Web3 Part 2: Digital Money and web 3 follow up
I recently appeared on a podcast with my friend and tutor for my Master’s, Jean-François Nantel, where we talked at some length about web3 and the aspects to take notice of. I really enjoy the format, and I hope you will too. It’s in French, with my ‘Allo ‘Allo accent, but it’s full of interesting tidbits. If you understand French, you should check it out here.
In this essay, I wanted to follow up on some of the things I wrote in Part 1, give a little context, and highlight some of the changes that have happened since. If you’re vigilant, you’ll notice that the world has standardised on Web3 and no longer tends to use Web 3.0. I have complied! I could make a joke about centralisation here, but I’ll resist.
I also wanted to discuss the “other side” of the technology and its use for good. I’m sure this is a more considerable discussion. I might dive into that another time.
I hope you enjoy this essay, tell me if you do or don’t. It’s easy, reply or ping me on Twitter (@virek), or you can find me on LinkedIn.
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Web3 Part 1 Follow Up
I wrote in Web 3.0 or Web 1.0 in sheep’s clothing? at a time when I was thinking about all of the different aspects of the web and how they had changed over the years, and what I thought it might become. There’s a lot going on in my brain, and I thought that essay would help me clarify a few things. I’m not sure it did, but even little progress is progress. I guess what it did achieve, though, is that I have a clearer view of the various composite parts of web3.
However, one thing that came out of that reflection is a sceptical view of the unregulated crypto world. I (sort of) didn’t mean for it to sound as negative as it did, but to be fair, If you’ve been following what’s going on in that Wild West corner of the internet, you’ll have noticed that scams, frauds and downright theft are becoming a severe problem, as well as the new trend of crypto-romance scams.
Another aspect you’ll have no doubt noted is that governments are starting to get serious in their thinking on how to regulate transactions and how to kerb the more significant and larger amounts of energy required to conduct transactions at a fraction of the efficiency of traditional systems. I know that the algorithm is slated to change to reduce the energy requirements substantially, but I doubt that it will have any meaningful effect for a long time yet. Take Ethereum, their planned move to ‘proof of stake’from the ‘proof of work’ algorithm started over seven years ago and still hasn’t been completed. Kudos for the foresight from the Ethereum founders, but that particular problem seems to be extremely difficult to solve.
Also, look at this article from the BBC, where they went onsite to see one of the mining farms in Kazakhstan. You might be surprised to learn what is needed and what cost to the environment this trend is. Here’s a link to the full documentary, Our World - Kazakhstan’s Crypto-Boom?
The other aspect that I left hanging without really taking sides on is the state of the current NFT market.
The image above represents what the current NFT market looks like today. And again, you may shrug and tell me that isn’t that what all commerce of art, collectables and the like is? And to some extent, that’s correct. The real value of something is what someone is willing to pay for it. The difference in the current NFT setup is the gambling and Ponzi-scheme structure, as discussed in the last essay:
The other elephant in the room over cryptocurrencies are the obvious parallels to pyramid or Ponzi schemes. Several articles in various reputable media outlets like the FT etc., show how much of the “value” of cryptocurrencies and NFTs is speculation. Speculation that requires new entrants into the market to prop up the value higher up the chain. With the clear Achilles heel, if the supply of those at the bottom of the stack —i.e., those who lose their investments— stop pumping money to the higher level of the stack, the whole thing will most likely come crashing down.
And again, for all the bluster and hype, there is no getting away from the fact that the system is lossy on the whole and has been single-handedly responsible for an increase in efficiency to run anonymous ransomware operations that have been responsible for closing down hospitals, disrupting critical infrastructure, and extorting banks, to the tune of over $5B a year. I urge you to read this lecture from David Rosenthal at Stanford University. This site is an invaluable resource to keep up with some of this.
Suffice to say; I’m sceptical of the solution looking for a problem, aka Blockchain, as it is in its current guise for many reasons; decentralisation (it’s not), energy efficiency (dangerously inefficient), anonymity (not quite), speed (ZX81 rapidity), security (at the whim of someone else currently, as well as contributing to a security nightmare for business and public services).
Following on from the discussion —and criticism— on cryptocurrencies, it would be remiss of me not to talk about Central Bank Digital Currencies or CDBCs. These are digital currencies that have some similarities with cryptocurrencies but are fundamentally different from a technical, regulatory and implementation point of view.
