What might that tipping point be? We thought for years that events such as the adoption of crypto payments by Amazon Coin (AMZ) and the issuance of a crypto by Facebook (does anybody remember Libra?) would mark the moment when cryptocurrencies were going to be fully accepted. Why? Because if AMZ accepts BTC to pay for books, it is facilitating a crypto market because it means I know that my digital money has real value. And since AMZ is trustworthy, it could easily replace the Swiss National Bank in providing my crypto with credibility.
Instead, what has happened is that with the emergence of a new generation of blockchains, and especially with the development of Web3, the acceptance of cryptocurrencies has got underway via a different route to that which we expected: their own business models.
Today crypto is at the center of a massive transformation in financial services driven by decentralized finance, commonly known as DeFi. New non-fungible tokens (NFTs) have become available to individuals and provide a value-creating business model. Essentially, the oligopoly that BTC gave to “miners” to enjoy returns for every block they verified has been removed. Thanks to the introduction of “proof of stake” consensus algorithms, citizens have been accepting cryptocurrencies as an alternative to money.
Let me explain the process of staking briefly. In a similar way to that in which central banks periodically increase money supply to satisfy interest payments, blockchains generate an additional supply of crypto for every block that gets completed and verified. With “proof of stake” consensus algorithms, any member of a blockchain can verify transactions and get compensated for every block that is completed.
However, unlike “proof of work” which uses a competitive validation method to confirm transactions and add new blocks to the blockchain, the member who verifies proof of stake transactions wins that right depending on how many units of crypto she controls. In turn, other members can “stake” their holdings in a particular “pool” to gain verification rights and hence returns. This is called “staking returns”. By holding any crypto different to BTC and ETH – such as ADA, Solana (SOL) or ETH 2.0 – we can earn returns in the same way we could earn interest rates on bank deposits.
This is the massive disruption faced by central banks; their business model is being replicated by decentralized blockchains which, because they are more democratic, distribute “interest” more fairly.