What Are Wrapped Tokens?

Posted on February 15, 2023February 15, 2023 by Jean Chalopin

If you’ve been investing in cryptos, you may have likely heard the term “wrapped” Bitcoin or wrapped tokens. This article will explore the types of wrapped tokens in the crypto space, why they exist, and what benefit they have to you as a crypto trader or long-term investor.

Blockchains Are Separated

Different blockchains like Ethereum and Bitcoin use different protocols and have different functionalities. Moreover, due to the fundamental differences in their algorithms, they cannot talk to each other. While this independence preserves the blockchain’s sovereignty and increases security, it makes the existence of an interoperable distributed ecosystem with easy data exchange challenging.

The ideals of decentralized finance, or DeFi, is a smooth, efficient, and speedy movement of the value, and this is why wrapped tokens can find a place as a practical application. Newer blockchains, such as Polkadot, were developed to solve the interoperability issue that plagues separate blockchains. However, the need for communication between blockchains became apparent, and this communication was possible through the development of wrapped tokens.

Wrapped Cryptocurrency Basics

Wrapped cryptocurrencies and crypto tokens are cryptocurrencies and assets pegged to the value of another cryptocurrency or asset, such as a precious metal, stock, or real estate, and then minted on a DeFi platform. They have become popular as retail crypto brokers made this asset class more accessible and more advanced in tandem.

The original asset gets “wrapped” into a digital vault, with a newly minted token created, which can be used to transact on another blockchain. These wrapped tokens allow non-native assets to be used on any blockchain, building bridges between different networks and creating interoperability in the crypto space.

Wrapped tokens can be created from any asset, art, commodities, collectibles, equities, real estate, and even fiat currencies. However, because wrapped tokens get “pegged” to another asset, it’s required for them to be managed by a custodial entity that wraps and unwraps the asset. We will be discussing why this is a limitation in the crypto world.

The First Wrapped Cryptos

Bitcoin was the first crypto to be wrapped, and the space is dominated by wBTC, which took bitcoin and put it on the Ethereum blockchain using smart contracts. This allowed investors to earn a passive fixed income. There are now many wrapped tokens, most of which use Ethereum’s ERC-20 format or the Binance Smart chain BEP-20 format.

Interestingly, though ERC-20 tokens are issued on Ethereum, the native ETH token is not compliant with ERC-20 standards because ETH was developed before ERC-20. Therefore, Ether must be wrapped to comply with other ERC-20 token standards. A tokenized wrapped Ether has therefore been created on the Ethereum platform.

Cardano, Solana, and Polkadot have begun experimenting with wrapped tokens, facilitating their access to DeFi applications. More recently, projects included the bETH, a wrapped ETH token, which can be traded freely or used as collateral on protocols of the Ethereum network.

Wrapped Token Types

Stablecoins were, in fact, the first wrapped “tokens.” As a result, they have a significant difference from the more established wrapped “coins.” A stablecoin such as the USDT, the Tether, is, for example, backed by a value of approximately one dollar.

However, Tether does not keep the exact amount of USD fiat currency for each USDT minted; its reserves include other assets besides cash, including cash equivalents, T-bills, and more.

There are two general wrapped token types:

Cash Settled

It is impossible to settle these for their underlying asset, only for their cash value.

Redeemable

These wrapped tokens can be exchanged for their underlying asset.

Non-native blockchains will host these two types of wrapped tokens.

Inner-Workings of Wrapped Tokens

Merchants such as Airswap, AAVE, Ox, Maker, and CoinList will mint the number of original tokens sent on platforms such as Ethereum and act as custodians of that value.

A similar process is used when the wrapped token must be converted back into its original coins, such as Bitcoin, Ether, or the asset. The holder of the wrapped token will request the custodian to release the token from the reserves. For every wrapped BTC, there is a Bitcoin that a custodian is holding.

The process employed for minting and managing wrapped tokens remains a limitation in crypto, as a trusted custodian who holds the funds is required. Unfortunately, this requirement needs to be revised for a decentralized distributed network that is supposed to be trustless.

A custodian is required because traders cannot independently use their wrapped tokens for cross-chain transactions. The technology is, however, evolving, and the potential for decentralized options that solve this problem are appearing.

Wrapped Bitcoin (wBTC)

“Wrapped Bitcoin” was first launched in January 2019 and was the first wrapped Bitcoin. The protocol was designed to bring the potential and liquidity of Bitcoin to the Ethereum network and, in doing so, an ERC-20’s flexibility.

The native BTC was unsuitable for decentralized finance (DeFi) transactions; the wrapped version could be used in place of the original asset to transact within the growing DeFi ecosystem and other Dapps within Ethereum’s network.

The wrapped Bitcoin is a significant addition to the cryptocurrency space. While a wBTC’s value is equivalent to the original Bitcoin, the added functionality accrued with the change to wBTC increases its value allowing it to be used in DeFi applications.

A holder of BTC can lend their Bitcoin via smart contracts by simply connecting their crypto wallet to a decentralized lending platform and earning a fixed interest rate each year. Concurrently, borrowers can use their crypto (BTC) as collateral which could automatically go to the lender in case of a default.

Using this type of financing, holders of the currency can still see returns on their holdings even in bear markets if the value of their asset drops.

Wrapped BTC, Unwrapped

There are three primary actors in wBTC’s creation and management.

The DAO

wBTC’s Decentralized Autonomous Organization comprises 17 members, all from the DeFi space, who hold a multi-signature contract allowing them to add to or remove from the list of wBTC merchants and custodians.

Merchants

These administrators trigger the minting of wBTC by sending a defined amount of BTC to the custodian and requesting the mining of an equivalent amount of the wrapped tokens, defined by the investor’s and trader’s demands.

Custodians

These trusted agents act as vaults who provide reliability and security for wBTC, ensuring that all the wBTC will be backed and verified via an on-chain proof of reserves. Custodians mint the wBTC and send that equivalent amount of wBTC (a one-to-one pegged value of BTC) back to the requesting merchant.

In essence, the merchant transfers the real BTC to the custodian’s address on the Bitcoin blockchain, which is then locked. Once the real BTC is received, the custodian’s address mints the equivalent amount of wBTC on the Ethereum network.

The reverse will happen, and the wBTC will be converted back into real BTC through the burning (destroying) of the ERC-20 BTC token, at which point the locked BTC will be released. The minting and burning of wBTC tokens are tracked and verified on the Ethereum blockchain.

Why Is There wBTC?

wBTC was created because of the growth of DeFi applications which are now valued in the billions of dollars. These tokens are sent to lending platforms, options, derivatives, and other financial applications.

The demand for BTC use as an underlying asset in DeFi was such that it needed to be converted to ERC-20 compatible tokens to participate in Ethereum ecosystem Dapps.

Are They Safe?

From a technical viewpoint, a wrapped Bitcoin token is safe. The original BTC will be in the custody of safe platforms like Ethereum or the Binance Smart Chain. When it is converted to an ERC-20 or BEP-20 token, it will maintain the security of the interconnected network.

A flaw with the wrapped BTC tokens is the need for trust in a custodian that holds the underlying asset. If that custodian unlocks and releases the Bitcoin to someone else, the ERC-20-compatible wrapped Bitcoin holders would be holding a worthless asset.

How the original Bitcoin is held determines the security level provided.

Centralized Custodial Bridge

For example, this organization promises to mint the ERC-20 tokens. The centralized entity must be trusted to hold BTC and not abscond. Users must ensure that these organizations are backed with guarantees and insurance in case something terrible happens.

Decentralized smart contract bridge

These would be the best choice in the crypto world. There would be no need to trust a third party, only the immutable time-stamped intelligent contract coding.

