Blockchain is a silent technology. Its practical applications aren’t as easy for ordinary citizens to visualize, when compared to the metaverse or artificial intelligence. And yet, it’s the foundation of a major economic revolution.
Before discussing blockchain’s potential, it’s best to define what exactly we’re talking about.
Its beginnings are linked to cryptocurrencies – especially bitcoin – but its journey is much longer and will produce important changes in payment systems. Most central banks are already working on their digital currencies. Meanwhile, logistics, the video game industry, or the world of investment are transforming as a result of tokenization – the concept of turning real assets into digital replicas.
Blockchain technology isn’t just a database: it’s a set of technologies that allow for the transfer of a value or asset from one place to another, without the intervention of third parties. In this sense, it proposes a new financial model, in which authenticity isn’t verified by a third party, but by the network of nodes (computers connected to the network) that participate in blockchain. Hence, no transfer of value – whether it’s money or another asset that has some kind of value – is carried out through an intermediary, but through a consensus, allowing information to be stored in a transparent manner.
As its name indicates, blockchain is a chain of blocks, which contain encoded information related to a transaction on the network. And, being intertwined (hence the word chain), the blocks allow for the transfer of data (or value) with a fairly secure encoding through the use of cryptography. “What’s truly new is that the transfer doesn’t require a third party to certify the information. Rather, it’s distributed in multiple independent and equal nodes that examine and validate it, without the need for them to know each other,” explain analysts from the Spanish bank BBVA. “Once entered, the information cannot be deleted; only new information can be added, since the blocks are connected to each other through cryptographic encryption. Modifying data from a block prior to the chain is impossible, since it would have to modify the information from the previous blocks.”
The big banks are already preparing for what’s coming. Citibank, for instance, has published a lengthy report on the economic impact of blockchain. Digital currencies (CBDCs) issued by the world’s leading economies alone could be valued at $5 trillion by the end of this decade and would be accessible on the mobile phones of 2 billion people. 90% of central banks are currently running pilot programs involving the use of virtual currencies. However, the European Central Bank (ECB) thinks that the new digital euro won’t be available for at least another three years, as several unknowns remain to be cleared up, particularly regarding privacy concerns.
Perhaps Manisha Patel – a finance expert at the IMF – has some solutions to the issues with blockchain. Firstly, how would this technology help the most vulnerable?
“These new digital formats are being explored by many developing economies, due to their potential to increase financial inclusion. They’ll succeed if they’re an affordable and widely-accepted payment instrument,” Patel notes. But these countries will require extensive internet infrastructure and access to mobile phones, so as to overcome barriers. “Custom proposals in each country can take several years,” she warns.
And what will happen to crypto assets if official digital currencies become popular? “Cryptocurrencies will survive as a form of payment within the underground economy, illegal activities and tax evasion. They compete with $100 bills,” predicts Kenneth Rogoff, a former IMF chief economist. “They’re going to be used for speculation and crime,” agrees Emilio Capela, a partner at McKinsey & Company. However, several experts 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 gets excited when talking with his eight-year-old little brother about ethereum, “an open source community that, unlike bitcoin, takes much less energy to mine (manufacture),” he says. “With this technology, the 2008 crash wouldn’t have happened.”
Another business that envisions mountains of money coming from blockchain is that of video games. Last year, some 3.2 billion players or gamers used the technology. These guys don’t usually ask themselves what technology is behind their video games. However, with the Web3 ecosystem (defined by investor Packy McCormick as “an internet that’s owned by developers and users, coordinated with tokens”), they’ll improve their experience when sitting in front of a computer. Newzoo – the consultancy that specializes in this intangible space – calculates that blockchain generates $184 billion annually from the video game sector.
Everything was more or less on track… until bitcoin began to be surrounded by controversy. “Cryptocurrencies have [blighted] the reputation of blockchain. However, the technology on which they are based is very useful,” clarifies Javier Pino, an expert from the Alliance for Financial Inclusion. Still, frauds, thefts and the bankruptcy of the FTX platform have left the crypto world with bad memories.
Consumption plays a big role in this game (distributors will gain an advantage in efficiency with the massive use of block systems), which, despite everything, can still be financially lucrative. Two major technologies – blockchain and tokenization – want to share the future together. Tokenization changes everything, because almost everything is tokenizable: a line of credit, a venture capital investment, the purchase of a house, the rights to songs and images, shares, currencies, gold, a Picasso painting… Advocates argue that digital assets democratize investments that were originally meant for the elites, or create brand-new investments that didn’t previously exist in the financial markets.
