If the crypto industry cares about mainstream adoption – rather than just pumping its bags – it will need to demonstrate socially useful applications for cryptocurrencies and blockchain technology that resonate with the wider population.
Let’s face it: The recent collapse of major crypto lending institutions and the sell-off in bitcoin, ether and other tokens have confirmed that crypto’s main value proposition so far has been the opportunity to speculate on “number-go-up” expectations.
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As a model for the market structure of the future, decentralized finance (DeFi) contains the promise of a more equitable financial system. But the high yields it offered were driven by demand for crypto borrowing and lending, which in turn depended on there being arbitrage opportunities in the underlying token markets. As expectations for rapid returns in cryptocurrencies wane, activity in those markets will drop, which will lead the arbitrageurs to retreat and “yield farming” to cool off.
The challenge now is to find real-world use cases that produce lasting, meaningful returns upon which DeFi yields can be sustained.
Our starting point should be to identify non-financial markets whose centralized structure is doing clear harm. Note: Decentralizing those markets won’t necessarily generate use cases for cryptocurrencies or blockchains, but the arguments for them should be stronger in these situations.
In my mind, there is one industry above all where centralization is a massive problem, one where the costs to society are self-evident and rising: energy.
Energy’s centralization costs
Consider the effect of recent disruptions in oil and natural gas markets.
The world is so dependent on oil that shifts in its supply, and the resultant swings in prices, can determine the health of the global economy. And it's all built around a highly centralized industry, with most of the world’s proven crude reserves located in a few, authoritarian states, creating dependencies, bottlenecks and profound political vulnerabilities.
In late February, one of those states, Russia, invaded Ukraine. It almost immediately incurred Western sanctions on its exports, which sent prices for West Texas Intermediate crude oil skyrocketing by 40% to almost $120 a barrel. That sent the cost of gasoline and other oil derivatives soaring, which when added to the Federal Reserve’s interest rate hikes accelerated the world’s march into a recession. One measure of that harsh whipsaw effect is a recent reversal in those same crude prices, which this week briefly dipped below $100, as analysts started to predict a plunge in demand.
Similarly, the dependence of Germany and other European countries’ on natural gas from Russia has sent prices for natural gas, as well as its shippable alternative, liquid natural gas, up by 700% since last year. Just as bad, gas shortages have threatened the viability of much of the Continent’s electricity.
Besides the war in Ukraine, other vulnerabilities to the energy industry’s centralized bottlenecks abound.
Remember last year’s Colonial Pipeline shutdown? A pipeline supplying 60 million people gave hackers huge leverage with which to extort the company into paying their ransom. It offered the physical equivalent of a “single attack vector,” enabling a classic “man in the middle” attack.
Or consider how Hurricane Maria, after wiping out just a few of the high-voltage transmission lines that transport electricity from Puerto Rico’s dirty, fuel oil-dependent generation plants, left 90% of the potentially renewables-rich island without power for months in 2017.
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Vulnerability to outside events such as these – which electricity system designers describe as a lack of “redundancy” – is just as big a reason to advocate for renewable energy as the climate crisis.
We desperately need to decentralize our energy model. Renewables such as solar, geothermal and wind are the answer because they are locally sourced and can function at wide ranges of scale – from single-home solar arrays to massive wind farms.
Decentralizing the energy system doesn’t necessarily translate into an accompanying need for a decentralized monetary system or blockchain-based transaction and data recording system. But crypto is a natural fit for such systems, and over the years, people have worked out a variety of ways in which it can be useful.
First, if we are going to spread solar, geothermal and wind across a wide swath of the world, we face the problem that many of those places are without access to traditional sources of finance to fund the installation.
One solution is to invite bitcoin miners to locate in such areas and have them underwrite the project development. Companies such as Griid are at the forefront of building relationships with developers of renewable energy projects and miners. A Texas project spearheaded by Block, Tesla and Blockstream is looking to show that mining and solar can be combined at scale.
Meanwhile, smart chips like those that Australia-based Sunified, can be embedded into solar panels to generate provable data that when recorded in a blockchain environment can be converted into tradeable digital assets. The hope is these kinds of DeFi assets can be used by institutional investors looking to satisfy their environmental, social and governance (ESG) mandates, fostering liquid markets in carbon-neutral assets that can help to unlock the trillions of dollars in investment needed to combat climate change.
There are still millions of people who believe crypto can be a force for positive change. Let’s use this crypto winter to demonstrate that’s the case, starting with our dysfunctional energy system.