The security of wrapped BTC bridges, crossing different chains, has resulted in several arguments in the DeFi community because of the need to rely on custodians to keep the real BTC locked and their financial incentive not to.

Closing Thoughts

Arcane Research reports that the amount of Bitcoin currently locked on the Ethereum blockchain has grown to $3.5 billion as of Dec 2022 (similar to the 3.6 billion Coinbase estimate above). In addition, it is estimated that over 1% (215,800) of Bitcoin’s current supply of 19.2 million coins is now being used in DeFi, all through wrapped tokens of various types.

Wrapped tokens increase the liquidity and capital efficiency of centralized and decentralized exchanges due to their capability to move assets across multiple blockchain platforms that otherwise would have remained isolated.

Additional advantages wrapped tokens provide speedy transaction times and lowered fees possible with newer blockchains, exceeding the capabilities of older blockchains like Bitcoin and Ethereum’s first generation.

Wrapped tokens also offer fractionalized ownership which is not usually possible for some underlying assets such as art, collectibles, or a classic car. We might see wrapped tokens appearing with discount trading platforms or as part of greater liquid portfolios.

These asset-packing solutions make bitcoin and, more importantly, other assets more useful. We will see many items wrapped into fungible and nonfungible tokens that can be used in the DeFi and metaverse moving forward. The ERC-20 and BEP-20 token formats make the world of DeFi possible.

Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

Stablecoins vs. CBDCs

Posted on February 11, 2023February 11, 2023 by Jean Chalopin

Stablecoins are crypto assets whose values are pegged to fiat currencies, such as the US dollar. Stablecoin operators generally maintain a reserve of fiat currency which equals the token’s circulating supply.

With the rapid rise in stablecoin circulation over the past few years, central banks have increased their efforts to develop their stable digital currencies. These centralized fiat copies are called Central Bank Digital Currencies (CBDCs), or cryptos backed by a country’s central bank.

Rather than being pegged to a fiat currency, CBDCs are a digital form of the country’s legal tender. This article will explain some of the critical differences between Stablecoins and CBDCs, and why CBDCs add very little to the global economy.

The Past Decade

Cryptos have come a long way since the inception of Bitcoin in January 2009. While still a speculative asset, cryptos are evolving into an asset class that is a legitimate investment opportunity as respected investing apps continue to onboard crypto trading.

The technological foundation of cryptocurrencies, the blockchain, has been shown to have utility in several public and private applications. Blockchain is now being applied in fields from the supply chain to medicine, gaming, ticketing, art, and finance.

What has also changed is crypto, and blockchain’s favorability with governments. Different crypto projects have garnered different levels of openness to regulation, and different governments have different perceptions about the advantages or threats of cryptos.

With these recent advances, two unique kinds of digital currencies have resulted. Stablecoins and CBDCs have emerged as potential options that could be widely used for commerce and trade in the future. Being related to fiat, these digital currencies may, at first glance, be similar, but there are significant differences between them.

What Are Stablecoins?

Stablecoins represent a type of tokenized asset whose value is pegged to a real-world asset, generally a fiat currency like the USD, but there are stablecoins pegged to gold and other assets too. They’re vital for removing almost all transaction fees and enabling the liquid trading of those using advanced crypto brokers.

Stablecoin operators usually maintain a reserve of the fiat currency and other assets (including cryptocurrencies) equal to the token’s circulating supply.

If the project mints more stablecoins, an equal amount of the pegged fiat currency should be added to the project’s reserves, and if “burned” (the process of unminting the coin and removing it from circulation), the reserve is reduced by an equal amount. This method is how many stablecoins maintain their value with the pegged currency.

What Are CBDCs?

On the other end of the spectrum, Central Bank Digital Currencies (CBDCs) are digital assets (not specifically a cryptocurrency) backed by a country’s or region’s central bank. Rather than being pegged to the fiat currency, these digital assets would be a digital form of the legal tender of the region or country such as China, which is probably the furthest ahead in its CBDC rollout program.

Similarities Between CBDCs and Stablecoins

The most significant similarity between stablecoins and CBDCs is that they are both digital currencies that can be used for payment. In addition, the speed by which a digital currency can be transmitted and a transaction completed makes these useful for domestic and international trade.

Depending on the CBDC, if they are blockchain-based, they can be stored pseudonymously in a crypto wallet like any other crypto. The transactions are all stored on a publicly distributed ledger. However, CBDC programs are generally authorized as (private) blockchain-based.

A second similarity between the two concerns their volatility. Most cryptocurrencies are volatile; changing 5 to 10% or more in a month is not uncommon, even for Bitcoin and Ethereum, which have the highest market caps. However, while stablecoins and CBDCs are digital assets, most of them are much more stable.

The final similarity between the two reflects their regulation. Both stablecoins and CBDCs are regulated. Third-party auditing firms regulate stablecoins, and central banks regulate CBDCs. The chance of a rug pull occurring for both digital currencies is minimal.

Differences Between Stablecoins and CBDCs

The first significant difference between CDBCs and stablecoins is their governing authority. Stablecoins are usually governed by private companies such as Circle or Binance. Still, there are also stablecoins, such as DAI, that are governed by DAOs (decentralized autonomous organizations), or a group of governance token holders that have a vote in the management of the coin.

CBDCs, on the other hand, are created, controlled, and regulated by the central bank of a country or region that releases the CDBC. Any country can develop a CBDC of its fiat currency and manage its monetary policy just like physical fiat.

The second difference is that stablecoins are (generally) backed by an equivalent amount of fiat currency. You can exchange your stablecoins for an actual dollar stored in the stablecoin’s reserves. CBDCs don’t have any assets backing them; they only have the promise of the country and its central bank. Governments used to use a gold standard that backed the currency with a supply of gold, but this was given up with the change to fiat.

Stablecoins fall under the crypto blanket. This designation means that there is a potential for national governments to ban them, and they can be taxed as digital assets. Alternatively, CBDCs would be considered the same as a country’s currency and, therefore, would be neither taxed nor banned.

Stablecoin’s Issues

Stablecoins have become the standard for international transactions and investments in decentralized finance (DeFi). Stablecoins have chosen to peg with only the most traded currencies, such as the USD, Euro, and Yen, and generally have strict auditing to preserve their international trust. However, there are two primary issues with stablecoins.

First, there is a need for stablecoins to trust the organization that is managing the coin and the organization that is auditing the coin’s reserves. For example, Terra (now known as Terra classic UST) is a famous algorithm stablecoin that fell from grace because the system, which included a management token Luna, that it relied on to keep its peg with the USD faltered when a significant amount of the coin was traded out at one time. Its holders lost $60 billion.

Similar algo-based stablecoins could have similar issues yet to be tested or discovered. There must also be trust in the reserves held by the stablecoin to ensure that the peg is sufficiently being met and that the auditors are doing their job; any break in this system could cause the coin to falter.

Second, a stablecoin is only as good as the fiat currency to which it is pegged. If the country falters in its currency management, the coin’s value will fall, which is out of the control of the stablecoin management and its investors.

CBDC’s Issues

CBDCs will only be as strong as the fiat currency of the minting country. If a country’s currency is banned from commerce by a nation, government, or organization that does not accept that currency, then they would not accept the CBDC form of it either. A fiat, in cash or CBDC form, is not backed by anything and is at the mercy of its central bank’s control.

CBDCs are not cryptocurrencies. They don’t even have to be on a blockchain or other distributed ledger. They are controlled by a central authority and can be minted and burned at that authority’s whim. True cryptos are decentralized and controlled by rules that cannot be easily changed. The benefits of blockchain are what make cryptocurrencies unique. They are trustless and immutable.

