, the lower the chances of getting reduced to a single point of failure.
One crucial metric that helps gauge how decentralized a network truly is is the Nakamoto Coefficient. Put simply, the coefficient indicates the number of validators or nodes that would have to connive together to slow down or block any blockchain from efficient functioning. Essentially, the higher the Nakamoto Coefficient relative to the total number of validators, the lower the risk of malicious collisions taking down a decentralized blockchain.
While not as close to the security Ethereum enjoys, other blockchain protocols such as Mina, Cosmos, Avalanche and Thorchain are well on their way.
Truly Decentralized Applications
True decentralization is necessary in a hostile environment the crypto industry is finding itself in. This does not just pertain to a blockchain, but also to the projects building on top them, the dapps. In an antagonistic environment, any central point of failure is the achilles heel of a project. Such attack vectors includes:
- A team with their main office in a hostile jurisdiction
- Projects of which most tokens still reside in the core team’s wallets without automated escrow
- Unfinished code
- Non-autonomous code
- Dapps that rely on centralized service providers such as AWS or Google
- Code with a killswitch or backdoor
- Unsustainable tokenomics
One of the most effective ways of staying anonymous in the crypto space is forming a DAO, a decentralized autonomous organization. Through these organizations, people can collaborate and act as a company and its shareholders without having a formal legal standing or named owners. These DAOs can have on-chain treasuries with Bitcoin or Ether in them and are able to develop and launch decentralized applications, fully pseudonymous and without the need for a bank.
Other than founders and innovators actively considering ways to address the bottlenecks of decentralization, the industry's intent to grow in an atmosphere of regulatory crackdowns have resulted in several truly decentralized applications.
Liquity, for instance, offers an efficient decentralized DeFi protocol that offers 0% interest rate loans against ETH and an algorithmic stablecoin LUSD. It is a fully decentralized Smart Contract protocol that even core developers can not adjust. Not only is there zero reliance on a central authority, but users also do not need to worry about any changes in the protocol that could affect their capital. Another great example is GMX, which will keep running regardless of what happens to the team.
Speaking of Liquity's stablecoin LUSD, it would be relevant to highlight that decentralized stablecoins can offer greater resilience and independence from increasing regulatory crackdowns than centralized stablecoins may offer. Apart from Liquity, there are several other stablecoins in the market.
Curve, a well-known decentralized exchange on Ethereum, has its USD-pegged, overcollateralized stablecoin crvUSD. One of the largest decentralized lenders - AAVE - has plans to launch its overcollateralized USD stablecoin GHO. sUSD is another USD-pegged stablecoin on the Synthetix platform that users can create by staking Synthetix-native SNX tokens in a smart contract. Like these and more - the world of decentralized stablecoins has opened up, with developers seeing a real growth opportunity amidst the chaos. All of these protocols are likewise highly autonomous with few central points of failure.
However, while stressing the benefits of decentralization, one must not forget that it must not reduce to a catchword to promote solutions and grab a quick market share. There are projects that experts categorize as DINOs, an acronym for Decentralized In Name Only projects. While these projects claim themselves as decentralized, they rely on a small group of individuals or entities to control their operations and make crucial decisions. These protocols stand a high chance of falling prey to attacks and the lack of transparency and fairness in financial transactions.
Asian and Middle-Eastern Projects
So far, we have discussed solutions that have the potential to turn impediments into opportunities by banking on the benefits of a decentralized and distributed network, significantly more immune than centralized protocols to unwarranted headwinds and censorship. We must also remember that solutions are available at a macroeconomic level as well.
If we look at the global context, a suspicious environment around crypto in the United States is not reflective of the overall situation worldwide. Some geographies are engaged in positive pursuits to turn the crypto space into a more efficient and seamless regime.
