Crypto technology has evolved manifold since the Bitcoin whitepaper was published in 2008, and today is reshaping finance, business, art, and even the foundations of the internet.
Consider Ethereum, the second-largest crypto by market capitalization. The going price of 1 Ether, the native token of the Ethereum network, is nearly ₹1.98 lakh (over $2,500). Despite a fall in recent times, due to broader economic and geopolitical factors, Ether has had a mean annual growth rate of nearly 200%.
What explains this growth? The answer is the real-world utility and uptake of the network. Ethereum today is the network of choice for developers of decentralized apps and financial services. NFTs, or non-fungible tokens, have been all the rage of late, and they are secured by the Ethereum network.
Decentralized finance, or DeFi, is an umbrella term for financial solutions using crypto technology. According to DeFi Llama, an open-source tracker, the overall value of crypto assets on DeFi protocols and financial instruments is nearly $200 billion.
DeFi startups today offer crypto-based lending and borrowing, hedging and staking, on-chain asset management and other innovative financial services. Wyoming in the US has attracted several such projects with its progressive regulations. Business use-cases such as these built on the Ethereum network appreciate the value of its token, Ether. This is true for other blockchain networks and layers-2 chains as well. Each of these networks has its native token—Chainlink has LINK; Solana, its eponymous token—and the token’s value reflects the utility of the network.
Tokens also perform a fundamental function in a decentralized network: They incentivize the participants to part with their computing power, besides being a unit of account.
A blockchain is a distributed network of several computing systems or nodes. These nodes collaborate, verify and record transactions without the oversight of a central entity. The algorithm ensures the chain is tamper-proof so that the transactions are immutable and are accepted by all through a consensus mechanism.
This consensus among the distributed participants of the network is arrived at by rewarding efficient participants with tokens. Without the rewards, the participants have no incentives to part with their computing power to record and verify the transactions. And no new data—the “blocks” in the “chain”—can be added if that incentive is missing.
‘Chicken and egg’ problem
The incentive model of crypto tokens also solves a practical problem faced during early-stage product development. A robust open-source project requires efficient contributions from a large pool of developers to keep it secure and up to date. But developers don’t typically contribute unless a project has attained scale. That’s the ‘chicken and egg’ problem.
In a decentralized project, crypto tokens solve this “chicken and egg” problem. Tokens incentivize developer contribution, and these early contributions strengthen the network, enabling it to scale faster and more efficiently.
India, with its large talent pool of developers, is already a significant contributor to blockchain hackathons and bounty programs. A winner of one such hackathon by Bitcoin Association, Shashank Singhal — no relation to the writer — has even founded a marketplace that uses Bitcoin SV’s micropayment functionality to enable developers to earn every time their API is used. Institutional investors, too, have bought into this model of token economics, with venture capital funds launching bespoke crypto funds to finance innovative startups by purchasing their tokens.
A considerate approach
Not all tokens are the same, of course. Some crypto tokens offer no real utility and merely piggyback on internet meme culture. There have also been instances of “rug pulling”, wherein the project developers cashed out soon after the tokens they held turned a neat profit, leaving investors in distress.
A well-defined regulatory framework can protect investors from such deceit, even as it fosters legitimate crypto innovations. And some of these innovations are being built in India. A case in point is Polygon, founded by Indian innovators Sandeep Nailwal, Jaynti Kanani, and Anurag Arjun to decongest and scale up the Ethereum network. Valued at over $20 billion, it is already one of the most popular protocols among crypto developers.
Polygon recently raised $450 million from marquee investors, including Sequoia Capital, SoftBank Vision Fund 2 and Tiger Global. The fundraising model? The investors bought Polygon’s MATIC because the native token is the ‘equity’ of the blockchain protocol.
Ashish Singhal is founder and chief executive officer of CoinSwitch.
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