The overall feature richness that programmable tokens offer is something unique. There are two additional areas we will focus on in our discussion, as they play crucial roles, too. One of them does it in providing liquidity to tokens, and the other as a means to interact with the legacy systems that will coexist with the blockchain systems of the future.
There are over 10.000 different crypto tokens as of the time this blog is being written. Although we could envision some consolidation to this number, we can also see a significant growth because different communities value different ideas and therefore generate tokens to represent these values in a digital setting.
Currently tokens are swapped via exchanges and centralized exchanges, where a single centralized third party aggregates the demand and supply of tokens, and creates marketplaces where tokens can be traded – either between digital tokens and/ or between fiat currencies like Euro, USD, JPY, or GBP.
Centralized exchanges aggregate all the demand and supply of tokens enabling more liquidity:
- Users transfer digital asset to be custodied by the exchange in order to provide the liquidity to the market and execute the exchange.
- They also offer a higher risk reward for hackers who aim to exploit any potential security flaws these exchanges may have. There have been numerous occasions in centralized exchanges, when they have been hacked or exploited and funds were lost as a result – though these situations have been getting fewer over time.
Nevertheless, centralization is not a virtue within the philosophical movement of digital assets, and alternative decentralized options have frequently been investigated.
Decentralized exchanges (DEXs) are locations that allow direct peer-to-peer exchanges.
- They aim not only to stay truthful to the principles of this industry but also to avoid the custodial transfer of funds to exchanges which users would need to do in order to take advantage of liquidity.
- In decentralized exchanges, the purpose is to bring users together who want to perform a transaction and keep them full custodians of their assets until the moment they sign-off the exchange transaction. Therefore, DEXs offer a marketplace to exchange value in a fully decentralized and more secure environment.
The current drawbacks of DEXs are mostly related to the lack of liquidity. Since adoption is still in the early beginnings, there is an overall lack of liquidity to these exchanges. As a result, order delays of trades can be very significant. Over time, however, once wallet functionalities and blockchain interoperability demands increase and overall use and utility for digital assets increase, DEXs will play central roles in the conversion of token values.
The more economic activity occurs in the digital world, the more there is a need to develop robust digital identity solutions.
Just as blockchains have no access to off-chain data – as we saw with oracles – they also have no way of identifying entities that are interacting with the protocol. Addresses are the unique identifiers to which value is allocated or moved across the blockchain in the form of transactions. To identify corporations, people, or machines on the blockchain, identity solutions are required which work on top as a layer 2 solution to the blockchain. This identity layer is also a crucial element to ensure connectivity of this innovative technology with the existing infrastructures and compliance frameworks which are in place, namely Know Your Customer (KYC), Anti-Money Laundering (AML) and Anti-Terrorism Funding (ATF) policies.
Origins of KYC can be dated back to the late 80’s early 90’s. Different iterations of the basic requirement to identify a customer raise funds have resulted in a cumbersome compliance framework that must be maintained by the financial sector at considerable expense, but is still of great value.
Our understanding is that the stronger the ties that can be built between the legacy systems and the infrastructure built on blockchains, the better and smoother the adoption of this technology will be.
There is an advantage to the use of cryptography in the design of identity solutions as an alternative to our present way of sharing information. We share a significant amount of data in our day-to-day interactions – many times in ways we do not even realize. With a blockchain based identity solution, an individual can have more control over the data being shared in every single situation. Sometimes you may want to share your age or address to execute a specific transaction but in other cases, you may not want to. Blockchain based identity solutions using cryptographic primitives allows this segregation, resulting in a much more effective data access management tool.
To show in what direction the combination of these developments could evolve to, let us use a working example of one of our consultants and their activities to travel to a client location.
Oscar is a Fusion consultant travelling to a client from a country in the EU to the UK. He got a ride from his home to the airport with a decentralized taxi service. He is a regular using this service and has accumulated taxi token. Oscar did not have enough to pay for the whole ride though, so he simply paid with digital Euros he had in his digital wallet by tapping his phone on the payment terminal of the taxi.
After his flight as he is arriving at the UK taxi terminal, he opens his wallet app, and he remembers that he could have paid the taxi ride as opposed to using digital Euros only: The digital wallet can recommend the best mix of tokens to use in order to pay. So, in the UK he decides to use the recommended option from the wallet app, pays for his ride and gets a token reward from the UK taxi company.
Behind the scenes the wallet app has an algorithm that collects exchange rate information of the tokens in Oscar’s wallet and proposes the best mix of tokens to maximize the value from his purchase, or in this case minimize the cost of paying for the taxi service. This recommendation algorithm is a machine learning algorithm. It’s using the real-time price points provided from Oracles that relay various DEXs data to recommend the best token combo. Token prices can fluctuate during the day – in particular transportation tokens. During peak periods, they can get very pricey as everyone wants to use them to pay for their taxi rides.
Besides the recommendation algorithm, the wallet’s back-end executes a predefined smart contract that triggers the payment upon the user’s signature with their private keys. The recommendation considers not only the best mix of tokens, but also the selection of the best blockchain to execute the transaction – based on fees, speed, and time to validate the transaction.
With the selection of payment options, the wallet triggers the exchange of tokens of choice to the means the taxi driver aims to be paid in – all with instant real-time settlement.
His project manager mentioned that Oscar would need to deliver the work during the week and therefore he could not know in advance whether Oscar would stay 1 or 2 nights abroad. So, Oscar logs onto the hotel application to book the reservation. This platform is no different to the web platforms we currently use to book hotel rooms, with the difference that this application can interact with a smart contract, allowing him to place a condition into the booking about his potential longer stay. Oscar should confirm until 2pm the following day, whether he stays for one more night. Once he sets up his reservation, he verifies the reservation with his private key which is on his hardware wallet device on his keychain. This triggers the reservation of a depot from his wallet.
Before signing the transaction to pay for the hotel reservation, Oscar should change the settings in his digital identity, as they are still set to the customs clearance requirements. For the hotel reservation, he doesn’t need to show as much data about himself as he did to customs when he arrived at the UK. After changing the settings and signing off the digital identification application, he adds the credentials to the hotel’s reservation smart contract application, and signs the transaction to conclude his booking.
What this simple example from the travel scrambles of our consultant has shown, is a world where the different facets of the blockchain future come together and play a crucial role in our day-to-day lives. The functionalities they enable, whether we notice or not, we will take full advantage of in a not-so-distant future.
In the following posts we will focus on applications of the blockchain industry in other areas of the economy. First, we will start by looking across industries, enterprises, and governments to see how blockchain technology could change them. Then, in the following posts we deep dive into our industry of passion which is the pharmaceutical, biotechnology and medical devices industries and find out how blockchain will affect these sectors of the economy as well.