CBDCs, if on private blockchains, cannot benefit from these. They don’t incorporate all crypto aspects.

Closing Thoughts

Central bank digital currencies have the potential to “partially” transform economies, making transactions safe, bringing greater transparency and inclusivity to those that have been unbanked.

However, this is where the benefits of CBDCs stop. CBDCs are not a replacement for cryptocurrencies and stablecoins, which are the basis for DeFi applications allowing them to have a set of uses that CBDCs cannot fathom.

Nearly all countries have turned over their financial controls to central banks. This is the reason that actual cryptocurrencies are of potential benefit. Cryptos are not under the control of any central authority. However, it is unlikely that a country would take back its monetary policy control from its central bank.

Every CDBC will likely be on its blockchain; that is the only way to guarantee control. This system would then require bridges between different countries’ blockchains, such as what Polkadot, Visa, and PayPal are trying to do. The best solution may be a single global cryptocurrency that is not controlled by any central authority and is fully decentralized.

How Digital Wallets Transform Banking

Posted on December 13, 2022December 13, 2022 by Jean Chalopin

We have an economy that is switching to 5G, and in a few more years, we may see 6G speeds. However, the global economy’s digital transformation is far from complete. After our struggles with Covid-19 affecting both health and commerce, we have moved our world toward global, digital connectivity. For example, digital wallets will forever transform the way that we bank, shop and pay.

Most of the world, including developed economies, is still only in the early stages of a true digital transformation. We will look at the future of digital wallets and see how they are going to be an integral part of the comprehensive digital potential that is coming to all of us. The new connected economy will be defined by several pillars, all affecting our daily lives.

Digital Wallets

Digital wallets allow their owners to store and spend funds digitally in the form of “real” money linked to a debit, credit, gift card, coupons, or loyalty points. Digital wallets differ from other online payments because they allow the user to save payment information by adding their card or account information to the app. When payment is required, the buyer can do it straight from the app, only needing to hold the smartphone close to the reader, and not having to remember or enter payment credentials.

This is only the start of digital wallet capabilities. Digital wallets can do much more, from adding loyalty cards, airline boarding passes, movie tickets, hotel door keys, and more. The recent growth of this technology has allowed many to leave bulky wallets behind and has pushed our economy toward cashless payments.

Apple, Samsung, and Google have all integrated these wallets into their devices and have become the biggest players in the space. Retailers like Walmart and Alibaba have added digital wallet capabilities to their checkouts, and PayPal, Cash App, and Venmo, which offer digital wallet services, have grown into financial powerhouses.

Banking’s Future

Beyond the convenience digital wallets provide at checkout, they can potentially solve the cross-border banking problem, a difficult-to-navigate and disjointed process. Opening an international bank account is often long and painful, and international transfers can add more roadblocks and delays lasting days or more.

New Fintech firms allow businesses to open their own international accounts with multicurrency IBAN in the organization’s name. Virtual wallets then make the process easier with same-day payments, while the company can keep funds in multiple currencies allowing for prompt payments and currency exchange.

The Technology of Digital Wallets

Digital wallets start with a digital core. This is obviously the foundation behind the digital transformation of banking. And this digital core refers to the applications and platforms a financial institution utilizes in its transition to a digital business.

It then uses open APIs (application programming interfaces) to integrate payment platforms and digital wallets, which bring front-end benefits to its consumers. With these fundamentals, institutions can build services that effectively and directly communicate to clients, driving transformational change. There are already many popular crypto wallets in Europe, Asia, and the Americas–nearly the whole world.

Beyond the open APIs, we will see more smart ledgers and wallet management programs come forward. These blockchain-based smart ledgers will transform the handling of digital wallets. Offering a way to record, transfer, and store alternative assets in token form, adding to digital wallet capabilities. When combined with API-accessible wallet management, users will experience a fully integrated digital payment model within a single platform.

Crypto’s Potential

The rise of cryptocurrencies is still considered an untapped frontier of digital wallets. Trading these non-tangible digital currencies has increased, and the price of a bitcoin has risen from $1 in 2011 to tens of thousands today. Remaining speculative means that crypto is ripe for continued growth, and the push for CBDCs means that the banking sector is concerned. It’s even possible to use APIs for algorithmic trading.

Visa is hedging its bet, building the structures for CBDC integration and for its own crypto digital wallet. This institutional interest and strong demand across wealth management are apparent, and there is a significant blockchain product offering that has the potential to transform the way markets behave. The blockchain value proposition has shifted to what else a blockchain can do beyond store value.

Digital Wallets Connect Economies

In a report about the connected economy by Stripe and PYMNTS, which surveyed over 15,000 participants from 11 countries, the ongoing digital transformation has only reached about a quarter of its full potential across those studied. These 11 countries represent about 500 million adults, a small portion of our now 8 billion global population.

Source: PAYMENTS

Brazil and other developing countries have massive potential to grow their connected stature. But even in highly connected places such as Spain, the UK, and Singapore, only about one-third of their digital connectedness has been achieved. The untapped potential hints that there are roadblocks to be overcome and transformation to be had.

Streaming and Social Media

On average, the survey found that 87% of respondents were connected to the internet. However, fewer than 20% were highly engaged with digital activities, especially shopping. This is an interesting, ironic result of the slowing but persistent pandemic. However, streaming services are the exception.

The research found that seven times as many consumers are engaged in watching streaming videos daily on YouTube, HBO or Netflix as are shopping on a marketplace like Amazon, Etsy, or eBay. Social media is the other plus point, with five times as many consumers checking their social media as compared to ordering food.

Digital Wallet Use Is Here to Stay

Digital wallets are the key to this connected future. Covid-19 brought a growing embrace of touchless or contactless payments, speeding up digital wallet adoption. There is no clear digital wallet leader, and use patterns differ based on geography.

PayPal is commonly used in the most digital wallet-centric nation, Germany, accounting for 37% of all online transactions. More than 40% of all domestic online transactions in Germany are using digital wallets, with 84% of these using PayPal.

Sources: Stripe and PYMNTS

In 2019, mobile wallets surpassed credit card use globally, becoming the most widely used payment type.

Juniper Research predicts that the number of unique digital wallet users will grow from the current 2.6 billion to 4.4 billion by 2025. China and India will lead the way, accounting for nearly 70% of all digital wallet transactions, with the US and UK lagging in digital wallet adoption.

Digital wallets have been successful in areas with low card penetration but high phone use. Southeast Asian consumers skipped cards, going from cash to mobile wallets, and digital wallet providers have done exceptionally well.

With this adoption of digital wallets and newer forms of digital currency, cryptocurrencies or CBDCs will be in demand. Future digital wallets will seamlessly store and pay in several currencies, particularly as many retail online brokerages offer crypto and checking accounts.

Closing Thoughts

As we become digitally connected, digital wallets play an obvious, necessary role. Their reach will spread, and governments and companies will push for their continued use. The increase in services they will supply, solving cross-border transaction issues, and improving the ease of banking will ensure that we use our digital wallets when we bank, shop, and pay.

Other services should look to digital streaming and social media to see how we can better integrate digital payments and digital connectedness into our lives. China and India will continue to lead this march, but that doesn’t mean the West shouldn’t catch up quickly.

The Web3 Race

Posted on November 24, 2022November 24, 2022 by Jean Chalopin

The race to create the future internet, Web3, is heating up daily. Providers are competing against each other, demonstrating a healthy, expanding, and decentralized Web3 ecosystem to come.