Hong Kong: In February, Hong Kong proposed rules allowing retail investors to trade certain large-cap tokens on licensed exchanges. Industry experts expect Hong Kong's encouraging crypto regulatory environment - more relaxed than neighboring China's - would help many crypto businesses, who are otherwise banned in China, return from exile and set up establishments closer to home.
Dubai: Around the same time, Dubai Virtual Assets Regulatory Authority (VARA) released its crypto regulatory rulebook. While publishing the rulebook, the Dubai authorities - in no uncertain terms - made it clear that the purpose of their new rules was to attract crypto businesses, promote the region as a global crypto hub, and boost its competitive edge while safeguarding the rights of the dealers and investors.
For a complete overview, read our full article on crypto-friendly jurisdictions here.
Apart from regions encouraging the crypto ecosystem to flourish, solutions and protocols are also finding ways to go beyond the immediate national jurisdictions of one or a few significant economies.
Conflux Network, for instance, is a solution that empowers creators, communities, and markets to connect beyond the limitations of borders and protocol without compromising its technological advantages. It offers all the functional edges that a protocol needs for its users to keep growing at a healthy pace, including high throughput at low fees and superior security, interoperability, and scalability.
Nervos - on the other hand - is a solution that goes beyond interoperability and empowers developers with a suite of integrated solutions to build universal apps. Through Nervos, developers can access any asset on any blockchain. Users of Nervos can operate dApps from any wallet or solution. It is possible to code flexibly by bringing dApps from anywhere.
Venom - This brand new protocol is situated in Abu Dhabi and intends to fully leverage the Middle-East’s friendly approach to the blockchain and crypto industry. The organization already works together with various governments and multinationals and is set to launch this summer.
Altogether, the chaos in the US is not only an opportunity to see beyond national boundaries but also to emerge with protocols and solutions that are universal or global.
There is always demand for money and loans. Hence, this sector shows lots of potential given both of the woes of the traditional world; the crackdown and the banking crisis. As the US tries to cut crypto off of the banking sector, millions of users are either left stranded with their capital on-chain or unwilling to use centralized banks any longer due to the control these financial intermediaries have over their money.
On the other hand, during uncertainty in the banking crisis lending is typically significantly reduced. There is less risk appetite meaning banks are less likely to provide loans and manage other people’s capital, and banks even start distrusting each other more as the counterparty risk increases. Nobody really knows who’s swimming naked until it’s too late.
This brings us to decentralized lending. This sector ushered DeFi into the (crypto) mainstream in the summer of 2022 with the launch of Aave and Compound. These two Ethereum-based protocols enable users to obtain loans with their crypto assets as collateral. They pay an interest rate on these loans, which is distributed to users who on the other side provide the necessary capital. They are truly peer to peer, do not need an intermediary and function completely on-chain via the protocol.
Given the popularity, and profitability, of these lending protocols, many have sprung into existence. We’d like to highlight here that the security of these protocols is of the essence and any DINO lending protocols, especially when based in the US, could be risky. Make sure a protocol has been in existence for a few years and that the code has been audited by a reputable form and has preferably processed hundreds of millions to billions in capital. The latter is important as the more capital, the bigger the bounty for hackers, so the more likely it is battle-tested.
Besides Aave and Compound, other interesting projects in the decentralized lending space are; JustLend, Maple Finance, Venus, Goldfinch and Clearpool. Please note that this is not an endorsement and do your own additional research.
The blockchain industry always had to be resilient
Building a new financial system from the ground up was always going to be met with adversity. Bitcoin, and serious blockchain and DeFi projects were built with this deeply ingrained in their architecture. It is during trying times like these that the need for true decentralization resurfaces.
Luckily for the industry, there is still time to build for more resilience as it’s not just protocols that are decentralized. Due to its truly global nature and appeal, there are many jurisdictions beyond the US that welcome the innovative and disrupting industry.
In the end, you can’t stop an idea whose time has come. Caution is required, but the industry’s antifragility and build-first mentality show no sign of slowing down any time soon.
Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.