“Tokenization can transform financial and non-financial infrastructure and public and private markets in the next five to 15 years,” estimates Alkesh Shah, director of digital asset strategy at Bank of America Global Research. The tokenized digital stock market is estimated to reach between $4 and $5 trillion by 2030. “It already allows for a reduction in credit risk, increasing the liquidity of assets that were previously illiquid, or allocating capital more efficiently,” the analyst explains.
“The next generation of the markets [and] the next generation of the shares will be their tokenization,” predicted Larry Fink – president and founder of BlackRock, the world’s largest asset manager – in an interview with The New York Times from November of 2022. If Picasso reinvented painting by dispensing with the vanishing point, technological disruption is poised to reimagine finance. Two inseparable sciences also help: sociology and cryptography. 67% of millennials (those born after 1981) around the world prefer to be guided by computer recommendations (robo advisors) when investing, rather than by fellow human beings. The investment firm Schroders has even deployed a new mantra to adapt to this trend: “technology and digital experience.”
Tokens are also gaining ground as the largest inheritance in history is about to begin. In the coming decades, Schroders details that, for example, in the United Kingdom alone, the former baby boomers (those born between the late-1940s and early-1970s) will bequeath 5.5 trillion pounds – or $7 trillion – to millennials and generation Z, who will tend to put more money in non-traditional assets. “Currently, tokens aren’t defined or regulated consistently in all regions… but [government] administrations will address that deficiency,” analysts from Schroders predict.
Tokenization – blessed by Wall Street – has already reached the mainstream economy. Venture capital firms such as KKR, Hamilton Lane and Apollo are digitizing some of their funds through blockchain platforms. Those who understand the technology will recognize the platforms ADDX, Avalanche, or Polygon. Meanwhile, other finance giants – such as Goldman Sachs, HSBC, JP Morgan, Citi, and Société Générale – have designed their own structures to trade digital assets. “It’s an opportunity to develop the use of these services on a large scale,” emphasizes John Gladwyn, manager of Pictet Digital. In fact, Hamilton Lane has lowered the minimum investment required to access some of its funds from $125,000 to $10,000. And, late last year, KKR tokenized its healthcare fund via the Avalanche platform. Even the market value of tokenized gold surpassed $1 billion in March.
Financial institutions understand that they have to constantly innovate or – like a recurring nightmare – they will suddenly be worthless. Until now, cryptocurrencies had the big problem of volatility. The way to get around this fence is with stablecoins. This digital currency is linked to a real currency, such as the dollar, to provide holders with stability. There were about $7.8 trillion in stablecoin transactions in 2022 alone. Still, hackers appear, as do speculators – both hindrances in any ecosystem where seas of money flow. This has caused doubts to emerge. “The stable versions [of bitcoin] are of little use as stores of value, because it’s never clear if they have enough collateral [assets] to stabilize the currency in the event of [cyber] attacks,” warns José García Montalvo, a professor of Economics at Pompeu Fabra University in Barcelona.
Within the uncertainties that come with all technologies, perhaps one of the spaces where there’s more consensus resides in smart contracts. This programming software allows pre-established transactions to be carried out only after a series of requirements have been met. “[This] guarantees a high level of accuracy and compliance,” affirms Álvaro Casado, head of digital assets at KPMG. Smart contracts work through blockchain, so the terms of the agreements are saved in a database. They can be seen… but not changed. “A clear beneficiary will be international trade, which uses an enormous amount of documentation and conditions. It could be automated with standardized rules and simpler trading options,” García Montalvo describes.
With these types of contracts – along with the tokenization of the supply chain – those who make a fortune counterfeiting, say, Louis Vuitton bags, would have a hard time. “Dolce & Gabbana or Gucci have already launched experiments selling digital garments, [which are] protected within that blockchain,” says Javier Molina, an analyst at eToro. “If, as a customer, I buy the NFT or, say, a digital scarf, it’s guaranteed that only I am the owner.” Porsche and Mercedes are also getting into this technology.
It’s not just about the money. In developing countries, adulterated medicines (between 10% and 30% of all pharmaceutical drugs sold) cost a million lives a year. Hence the value of tracing – of following the trail. “Walmart [and] IBM have managed to track the path of orange juice from a farm in South Africa to the American consumer in just three seconds [with the help of blockchain technology],” says Daria Krivonos, CEO of the Copenhagen Institute for Future Studies.
Around 20% of the top 10 global food companies will use blockchain technology by 2025. One example of this phenomenon is BlockBar: a blockchain-governed platform that allows luxury beverage brands to issue NFTs on a collection of rare wines or spirits. The goal is to own these exclusive bottles and sell them on the secondary market. “The company stores them in state-of-the-art facilities and they can be shipped worldwide, or picked up at more than 250 duty-free outlets,” says its president, Sam Falic.