The Basics

Users interact through various open-source applications such as MetaMask, Web3 gaming, the metaverse, and DeFi protocols. However, they don’t usually stop and think about what happens behind the Web3 scenes, or what is piecing the blockchain-based web together. If we imagine Web3 as a burgeoning new metropolis, it’s the providers of the underlying infrastructure and power grid that make all these operations possible.

Every Dapp relies on communication with one or more blockchains. Daily, full communication nodes serve billions of requests from Dapps to read and write data onto a blockchain. We require a massive node infrastructure to keep up with the ever-expanding Dapp ecosystem.

However, the running of nodes is both time- and capital-intensive. Dapp builders must turn to external providers for remote access to nodes. This requirement results in extreme monetary incentives for infrastructure providers to serve as many of the Web3 ecosystems as possible. But, who are the ones winning this race?

The Problem of Centralization

The most expeditious way to provide the reliable infrastructure that can power Dapp ecosystems is for centralized companies to set up a web of blockchain nodes, which would commonly be held in data centers such as those of Amazon Web Services (AWS). They would allow the developers to access these from anywhere for a subscription.

This system is precisely the method that a few players in the Web3 space did, but it resulted in centralization, which is against the ideals of the self-named decentralized space.

Centralization is a significant issue for the Web3 economy because centralization means that first, the ecosystem becomes susceptible to 51% attacks, and second is at the mercy of a few powerful players.

Let’s consider that 81% of Ethereum beacon chain nodes are located in the United States and Europe. Additionally, if the three largest mining pools were to come together, they could conduct a 51% attack on the Ethereum network. Today’s blockchains are less distributed and more centralized than we think them or would like them to be. This structure starkly contrasts the vision expounded by Satoshi Nakamoto’s Bitcoin white paper.

If the large node providers were to collude, then the advantages Web3 has over Web2 would be lost. What’s more, the reliance that users would have on centralized providers can increase the chances of system outages. The Ethereum outage that occurred in 2020 due to Infura, one of the larger node providers, shows the problems of a centralized system. The outage caused several crypto exchanges, including MetaMask, Coinbase, and Binance, to suspend their withdrawals of Ethereum and ERC 20 tokens because the exchanges could not entirely rely on the Infura nodes.

It must be noted that Amazon is often the backbone of these centralized providers. It has suffered from several past outages, which now creates a second, severe layer of vulnerability.

The Infura outage was not the only such outage, with the Ethereum network’s move to Ethereum 2.0 or “The Merge.” The move to ETH 2.0 was interrupted by a 7-hour outage resulting from a single-node hardware failure on the network. A genuinely decentralized network would not have these types of worries.

Solana’s Problem

Decentralization remains a crucial tenet of Web3 and its economy, and a centralized blockchain infrastructure is a threat capable of undermining it. The Solana blockchain has suffered through multiple outages, all due to a lack of decentralized nodes. The network was insufficient to handle a spike in traffic.

Solana’s problem is common for many blockchains that are trying to scale their operations and throughput. Many of the top decentralized blockchain protocols continue to struggle with a pathway to scale while also being decentralized. The largest blockchains, Bitcoin and Ethereum, are steadfast in their part in the decentralized war, but ETH is still vulnerable.

In the early days of blockchain, on June 8^th, 2013, Feathercoin (FTC) was the victim of a 51% attack. One entity was able to control over half of the FTC network’s total processing power. This strategic move allowed them to reverse the confirmed transactions on the chain and even prevented new transactions from going forward. FTC has fallen into blockchain obscurity with a price that plummeted, alongside a delisting from all major exchanges.

The reason for the ongoing centralization is due to the overreliance on Web2 cloud providers such as AWS and Infura, which have continued in their roles from Web2 and have provided the infrastructure for Web3 and its economy. However, the current strategy to avoid centralization and blockchain’s problematic “single point of failure” is gaining significant steam. This change is good news for the future of Web3 ecosystems that wish to remain healthy, secure, and decentralized.

Better Solutions With Decentralized Infrastructure

With the advent of novel innovations, there is a rise to a new breed of decentralized provider. These node providers are running their services on-premises or even in users’ homes instead of relying on centralized cloud providers.

The Architecture of Web2 vs. Web3

The key advantage that decentralized nodes provide is that they cannot be taken down in the same way as a single point of failure. They can also provide faster connections for global users. Additionally, providers of decentralized node infrastructure create new economies, where these independent providers serve requests for data and earn rewards in their native tokens.

Increasing Competition

Several providers in the decentralized Web3 space, such as Flux, Ankr, and QuickNode, compete for market share. This competition ensures that providers are consistently motivated to improve their services and provide the best possible user experience for their customers. Such a competitive environment is good for the Web3 economy because it leads to innovation while also lowering prices.

Investors are seeing great returns acting as pooled node providers as well. Yieldnodes sets up decentralized nodes for investors and has paid 10% returns a month for over two years, with a high of over 19% in February 2021.

What’s even more important is that competition for blockchain infrastructure results in a more decentralized Web3 economy. The more decentralized the network, the more resilient it is to censorship, and 51% attacks will remain an issue of the past.

Closing Thoughts

The idea behind Web3 is not just to create a better internet but a better world. Decentralized infrastructure providers are building an internet foundation that is more equitable, censor-resistant, and secure.

By shaking things up, they are supplanting the status quo of giant, centralized hosting providers that are carryovers from Web2 and which make blockchains more susceptible to attacks, outages, and censorship. The new decentralized providers are on the cutting edge and have an incentive to push innovation, providing their users with both the best possible service and the greatest level of integrity.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

NFT and Crypto in GameFi

Posted on November 18, 2022November 18, 2022 by Jean Chalopin

The GameFi sector has been one of the main contributors to the explosive growth of the cryptocurrency market over the past few years.

Gamers can earn incentives while playing thanks to GameFi, a combination of the words “finance” and “gaming.”

With consistent growth, the market has a token market cap of almost $9.2 billion. Notably, despite the crypto winters, GameFi networks have endured and thrived.

*Source:* *https://cointelegraph.com/news/gamefi-is-showing-signs-of-a-mature-landscape-report*

By 2031, the sector is expected to be worth $74.2 billion.

What Is GameFi?

GameFi is a platform that combines blockchain technology, non-fungible tokens (NFTs), and game mechanics to build a virtual world where users may interact and earn tokens.

Video games used to be stored on centralized servers, allowing publishers and creators complete control over everything in their games. This meant that none of the digital objects that players had gathered over many hours or even years of gaming belonged to them.

Few of these objects had any use outside the game, ranging from avatars and virtual territories to weapons and clothes (sometimes referred to as “skins”). Therefore, there was no practical mechanism for users to get reimbursed for their online time or have access to the value of their acquired in-game goods without undertaking a professional gaming career.

*Source:* *https://www.cryptohopper.com/news/5908-press-x-to-earn-the-rise-of-gamefi*

Players earn in-game rewards by completing objectives and moving through different stages in GameFi games. These prizes, as opposed to conventional in-game money and equipment, have monetary worth outside of the gaming industry.

The industry has been dubbed “play-to-earn” because of gaming products given in the form of NFTs as “accomplishment tokens” that may be exchanged on NFT marketplaces or cryptocurrency exchanges.

Even though “play-to-earn” is the preferred terminology, participating in GameFi involves risk, including the possibility of incurring significant upfront fees that a player might lose.

How GameFi Works

There is an in-game currency, market, and token economy in almost all blockchain-based games. There is no centralized authority, in contrast to conventional games. Instead, the community generally manages and governs GameFi projects, and users participate in decision-making.

