Core Cryptocurrency Use Cases


via EladBlog

As a market driven investor, I am skeptical of 99% of the crypto projects under development today. That said, there are a core set of use cases with massive market sizes that cryptocurrencies will fill (and in some cases already fill):

1. Store of value (SoV) & investment

A digital store of wealth such as bitcoin can have multiple advantages over traditional ones such as gold ($7 trillion plus asset), USD, art, or land. This includes seizure resistance (a badly acting government or thief will find it hard to steal) and ease of transport (cryptocurrencies allow you to cross a border with literally a billion dollars in your pocket or mind).

This use case is already a real one for cryptocurrencies and generationally many millennials view cryptocurrencies as a digital asset to own. The primary drawback to cryptocurrencies as SoV is their volatility, which should decrease with adoption, liquidity, and derivatives. Until volatility decreases cryptocurrencies will still be used as an investable asset and partial store of wealth. Many people are willing to trade crypto price volatility for security or avoidance of high inflation in unstable economic or political regimes (see e.g. Venezuela). Similarly, some governments may want to hold assets divorced from the action or whim of other government-driven currencies. This is a multi-trillion dollar opportunity.

2. Offshore capital: Private assets & payments

Over $20 trillion dollars are believed to be stored in the Cayman Islands and in Swiss bank accounts. These offshore accounts are used due to their discretion and privacy. Digital privacy tokens like Monero and Zcash will subsume this use case over time[1].

On a related but different note, privacy tokens may be well optimized for grey or black market use cases. That said, it should be possible to build a privacy coin whose primary use case is discretion of assets (Cayman Islands/Swiss accounts) versus nefarious purposes (buying drugs online).

3. Money wrapped in code: Securitization platforms & asset ledgers

A wide range of assets in the traditional financial system are value wrapped in contractual code - for example a stock certificate (or electronic form thereof) is really just contractual ownership of future cash flows or value of a company. Similarly, escrows, titles, loans, mortgages, trusts, wills, and derivatives are all value wrapped in contracts. Contracts are really an analog form of code. Smart contracting platforms like Ethereum, or regulatory compliant approaches like Harbor, are going to take analog contracts and convert them to digital ones.

The nearest term example of this are ICOs, with $5.6 billion in ICOs are thought to have been raised in early 2018. Many of the tokens sold in ICOs are ERC20 tokens based on the Ethereum smart contracting platform. This is the earliest large use case in the conversion of financial contracts into code running on a blockchain, as well as unlocking global 24/7 markets. Smart contracts today are most interesting in their ability to create massive crowdfunding markets for all types of assets.

4. Persistent digital goods

Adoption of ERC721 based persistent digital goods is early (see Cryptokitties), but this area will accelerate in the coming years as traditional gaming talent enters this market. This market will be smaller then the three other markets above, but it will be in the billions of dollars in its own right. Example applications may include games, esports, collectibles, and eventually fine art.

In summary, there are multiple large, multi trillion dollar use cases for cryptocurrencies today as financial products to store wealth, to maintain privacy and discretion of assets, and to convert analog contracts to smart digital ones (money wrapped in code). Additional, a smaller but real use case exists in persistent digital goods on blockchain.

Are there any markets I missed? Let me know on Twitter.

Thanks to Avichal Garg and David King for comments on this post.

NOTES
[1] You can also imagine e.g. integration of Bulletproofs, zk-STARKs or zk-SNKRs into bitcoin or other chains as well taking on this use case. For now it seems these may be different (but overlapping) use cases with different regulatory implications. There are also interesting new protocols like Grin and Signal is workin on Mobilecoin. This is an area to watch.

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I see 2018 being the year where a lot more use cases come to realization. A lot more talk around this in the media. Maybe even Warren Buffet will warm up to some coins :rofl:

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totally agree. i can’t wait to see what comes next.

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