Yves Renno, Head of Trading at Wirex
Blockchain technology is revolutionizing the structure and management of communities and businesses worldwide. This statement might seem excessive at first, but it should not be taken lightly. Between the unconditional cryptocurrency believers and the most severe critics, including Warren Buffet or Bill Gates, it is sometimes difficult to pick a side, but it could be detrimental not to.
The 1900s industrial revolution led businesses to adopt the latest productive techniques and to seek what Alfred DuPont Chandler called ‘efficiency through coordination’. But the coordination was conceived at a managerial level. The managerial class rightly took most credit for the conception of the economic fabric of nations as we know it: activities were integrated and organized into capital-efficient value chains. This revolution was not perfect: ecologists would argue that it was a failure because of its environmental impact a century later.
Non-Fungible Tokens (NFT) and the Environmental Debate
There is good and bad in every revolution. But the blockchain revolution has one clear benefit: its capacity to create or adapt fast for the benefit of inclusive communities. The first NFT was created five years after the Bitcoin network went live.
NFTs are digital certificates of authenticity and ownership that are based mostly on the Ethereum network and implemented with an ERC-721 smart contract standard. As such, an NFT stores unique information in its metadata and handles the essential actions of ownership transfer and verification. They can solve the difficult challenge of digital ownership for artists and collectors. However, their potential drawback is their hurtful environmental impact. This debate is keeping many from engaging with NFTs.
In fact, the environmental debate is not NFT-related: it is specifically related to the mechanics that govern the blockchain. Bitcoin and Ethereum are governed by a Proof of Work (PoW) protocol, a consensus mechanism designed for ‘miners’ to produce blocks and confirm transactions on the chain by solving complex, power-intensive cryptographic puzzles. Although this is far from energy efficient, Ethereum, the largest NFT issuer, is addressing this by upgrading its PoW protocol to the environmentally friendly Proof of Stake (PoS) protocol in 2022.
The PoS protocol entrusts the block production and transaction validation to those who put their cryptocurrencies at stake. In other words, stakeholders align their interest to the interest of the blockchain, and by extension, to the interest of the community. , a co-founder of the Ethereum blockchain, is projecting the new protocol to use only 1% of the energy currently consumed. The success of the upgrade would not only close the environmental debate, but mostly demonstrate the dynamic nature of the technology, and the efficiency of a driven, consensual community.
Blockchain Technology in the Corporate World
Like a business, a blockchain is as good as its people. A successful business knows how to incentivize its people. It aligns the employees’ interest to the interest of the company through the distribution of stock-options. An independent board is elected by the shareholders to represent them, and debtholders have claims on the company’s debt that are specified by contract. The corporate structure and governance that we have just described could be captured by a digital protocol.
The blockchain pioneers found inspiration in the corporate world. They used their idealistic vision of a transparent community-centric corporation to create the most successful public blockchains. In turn, the corporate world is now using the product of this vision to bring efficiency and trust to their own activities. The blockchain technology is on track to be the new economic fabric of our time.
Potential Business Use of NFTs
The use of NFTs for digital rights ownership in the art sector is now a trending topic: NFTs can handle the sales, royalties, and distribution of a music track (e.g. EulerBeats). However, NFTs can also be designed to handle the ownership of a company’s shares, or the claims on a company’s debt.
On the debt side, Telos for instance designed the ‘T-Bond’ NFTs, which act like treasury bonds. Also, on 5th May, the European Investment Bank (EIB) announced their ‘first ever digital issuance on a public blockchain. In its statement, the EIB underlined the benefits of digitalisation that are all attributable to NFTs: “a reduction of intermediaries and fixed costs, better market transparency through an increased capacity to see trading flows and identity asset owners, as well as a much faster settlement speed.”
On the equity side, an NFT can represent a ‘nominative’ share in the ownership of the company. However, ERC-721 NFTs are by construction not fungible. If every Tesla share were represented by a unique NFT, trying to swap one share for another would be difficult – there would be no digital constraint to ensure that the price of two NFT shares is the same. The solution was to create the ERC-1155 standard three years ago. An ERC-1155 smart contract can hold many tokens with similar properties, including their market price. Therefore, a digital version of the Tesla shares could be governed by an ERC-1155 smart contract, and within this contract, two Tesla share NFTs would be exchangeable, with their owners still identified.
Despite these opportunities, Binance recently created stock tokens where each token represents a share in a stock corporation. Unfortunately, in this case, the tokens were issued with the ERC-20 standard, meaning that, stock ownership rights are held by a third-party. Had the tokens been properly issued as NFTs within an ERC-1155 smart token, the owner could have claimed their voting rights without the intervention of any third-party.
The latest applications of the NFT technology are ground-breaking. But the fast evolution of the technology is truly the big picture. It is likely that corporatism as we know it will slowly disappear several decades from now, handing over the stage to more efficient, driven, and inclusive communities.