Although each GameFi project has its own unique mechanics and economics, they have similar characteristics:

Blockchain Technology: The distributed ledger of a blockchain powers GameFi initiatives. This maintains player ownership records and guarantees the openness of all transactions.
In contrast to traditional gaming, where players play to win, GameFi initiatives employ a P2E business model. By providing incentives with measurable values outside of the game, these games encourage players to play more. These incentives typically take the form of NFTs or in-game money.
Asset Ownership: In conventional gaming, in-game purchases are immutable investments that are trapped inside a particular game. Players own their tokenized in-game assets via P2E. In most cases, people can trade them for cryptocurrencies and, ultimately, money. On the blockchain, assets are tokenized and might include anything from a suit of armor to a piece of virtual real estate.
Decentralized finance (DeFi) solutions, such as yield farming, liquidity mining, and staking, may also be a part of many GameFi initiatives. These provide participants more ways to grow their token investments.

Decentraland, The Sandbox, Axie Infinity, and Gala are examples of well-known blockchain gaming networks that use the P2E GameFi architecture.

Axie Infinity

Consider the Ethereum-based game Axie Infinity, which gained popularity in 2021 and became the most Googled NFT worldwide in March 2022. Players in Axie Infinity gather, breed, train, and engage in combat with “Axies.” Each Axie may be exchanged on the game’s market for real money, unlike other in-game products (to give you an idea, the most expensive Axie ever sold was for US$820,000).

Axie Infinity Shards (AXS), which can be purchased and sold on exchanges like Crypto.com, and Smooth Love Potion (SLP), which users earn by playing the game, are the two native cryptocurrencies of the game. AXS is also utilized as a governance token, enabling token holders to decide how the gaming experience will evolve in the future.

Having said that, there may be a significant barrier to entry for games like Axie Infinity. User purchases of three pet characters are required to launch the game. A typical team setup used to cost roughly $300, although prices have recently decreased by approximately one-third.

Despite the price decline, this initial cost remains a significant barrier for many, especially given that the vast majority of blockchain gaming players now come from underdeveloped nations. Due to this barrier, gaming guilds have emerged, which allow NFT owners to lend out in-game assets (NFTs) in exchange for a percentage of the assets created.

GameFi Is Boosting Growth

Because GameFi initiatives use cryptocurrencies to settle transactions, the use of digital currencies has grown significantly in recent years.

The number of Unique Active Wallets (UAW) connected to the blockchain gaming industry increased significantly in the third quarter of 2021, according to a report recently released by DappRadar, a platform that monitors activities on decentralized applications (DApps).

These wallets made up roughly 49% of the 1.54 million daily UAWs registered during that time. The information supports the sector-disruptive potential of GameFi and the rising use of cryptocurrencies, which in turn encourages their uptake and use.

Another study report on the subject was recently made public by Chainplay, an NFT game aggregation platform, and it showed that 75% of GameFi investors entered the cryptocurrency markets as a result of their engagement in GameFi, demonstrating GameFi’s expanding influence on crypto adoption.

In addition to an expanding crypto universe, and growing retail crypto exchanges, GameFi has significantly contributed to the NFT market expansion. NFTs are used more often on the blockchain since GameFi largely relies on them for in-game assets. The growth of the GameFi market in 2021 closely mirrored the NFT boom.

Sales of GameFi’s NFTs increased from $82 million in 2020 to $5.17 billion in 2021.

Closing Thoughts

Because GameFi is a part of the cryptocurrency sector, it is also impacted by its many ups and downs. As a result, activity in the GameFi sector increases during uptrends while it declines during downtrends.

GameFi platform developers must work hard to create captivating games and help crypto ecosystems withstand market declines if they hope to keep users onboard.

Although the endeavor is easier said than done, GameFi investors are now focusing on enhancing gaming experiences with the clear objective of sustainability.

There are many obstacles for developers to overcome, but if they can draw gamers in with excellent gameplay, the future of blockchain-based gaming is more than promising.

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The Future of NFTs in Web3 and Web4

Posted on November 15, 2022November 15, 2022 by Jean Chalopin

The market for non-fungible tokens, or NFTs, was valued at $232 million in 2020, increasing to $22 billion in 2021. Because of its growing popularity in collectible trading and the developing significance of Decentralized Finance (DeFi), this market is anticipated to expand by around three times by 2031 as Web3 comes into being.

This article delves into why NFTs are an essential part of the future and how they fit into the evolution of the internet, known as Web3 and, eventually, Web4.

What Are NFTs?

NFTs are digital coins that operate similarly to cryptocurrencies on a blockchain. But they differentiate from crypto tokens because each one is bespoke. This means they can grant “uniqueness” to other assets to which they are connected. Digital art has proven to be the most common initial use for NFTs, with pieces made by artists like Grimes and Beeple being well-liked with online collectors, frequently fetching high prices.

*Source:* *https://www.designboom.com/art/grimes-crypto-art-nft-6-million-03-02-2021/*

NFTs are most frequently stored on the Ethereum blockchain. However, they may also be kept on other blockchains, including Polygon and Binance.

What Is Web3?

The phrase Web3 represents the notion of an innovative, improved internet. In essence, Web3 leverages blockchains, cryptocurrencies, and NFTs to return ownership and authority to the consumers. As put by a tweet from 2020: Web1 was read-only, Web2 is read-write, and Web3 will be read-write-own.

Some Web3’s core virtues are:

Decentralized. Ownership of the internet is distributed among its builders and users, rather than with a controlled entity.
Inclusive. Everyone has equal access to participate.
Merit-driven. Web3 uses economic mechanisms and incentives rather than relying on third parties.

Let’s give a contextual example of how Web3 works.

Web3 offers you control of your digital assets. Let’s take the scenario of playing a web2 game. An in-game item that you buy is linked to your account immediately. You will lose it if the game’s developers terminate your account, or if you quit the game.

Direct ownership is possible with Web3, thanks to (NFTs). Nobody, not even the game designers, has the authority to revoke your ownership. Additionally, you may sell or trade your in-game possessions on open marketplaces to recuperate their worth if you decide to stop playing.

What Is Web4?

The semantic web, where computers instead of people will generate new information, is commonly seen as the result of “Web 3.0.” The Internet of Things (IoT), or a web of intelligent links, will be what we refer to as “Web 4.0.”

The core features of Web4 include:

A hazy, blurred gap between man and machine
Information transmitting from every part of the worldArtificial intelligence capable of human-like communication
Completely transparency and traceability
Incredible speed and resilience

*Source:* *https://bamert-consulting.ch/f/an-update-on-the-web-40*

Everything around us is changing because of Web4, including the economy, logistics, and even medicine. The customer would have complete control over the internet and unbridled access to their activities and data. Web4 expands the potential of any internet-related sphere of activity by enabling a connection between man and machine.

NFTs in Web3 and Web4

Web4 will be synonymous with the digital economy and all digital assets. The impending metaverse will bridge the digital gap, making “tokenomics” seem like nothing.

*Source:* *https://dcxlearn.com/economics/tokenomics-a-guide-to-utility-business-and-value/*

In this context, NFTs will prove key to online communities, events, exchangeable assets, digital identities, and more. They will also greatly add to the rising popularity of retail cryptocurrency trading, which has already produced its fair share of mavericks and winners. In essence, NFT technology protects the integrity of the growing digital asset space.

NFTs have been utilized to grant exclusive access to offline events in addition to online groups and events. The permanent evidence of ownership provided by NFTs on the blockchain makes the technology well suited to address significant problems in the realm of event tickets, such as forging and digital theft.

NFTs have been integrated into blockchain games like DeFi Kingdoms, Axie Infinity, and Crabada, resulting in the development of thriving in-game economies where NFTs are valued according to their characteristics and statistics. In these games, playing more is highly rewarded since leveling up NFT assets increases profits and boosts the likelihood that uncommon and expensive item drops will occur.