Big brands make a bet
Little by little, an ecosystem is taking root, one whose fertile ground is that of blockchain. Brands are building a community in relation to this technology. Adidas has created an NFT collection called Into the Metaverse; Balenciaga has designed different outfits for Fortnite game avatars, while Gucci sold a virtual bag on the Roblox video game platform for $4,000. Nike recently acquired RTFKT Studios – a digital shoe manufacturer.
But this technology not only lives in that thin digital air: it also exists on the ground. “The application of digital technologies and blockchain – if they’re adjusted to local needs and we guarantee that small producers can also access them – could generate great benefits for the economy as a whole, and achieve greater efficiency, productivity, resilience and sustainability,” lists Máximo Torero, chief economist of the Food and Agriculture Organization of the United Nations (FAO). He also warns that “there’s a risk of aggravating inequalities if these advances continue to be inaccessible to women, young people or small producers.”
Tokenization is a phenomenon that’s increasingly becoming part of culture. Selling the music catalogs of successful artists to companies such as Hipgnosis – run by Canada’s Merck Mercuriadis – is generating billions. The singers earn money that relieves them from financial pressure, while the firms make cash through the reproduction rights. Universal Music Publishing has paid about $600 million to Bob Dylan to acquire his catalog. Bruce Springsteen has sold 300 songs, 20 studio albums and 23 live albums for approximately $500 million, while Sting sold all his production to Universal after receiving more than $300 million. About 130 creators – such as Paul Simon, The Killers, Phil Collins, or Neil Young – have already liquidated their works.
Until now, investing in intellectual property was impossible for an average earner. This is where blockchain technology, tokenization and its ability to fragment pieces of cultural production come into play. For instance, the co-producer of Rihanna’s song Bitch Better Have My Money has made $63,000 after tokenizing the rights to the song in an NFT. He divided it into 300 parts for $210 apiece through the AnotherBlock platform. The fragments were subsequently purchased by 205 people.
Selling bits of paint as art
Turning masterpieces into digital assets clearly opens up big business opportunities. But it also raises some ethical questions.
The conversion of artworks into digital assets to exploit their value is dividing the art world. In the last months of 2021, NFT-based crypto art was going through its winter. After the digital artist Beeple (Mike Winkelmann) sold a $69.3 million NFT (Everydays: The First 5000 Days) via Christie’s, almost everyone in the industry thought the most absurd art orgy in history was over. “They’re a scam, just like cryptocurrencies,” shrugs philosopher Bartomeu Marí. “Right-wing anarchism was looking for a way to escape the financial control of the state and not pay taxes. I haven’t seen any fabulous artwork in that format.”
But the pursuit of money by human beings can never be exhausted. Jackson Pollock’s studio has turned the paint residue that stains the floor of the deceased artist’s workspace into NFTs. In association with the Web3 Iconic platform, the studio churned out 100 units from the stains. This past July 19, they were marketed online: all were sold in just three hours for around $450,000 (paid in dollars and ethereum). When Pollock worked, paint dripped down the wooden handles of his brushes.
The works of Rafael Lozano-Hemmer are exhibited in some of the most prestigious galleries in the world, such as the Pace Gallery in New York. Acquiring one of his works can cost over a million dollars. The Mexican artist tells EL PAÍS his thoughts on the matter:
“I’ve made sure that my name isn’t associated with NFTs, due to its intricate relationship with cryptocurrencies,” he summarizes. That being said, he defends that the format can be a means of survival for artists from communities that are poorly-represented in the market. “However, I’m less impressed with creators who have a privileged position – I think of myself – and still produce them,” he criticizes.
Over the course of nine days this past April, British artist Damien Hirst pocketed more than $20 million from the sale of 5,508 paintings from his spiral series – all of which were generated by artificial intelligence. 399 were turned into NFTs. Despite everything, art institutions such as Lacma, Castello di Rivoli, Buffalo AKG or Pompidou have included them in their collections. In this new climate, there’s always the question about what will perish and what history will disdain.
Measures are being taken so that this tokenization cannot be done to the great masters. The Italian government halted NFT sales of masterpieces from the country’s museums in July of 2022. Those who paid $80,000 for NFTs of Michaelangelo’s Doni Tondo ended up making a bad business decision. While many museums engaged in this form of digital commerce during the pandemic to raise funds, Italy will no longer allow this to continue: it wants to protect its cultural heritage.
The person in charge of one of the great Spanish art galleries – who requests anonymity – is in agreement. “The collection belongs to the whole country. It would be devaluing the works if we [allowed them to be sold digitally] to specific people,” he reflects. However, the Thyssen Museum in Madrid has decided to use this technological tool with the painting Les Vessenots près d’Auvers (1890), by Vincent Van Gogh. The institution is selling 100 digital versions of the painting for $33,00 apiece. They can be purchased on an NFT marketplace run by a local telecommunications company.
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