Decentralized Finance: present and future

What is Cryptocurrency?

"Any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions". Cryptocurrencies are based on a blockchain technology, also known as a distributed ledger. Due to the decentralised nature, the currencies are thought to be resistant to government manipulation and interference.

Stability of Cryptocurrency

When we talk about the stability of traditional currency, we are referring to the so-called purchasing power of that currency. If the amount of goods that can be purchased with a unit of currency does not fluctuate much over time, then that currency is said to be stable. Before 1971, the value of currency (and its consequent stability) was tightly linked to gold, insofar as the currency was merely a standby for the literal amount of gold that could be exchanged for that banknote of coin. The power of this transition from amounts of stuff (goods, cattle, gold, ect.) to a “paper” that guaranteed the same values exchanged was understood and already implemented in early-developing banking systems. The advantage is clear: less need to move goods around for every transaction; faster and more agile trading. This whole system relies, however, on the possibility of banks to exchange the banknote for gold, and vice versa. The bank grants for the amount of gold in your stead. After 1971, however, the literal connection (and possible exchange) from banknote to gold was severed. Traditional currency is now referred to as fiat (latin for “it will be”). This fiat currency is now issued by a central government, and the same government grants for its value. When managed by strong governments, fiat currency is generally stable. Moreover, governments generally offer some form of asset protection, and enact laws that protect consumers against digital fraud or theft, which makes it easier to recover lost funds. Unfortunately, the centralisation also brings many problems, an obvious one being inflation. Moreover, having to rely on intermediaries, significant charges are issued to users. Absence of intermediaries is indeed one of the more appealing characteristics of crypto currencies, which enables the consumers to lower the fees (transactions, ect.) and costs of account maintenance, and take more control over their finances and privacy. However, the same anonymity properties can attract money launderers and other criminals, who can use them not to be tracked back to a fraud or a cyber attack. These are all factors that contribute in an indirect manner to the stability of crypto currencies; however, the lack of a regulated body that can grant asset protection or insurance is the main cause of instability. The value of cryptocurrency is generally derived from the continued willingness of market participants to exchange fiat for cryptocurrency, which may result in the permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency diminish or disappear. There is no assurance that persons and companies who accept cryptocurrency as payment today will continue to do so in the future. Moreover, cryptocurrencies issued with a fixed number of units may be susceptible to deflation. In 2018, the Bank for International Settlements, a 90-year-old institution based in Switzerland, issued a research report concluding that cryptocurrencies are afflicted with inherent contradictions that make their widespread use as money impossible. Most of the crypto currencies generate trust by limiting the amount of currency available, in the case of bitcoin to 21 million. The problem with that is that during periods where there is greater demand for them, the supply is unable to respond This is theoretically a good feature for the store of value function of money, as your savings theoretically cannot be debased by creating more of the currency, but it's not so good for the stability required for price comparisons or making transactions. And it can backfire too for those trying to store value — just as there is no central bank to put downward pressure on the value of money, there's also no institution there to absorb potential losses and prop up the value of cryptocurrencies in times of crisis.

Media:bis.png Source: Bank of International Settlements, 2018

Government & Regulations

Digital Divide

We define the digital divide as the gap between members of society who have access to digital technologies (not only access to the Internet, but also to devices, such as computers and smartphones) and those who do not. The socio-economical disadvantages faced by those who suffer from digital divide are, among others: Learning and researching option are drastically reduced Inability to expand their business reach Limited means to find and apply for jobs Restricted purchasing options, being unable to benefit from the ones that are online Limited way to participate to democratic life, for example through voting According to reports from the United Nations and World Bank almost half of the world still does not have access to the Internet, as per April 2021.Particularly, data showed that, on average, developing countries’ internet penetration rate is around 35% (with the lowest valley recorded in Africa, with only 26%) compared to developed countries of 80%. Moreover, an increase in GDP of about 2 trillion US dollars and the creation of more than 140 million jobs have been estimated to be achieved by raising internet penetration to 75% in developing countries.

Bridging the digital divide by providing mobile networks and internet access would lead to improving the economic growth of a region, and improving social mobility and economic equality.

The two factors that have been hindering the spread of the Internet are: high infrastructure costs to fund rural, remote, or sparsely populated areas and the lack of funding as a result of high infrastructure costs.

As of lately, however, thanks to a promising new iteration of the WiFi technology (namely 6G) combined with a blockchain platform, many companies have expressed interest in venturing into researching and developing solutions for a mesh network that could cover those problematic areas.

A blockchain platform, combined with wireless mesh network technology, can put an end to the digital divide by providing affordable broadband internet access to remote areas.

Media:internet_inequality.jpeg Source: International Monetary Fund, 2020

The specific solution for Africa is a mix of extensive 4G coverage for outdoors and cheap-to-implement WiFi for indoor and stationary users. While it is true that satellite connectivity can be considered as an option for connectivity in remote areas, the costs are still too high, for a pretty slow connection (compared to high speed internet delivered through fiber, for example). the digital divide by bringing the internet via a satellite in a remote area, it is still costly.

A new technology based on blockchain is able to provide the low-cost internet infrastructure much needed in remote areas and low-income countries. Such technology is based on a mesh network architecture which makes use of blockchain protocol to keep track of every node in the network and its usage. Every node can behave as a receiver and a transmitter, essentially covering vast areas as a single Local Area Network with many Access Points.

As subscribers both receive and transmit data to other users, subscribers who consume less data than they transmit can also earn credit. The bookkeeping of this credit is delegated to a dedicated cryptocurrency, through blockchain protocol.

The same cryptocurrency will also be used as a utility credit for the user subscription service. This means that when subscribers pay for the network services they are actually buying a tiny portion of the coin which will be deducted as they use their phone to make calls or surf the internet.

As more and more users use the network the price of the coin will go up. However, this is only going to benefit the subscribers, so if the value of the coin goes up, the amount of available credit also increases.