Source: https://news.coincu.com/29875-crabada-ido/

Concerned that someone could take your metaverse username? Through the Ethereum Name Service (ENS), NFTs have already made it possible for users to possess unique “.eth” Ethereum wallet addresses. The network is attracting a huge number of new addresses each day.

These unique addresses, which are NFTs, are linked to other decentralized services and make complicated wallet addresses more individualized and much simpler to remember.

Closing Thoughts

Usernames and wallet addresses are no longer the primary means of identifying assets in the metaverse–non-fungible tokens have taken their place. The Sandbox’s metaverse project already uses NFTs to represent virtual locations, furnishings, and other objects.

The Sandbox generated more than $24 million in revenue in March 2022 from selling NFTs representing real estate in the metaverse. Leading companies and well-known individuals from various industries, including Atari, Snoop Dogg, and the South China Morning Post, all own land in the metaverse.

NFTs are building the groundwork for digital communities, tradeable in-game items, and the greater metaverse economy while also revolutionizing the ownership and exchange of digital assets.

Ethereum Is Not Decentralized

Posted on November 10, 2022November 10, 2022 by Jean Chalopin

With “the Merge” to Ethereum 2.0, the world’s second largest blockchain network by market cap has been the talk of the town. We have heard and read some postulating that Ethereum (ETH) can succeed even if it does not scale correctly.

The ETH is more than its potential scalability. It stores billions, and eventually, trillions in value and does not need a central monetary authority or bank. However, the necessary key is increased liquidity and decreased volatility.

Bitcoin (BTC) has followed a similar path to Ethereum, with many saying they wanted the BTC network to scale as a priority. They believe that Bitcoin’s success is measured as a rival for Visa, or it will fail, arguing that it must be a method of exchange rather than only a “Store of Value” like gold.

This requirement results in a decentralized network in jeopardy, prone to censorship and government capture. Fortunately, even with the high cost of mining hardware, small block miners have been successful. At the same time, network scaling is happening through “layer-2” (outside the base blockchain layer) solutions and side chains like Liquid and the Lightning Network. And Bitcoin’s base layer can keep its role as an SoV while building its own exchange network.

Ethereum is designed to be the world’s computer with unstoppable code that can run Dapps cheaply and trustlessly. But Ethereum has had to implement a major fix since the DOA hack, forgoing decentralization, and scalability was also jeopardized when the Dapp CryptoKitties broke the chain’s usability. We hope that Ethereum’s move to proof of stake will solve the throughput issues and lower the gas (transfer) fees for base-layer transactions which can be excessive.

Since Ethereum’s Merge, the supply of new ETH is slowing. According to data from Ultra Sound Money, the Ethereum issuance rate has fallen by 98%. Though it has not become deflationary. At the end of September 2022, it is only sitting at 0.09% annualized growth per year with a total of 14,042,583 ETH currently in Ethereum staking contracts, totaling $18.7 billion.

Ethereum Is Not Decentralized

Glassnode data shows that 85% of Ethereum’s total supply is held by entities that have 100 ETH or more, and 30% of the supply is in the hands of (wallets of) those with over 100,000 ETH.

Ethereum’s centralization issue is even more apparent with the shift to proof of stake. Being a “staker” does not require the same hardware as proof of work, but a validator needs to have 32 ETH staked to participate, a sum that most cannot afford. Ethereum’s “Beacon Chain” validators illustrate how the PoS system will look.

Most Beacon Chain validators are large entities, large exchanges, and newly founded staking providers with significant ETH holdings. A large portion of validators are legal entities registered in either the US or the EU, subject to those jurisdictions’ regulations.

These centralized holdings mean that just under 69% of the total amount of ETH staked on the Beacon Chain is held by a mere 11 providers, with 60% staked by only four providers. A single provider, Lido, makes up 31% of the staked supply.

When there is a bull market like we saw until the first quarter of 2022, this amount of centralization generally goes unnoticed, but as the tide turns, uncertainty reveals such flaws.

The potential for a proof of stake attack is just under 68%, and if the top 11 stakers were to collude, they could succeed in such a play.

No Really, DeFi Is Centralized Too

Decentralized finance was never really decentralized in the first place. The truth is that Ethereum’s not securing as much decentralized wealth as we think. Much of the value of Ethereum is in yield farming that results in high annualized yields, and in other Ethereum-based DeFi that worked until 2022’s crash. High yields had prevented major players from looking behind the curtains and finding the flaws.

There was a massive growth in the “Total Value Locked” (TVL) of Ethereum, but since the crypto is not actually locked—it is temporarily deposited to capture those ridiculously high yields, hence dropping from $110B to $31B in only a year.

Lack of Users

Likely fewer than 500,000 people have interacted with DeFi or with Ethereum. The user numbers for YCharts, DappRadar, DefiPulse, Etherscan, and Nansen, are all underwhelming.

While the most valuable Ethereum-based DeFi coins have a small number of active users, it means that their fees are high enough to drive new users away from Ethereum. The highest valued DeFi protocols only have users in the thousands (OpenSea has only 26K daily users; see above). The reason that $31 billion is “locked” is the incentive of high “APY” (yield) liquidity mining.

When users are being paid to borrow money from a DeFi protocol, you cannot consider any one user the same as a long-term holder. They can disappear quickly.

The Solution

The solution for a centralized system is quite simple–make it more decentralized. Unfortunately, those currently working on Ethereum are rebuilding everything that is wrong with Wall Street and putting it on a blockchain.

The deep-pocketed backers or in-the-know developers are pushing for centralization because they desire the most of the pie. As limited as Bitcoin is functionally, it is the most decentralized cryptocurrency with the prevalence of Bitcoin’s fractional shares. However, Ethereum has more potential and can be successful.

Staking

Staking was intended to remove the hardware requirements that kept the small player from participating. The requirement of a 32 ETH stake for participation in PoS is limiting. In October 2022, 32 ETH is about $44,000.

If there are enough decentralized staking pools, then much of this issue can be resolved. By allowing many to invest through aggregating pools, the small players can finally join in.

Layer-2 and Beyond

If the number of nodes (validators) is high enough to lower the gas fees and increase the throughput of ETH, then Ethereum may have a successful decentralized future. If other avenues imprinted on Layer-2 solutions can increase the affordability of transactions further, enabling micropayments like what µRaiden wants to do, then Ethereum can be truly decentralized. This may draw much more retail, everyday users to cryptocurrency through the many American or European crypto exchanges.

When combining affordable layer-2 solutions with a broad and decentralized PoS system, Ethereum will lose much of its centralization.

Volatility and the Catch-22

The use of ETH is the key, but volatility is the restriction. While the types of price swings we have seen in the crypto markets remain (10% or more in a day), all crypto use will be limited. The problem is that while the volatility is high, the acceptance will not be widespread, and while acceptance is not widespread, volatility will be high.

Getting transaction prices down and making micropayments possible will allow for more widespread use, and more widespread use means more stability. If the large holders can release their grip that is centralizing Ethereum, then they will likely do better in the long run for the greater good of decentralization.

We are incredibly positive about the Ethereum network and look forward to its decentralization.

The Metaverse and Its Ingredients

Posted on November 4, 2022November 4, 2022 by Jean Chalopin

Since the early inception of the metaverse, starting with the 1982 book by Neil Stevenson, “Snow Crash,” the idea of an immersive world without limitations intrigued many. This interest has been boosted by the increased online presence characterizing the Covid pandemic and Facebook’s name change to “Meta.”