One thing that may have escaped your attention is that the Caribbean has and is at the forefront of this technology. Rather than following the word, we find ourselves leading the world. That in and of itself is, in my mind, proof of the possibilities and opportunities that exists here, despite what you may think. Homegrown digital currency companies like Bitt Inc. are leading the world and are developing projects outside the region to Africa and beyond. We are also the home to the world’s first economic union CDBC. In this context, the question becomes “What can Europe learn from us?” rather than the other at round!
Let’s look at a couple of examples in the Caribbean and what they might mean for people living in the Caribbean.
The Caribbean has traditionally suffered from economic underdevelopment, leading to a wholesale stalling of digitisation for the last ten or so years. Where some countries had started their digital transformation that then got a kick in the butt by COVID-19, accelerating those efforts, here, COVID-19 started the process from scratch in most instances. There are several consequences of that economic underdevelopment that I won’t go into here. I’m not an economist, and I’m not sure it’s worth going over old and stale ground. We all know what we’re capable of here and why it hasn’t happened yet too!
However, a couple of things are of interest when talking about the technology of money. According to a CIGI-Ipsos survey in 2017, around 65% of the eligible population (children and adults) were unbanked. A large cash economy has difficulties, notwithstanding a sizeable informal economy that provides no receipts for government or public services, let alone access to ICT-based products and services.
CDBCs promise to resolve some of these structural problems, with access to payments systems and pseudo-banks for people that have traditionally or intentionally avoided the banking system. They also provide security for cash payments, withdrawals, and transfers. That last service is more important in the Caribbean than in other regions due to the distribution of populations around the different territories in the region and beyond.
Additionally, I note that remittances to Latin America and the Caribbean are estimated to be around USD 103 billion, with Jamaica alone counting for over USD 3 billion. Remittances that are sent need to be transformed into cash, often by relying on convenient but expensive services such as MoneyGram or Western Union. The middleman always gets his cut.
One such CDBC currently in public beta (to use a tech expression) is DCash. DCash is the official CDBC of the Eastern Caribbean Currency Union (ECCU). Having partnered with several of the local banks and businesses in the OECS, the Eastern Caribbean Central Bank (ECCB) has launched its pilot program in Antigua and Barbuda, The Commonwealth of Dominica, Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia and Saint Vincent and the Grenadines with Anguilla to join the list after the initial test period.
From a technical point of view, DCash uses an open-source blockchain co-developed by IBM, called Hyperledger Fabric, a “permissioned” blockchain, ensuring only known parties are participants, thereby contributing to the immutability and the reduced risk of fraud and theft of assets on the blockchain. It does remain to be seen if it can scale to multiple thousands of transactions per second that traditional financial systems have been doing for decades. That is just a matter of technological maturity rather than anything else, in my view. No one believed the limited capability of the original iPhone would be the cornerstone of practically all that is digital today, either.
On a regulatory note, CDBCs are regulated and controlled by their issuing central banks by their very nature. In the case of the Sand Dollar —another CDBC that was the world’s first— the Central Bank of The Bahamas (CBB) is the regulating authority. The CBB authorise financial institutions and retailers to accept the Sand Dollar and handle the valuation and volatility of the currency. This should, in theory, provide a basis for trust in the use of the technology.
However, implementing these CDBCs is not easy, as the recent problems with DCash have been highlighted. For context, DCash transactions have been suspended for over a month, seemingly due to a digital certificate issue. At this point, it would be easy to point out these difficulties and say, “See, it won’t work!”. But to do so is to ignore the substantial potential for a project of this scale and importance. I do not doubt that the currency will be back online soon and that the teething implementation problems will largely be resolved. I am also confident that other issues will be found and will be corrected. I am also a firm believer that the broader adoption by larger countries and currency unions will be streamlined as a direct result of the in-situ PoCs happening in the Caribbean.
If these projects are successful, as it seems they will be, the transformational changes to the Caribbean economy could be profound and in a good way. For example, cross-border trade in digital and physical goods could be unlocked from current restrictions, complexity and costs, not to mention other applications (remember Blockchain Hurricane Protection from CREAD). Don’t just take my word for it either, How blockchain accelerates small business growth and development.
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Proof of stake brings up other interesting questions about equality, contributing to discredit the argument in favour of decentralisation.
I wrote about it here: