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5 trends defining blockchain's path in 2022

January 26, 2022

Author: Alisa DiCaprio, Chief Economist

Blockchain in 2017 wouldn’t recognize blockchain in 2022. We now live in a world where you can send your kid to crypto summer camp, my 74 year old father is taking an online course about blockchain, and your bank will custody your bitcoin.

All of these facts point to the same conclusion: decentralization isn’t a trend anymore. Today, the question is: what is the magnitude of this transformation? To fully capture what this means, this blog interprets five economic trends through a blockchain lens. These include inflation, liquidity, computing hardware, the metaverse, and the green transition.

1. The stickiness of inflation is ramping up central bank engagement with CBDC

The tools of monetary policy have expanded as a result of two events in the last 15 years: the 2008 global financial crisis which introduced interest on reserve balances, and the 2020 COVID pandemic, which introduced central bank liquidity swaps, the FIMA repo facility, and a standing overnight repurchase agreement facility. Yet as inflation reached fresh highs in late 2021, central banks have been reactive instead of proactive. Attention to central bank inflation handling, augmented by the rise of private money, has contributed to central bank activity around CBDCs. Depending on the design decisions, CBDCs have the potential to update and strengthen monetary policy via the application of interest rates, as the recent Fed report recognized.

2. Acceleration of securities settlement times is driving a refinement of crypto liquidity mechanisms

Stablecoins only represent 5% of crypto assets but are present in 75% of all transactions on crypto trading platforms. Much of the reason is to speed up transactions. It’s a new angle to shorten settlement times for traditional financial instruments. Today, both the DTCC’s push towards T+1 and the emergence of bitcoin as an asset class have focused attention on the liquidity implications of faster settlement. Speedier settlement in securities means less risk and shorter holds on liquidity. Efforts to speed up crypto settlement encompasses a range of activities including: the rise of stablecoins and AMM to facilitate crypto trades, sub-custodian relationships between crypto companies and banks, and research on the stability implications of runs on stablecoins. The second half of 2021 already saw the beginnings of institutional participation in digital custody for limited types of customers.

3. The ongoing hardware revolution is shifting where and how blockchain nodes can run

The computing power needed to train AI has doubled every 3.4 months since 2012. This, among other things, has led to a number of innovations happening in the hardware space. These include: secure enclaves built into chips, custom SOCs being designed by companies like Apple and Google, and acceleration of AI-specific computing. The common undercurrent is that processing power has increased dramatically along with better efficiency. The need for energy efficiency is partly driving the rapid adoption of ARM in the mobile, desktop and server spaces. Having more computing power available on edge devices can shift how and where blockchain nodes run. The focus on faster computation, along with efficiency and concurrent workloads, portends continued interest in throughput from larger FMIs. Finally, the improvement in performance per watt will be critical given the green focus of consumers.

4. The scaling up of multi-platform opportunities to transfer value in the metaverse will increase demand for native digital assets

Bloomberg expects the metaverse to be an $800 billion market by 2024. This measurement might even understate the transformative vision of the future presented by not just the metaverse, but NFTs and web3. As these visions scale, there are two features that will impact blockchain integration. The first is that products are monetized in unique ways when transactions are fully digital. One example is how the NFT market creates value in ownership that is separate from possession. The second outcome is that transactions must occur across platforms to fully capture their value. As opportunities to share assets across platforms continue to materialize, demand for both fully digital assets and the regulations around how they are traded will continue to gain momentum.

5. Aspirational ESG is coalescing into direct commitments that will require credible reporting

JPM is devoting $1 trillion of financing for green initiatives over the next 10 years. As the green transition accelerates, governments are committing to stricter rules, and consumer demand for sustainability is holding companies to account. However, there is insufficient guidance about what it means to be “green.” To solve this, the market needs both more data and better tools to track and analyze it. Today there is an enormous amount of activity as companies seek to meet demand without disrupting existing ways of doing business. Greenwashing remains a problem without a clear solution. The impact on blockchain is two-fold. First, there is high demand for energy-efficient blockchains and second, entities are looking for guidance about how to track and report on green activities with credibility.

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