There remain several questions about the metaverse, and we have addressed many of these with our previous article examining the metaverse’s relationship with programmable data. Yet there remain several more questions: Can the metaverse live up to its hype? What is it good for? And how is it distinguishable from any other virtual reality-based world?

The Metaverse’s Core Idea

The metaverse is, at its core, just a named version of the internet’s evolution to a more social, economically sophisticated, and immersive system. The tech world has two perspectives by which they believe this can be accomplished, which are in opposition to each other.

The decentralized approach: An open and interoperable system owned by the communities that maintain it.
The centralized approach: A centralized system that is closed and controlled by corporate mandates. This is like the current “Web 2.0” system that demands economic rents from creators, donors, and residents. Think of the Apple store that prevents some apps from being distributed and demands a cut of every app’s revenue.

Open against closed is the distinction separating these two perspectives.

A closed metaverse is a world created by a single entity and is controlled by them. They dictate rules, enforce those rules, and can decide who is excluded and why they are. We can easily imagine Meta developing this example.

In an open metaverse, individuals govern their own identities, and the collective will enforces property rights and benefits for the users. Transparent, interoperable, and permissionless, an open metaverse enables users to freely build a metaverse of their choice.

A true metaverse is an open one, where in a Web 3.0 style, the users determine what’s best.

The Seven Ingredients

We have identified seven ingredients that are required to build an open metaverse.

1. Decentralized

The overarching fundamental requirement of a healthy metaverse is that it must be decentralized. Centralized networks start as friendly and cooperative places to attract new users and developers. However, as the growth curve slows, they transition to a competitive system extracting more and demanding a zero-sum game.

Powerful intermediaries become involved in repeated violations of users’ rights and then may ultimately de-platform, or phase out a version of a metaverse, of their metaverse entirely. A decentralized platform avoids this by propagating user ownership and a healthy community.

Decentralization is critical. A centralized network stifles innovation while the opposite remains true for a decentralized counterpart. Maintaining decentralization offers the best protection against a failed metaverse.

2. Autonomous

The next ingredient of an open metaverse is the self. The first thing you should have in a virtual world is yourself. A person’s identity must persist when crossing the real-to-virtual threshold and across the metaverse.

Identification is established by authentication, confirming who we are, what we can access, and what information we can provide. This is currently done through an intermediary that conducts the process using solutions like single sign-on (SSO).

Leading tech giants of today (i.e., Google and Meta) built their companies on user data. They collected it by analyzing people’s activity and developing models to provide more relevant and effective marketing.

Cryptography, which is at the heart of Web 3.0, allows users to authenticate without relying on a central intermediary. Users govern their identity directly or with the support of a chosen service. Crypto wallets (i.e., Metamask or Phantom) can be used for identity authentication. Open-source protocols such as EIP-4361 (Sign-in with Ethereum) or ENS (Ethereum Name Service) can be used by projects to build a decentralized system securing identity.

3. Property Rights

The most popular video games of today make money from the sale of in-game items: skins, weapons, emotes, and other digital things. People who buy these are not really purchasing them but instead renting them. If the game shuts down or unilaterally changes the rules, the players will lose access to their purchases.

While we are used to this Web 2.0-based system, digital assets could be genuinely “owned,” transferred, sold, and or taken outside of games. The same logic of what is owned in the physical world can be applied to the digital world. When you buy something, you take ownership. It really is that simple.

These ownership rights should be enforced in the same fashion that courts enforce them in the real world. Digital property rights were not a possibility before the advent of encryption, blockchain, and complementary advances like NFTs. The metaverse can turn a digital serf into a landowner.

4. Flexibility

The mixing and matching of software components in the same way that Legos can be combined is called composability. Each software component is written once, and then it is reused.

This system is analogous to Moore’s law, or the way interest compounds. The exponential potential that such a system provides has shaped the worlds of finance and computing. It can be applied to the metaverse.

Promoting metaverse composability, which is closely related to interoperability, requires a high-quality foundation with open technical standards. With Web 2.0, developers build digital goods and novel experiences using a system’s foundational components, like those found in Roblox and Minecraft.

However, using those goods or experiences outside their native settings is more complicated or impossible. Companies offering embeddable services like Twilio’s communications or Stripe’s payments work across multiple websites and apps, but don’t allow developers to change or alter their code. Composability enables developers to use and modify the underlying codes, similar to open source.

Decentralized finance (DeFi) is a fairly good example of composability and interoperability. Anyone can adapt, change, recycle, or import the underlying code. Further, engineers can work on live programs, such as Uniswap’s automated market-making exchanges or Compound’s lending protocols, using the memory of Ethereum’s shared virtual computing system.

5. Open Source

Composability is not possible without open source. The finest programmers and producers, not platforms, deserve absolute control so that they may be truly innovative. This way, developers can achieve their goals of creating more sophisticated and trustworthy experiences when codebases, algorithms, protocols, and marketplaces are accessible to all.

This openness produces better software, heightened transparency with economic arrangements, and closes information gaps. All these features aid in the development of more egalitarian and equitable systems that align all network participants. Such systems can make many securities laws obsolete, which were designed to address the principal-agent dilemma and asymmetric commercial knowledge.

6. Community Ownership

When a single entity owns and controls a virtual world, it provides limited escapism without offering a truly virtual experience—like a theme park. Users and programmers must not be forced to adhere to the possibly arbitrary rules of centralized management. All stakeholders should have a say in a metaverse’s governance.

Community ownership is the ingredient that brings together all network players: builders, investors, creators, and consumers. The metaverse, using blockchain and ownership tokens, can provide this level of coordination.

Web 3.0’s decentralized autonomous organizations (DAOs) have taken this idea to heart. They are moving away from the rigidity of corporate institutions and toward more flexible, democratic, and informal governance models. DAO communities can be constructed, governed, and pushed forward by their users rather than through centralized bodies.

7. Total Social Involvement

Tech companies would like you to believe that virtual reality (VR) and augmented reality (AR) hardware are essential components of the metaverse. They are not necessary but are instead modern Trojan Horses. The tech giants see this hardware as their pathway to being your primary provider of 3D. Yet, the theme park analogy also applies here.

The metaverse does not require VR or AR. The best manifestation of the metaverse demands social immersion. The metaverse enables activities and interactions that are more important than the hardware. People are there to interact, mingle, cooperate, and have fun from anywhere in the real world, as is done with Twitter Spaces, Discord, and Clubhouse.

Covid-19 showed us the need for more immersive experiences. For example, zoom replaced text chatting. FaceTime and Google Meet entered the market by storm.

Closing Thoughts

While companies have started building metaverses, any virtual environment that lacks the above ingredients cannot be considered a fully developed metaverse. Web 3.0 is required to achieve the greatest potential inherent to the word metaverse.

The metaverse is built with openness and decentralization as its core principles. Self-autonomy and property rights must endure the influences of centralized powers and do require decentralization to flourish. With collective ownership, the metaverse avoids the pitfalls of unilateral ownership. With collective ownership, innovation flourishes.

IoT Devices Enhance Proactive Risk Management

Posted on November 2, 2022November 2, 2022 by Jean Chalopin

IoT (Internet of Things) is a buzzword that has been around for a few years and is growing in popularity as we slowly connect everything to the net. An enormous amount of data is being collected already, and this is going to the next level through IoT sensors.

While there are many problems with IoT sensor security that still need to be solved, the data that is being supplied by these devices, if useful and used correctly, has the power to disrupt traditional risk management. This article will discuss some proactive uses of IoT for risk management and why IoT will be invaluable in the finance and insurance fields.

IoT’s Growth

The growth of IoT as a technology is unbelievable. IoT use cases are being seen in nearly every business sector, from connected technologies to cloud computing and digital data. Pharma is using IoT for material tracking and machine monitoring. Oil producers are using IoT for safe extraction and delivery. The travel industry is connecting aircraft to regulate seat temperatures and other IoT devices to make travel seamless.

Cannabis producers are using IoT devices for monitoring their plants from seed to store to stay compliant with their local regulations. Any industry can find benefits from IoT devices. And for finance and insurance, this spread of devices can be used for our own needs.

IoT for Risk Management

The embedding of IoT sensors into physical objects can complement risk mitigation and risk management services. The finance and insurance industries can either piggyback, extracting data from devices that are already installed, or can require the use of our own device’s native sensors. Our goal is to predict and identify risks with reliable accuracy.

During the COVID-19 pandemic, the use of IoT sensors surged in popularity. The shutdowns of the pandemic forced many businesses to rely on IoT sensors to be their eyes and ears.

These new sensors had the ability to watch over vacant buildings. If a building’s system fails, the IoT sensor would identify the failure and notify someone to deal with the problem. The ubiquity of these sensors means that there is a continuous supply of tracking data, like with the data inherent to finance and insurance.

At this year’s Risk Management Society (RIMS) conference, several industry leaders from Waymo, Chubb and Prologis Inc. spoke about how IoT is being used for their risk mitigation practices.

The team members from Chubb, including their chief risk officer, spoke about how IoT is helping Chubb take risk mitigation and management to the next level, allowing them to predict and even prevent potential damage before it happens. A Chubb team member stated that IoT is having a particularly noteworthy impact on their commercial insurance industry. This change is evolving the way that they are now pricing, underwriting, and servicing commercial insurance.

IoT in Insurance

The adoption of IoT in the commercial insurance segment has accelerated significantly since the beginning of the pandemic, and they expect it to expand further. Chubb’s senior vice president and IoT lead, Hemant Sharma, said that Chubb sees IoT as a valuable opportunity to offer their clients bespoke risk prevention services that will ultimately reduce or, in some cases, avoid losses.

Prologis Inc’s senior vice president of global risk management, Jeffery Bray, spoke about how critical IoT was to their business. Prologis has a billion-dollar portfolio of warehouses, and they are using IoT to find better ways to manage and predict risk. IoT tech provides the perfect fit as Prologis’s main risk is driven by property exposure.

The IoT sensors help Prologis get ahead of their operating risks, collect more data in real-time and be more predictive. According to Bray, Prologis is now working on valuing leading indicators as opposed to reacting to lagging counterparts. This switch involves the ideation and development of “autonomous” buildings, those which effectively use IoT devices.

One new area advancing IoT: drones. After a natural disaster, drones can be utilized to gather in-field data quickly for any resulting claims. Drones gather data for building inspections, providing underwriters with more information and people with faster payouts.

Potential Uses for IoT in Risk Management

For future uses of IoT, there are two crucial questions to ask:

1. Will this new technology help drive differentiation in the marketplace?

2. Will it stand the scrutiny required of a solid and profitable business case?

The risk management space has many candidates that can potentially fulfill these requirements.

Oil and Gas

The oil and gas industry has consistently invested in its sensor and early warning infrastructure to ensure safety. Some of the most common risks in the energy industry are injuries, fires, hazardous gas leaks, and vehicle accidents.

A collaboration between the energy industry and insurers can be formed through IoT data to look for the early signs of potential accidents. This can prevent costly accidents, environmental spills, and insurance claims.

Despite preventive measures, risk is always present with oil and gas, and the costs of adverse events are often devastating. Research from 1974 to 2015 shows the total accumulated value of the 100 largest oil and gas disasters exceeds $33 billion. Another report shows that only Russian refinery damage from 2011 to 2015 exceeds $1.5 billion.

Infrastructure

The variety of sensors for commercial infrastructure OEMs has seen a substantial increase. These sensors can monitor safety breaches, ranging from water leakage, smoke, overloading of weight-bearing structures, and the presence of mold and mildew, among others. There will be an ongoing integration of infrastructure management systems with IoT data to aid loss prevention programs and provide preventative actions.

A 2018 study compared a classical (non-telematics, IoT-based) risk model against a telematics-based version and a hybrid (telematics and traditional factors) version, measuring their predictiveness levels. The result: the classic model ranked least predictive.

Grocery and Other Retail

With the millions of routine visits to these stores and the potential hazardous locations within grocery and convenience store aisles, seafood facilities, salad bars, and liquid storage areas, opportunities for proactive risk management are abundant.

IoT devices can be used in accident-prone areas to monitor human traffic patterns, debris, and cleaning. Beyond the logging of activity for compliance reasons, IoT can help prepare injury reports and the necessary remedial actions for reducing claims-based losses.

Smart Homes

We now see the addition of new connected devices entering our homes. Ring doorbells, smart thermostats, baby monitors, IoT-enabled refrigerators, other appliances, pipe leakage sensors, lighting, and entertainment controls are becoming more commonplace. If utilized correctly, the resulting increase in data can allow for new innovative insurance products and engagement with the insured and mortgage borrowers.

Wearables

Connected health wearables such as watches, patches, shoes, socks, and a new supply of industrial safety wearables are entering the market.

These different items of clothing monitor biometric data, as well as odd joint angles (improper lifting technique, carpal tunnel syndrome), bad posture, and more. They help prevent injuries and costly medical insurance claims.

Proactive Risk Management in IoT Programs

IoT technologies continue to evolve, and the real test is whether the technology can benefit the finance or insurance carrier and the borrower or insured respectively. Until the industry can get a high engagement index with the user, be they personnel or commercial, the chance of the user opting out remains high. Thus, the technology’s potential is limited.

Progressive Insurance and other pioneers in the IoT space have moved in the right direction, initially focusing on the automotive sector. Their Snapshot program rewards the insured with monetary benefits when they can drive safely and avoid high-risk driving behaviors such as late-night driving or excessive acceleration and breaking.

The result is a “high stickiness” describing their insured population, who will keep lower rates for passing the six-month “Snapshot” test. It also allows Progressive to identify more risky drivers that will not receive the lower rates while still notifying those drivers with “beeps” that their actions are hazardous. Additionally, Snapshot has withstood the scrutiny of actuaries, reshaping how insurers assess, limit, and price the risk of their product offerings.

*Image courtesy of* *Progressive Insurance*

So, what can we do to fulfill the two questions of market differentiation and profit?

Develop an ecosystem with technology partners. This means to explore the IoT marketplace thoroughly by studying product roadmaps, vendors, and system integrators.
Continuously experiment. This means to include businesses and markets adjacent to your usual targets through expanded coverage or product rehauls.
Integrate IoT into operations early. In other words, developers must marry underlying systems to IoT-capable devices starting from the ideation stage.
Plan for the long-term. As IoT evolves, business leaders should increasingly take on an “investor mindset,” seeking out opportunities to improve income or reduce costs?

Closing Thoughts

The internet of things (IoT) is flourishing globally as the number of connected devices continues to expand, projected to grow beyond $50 billion in 2025, with more than two devices for every human (19.1 billion). This massive expansion, coupled with ongoing device computing power improvements, is giving rise to new possibilities for the finance and insurance industries..

Possible incentives include better pricing on mortgages and loans, rebates on policies, and discounts for companies that use them. IoTs also come with added conveniences, such as reduced employee absence, less downtime, and faster repairs. The key is to remain proactive and consistently seek out methods by which IoT reshapes the global risk management industry.

The Metaverse and the Programmable World

Posted on October 31, 2022October 31, 2022 by Jean Chalopin

We have previously discussed both the Metaverse and Web3. Enterprises are reimagining the internet, and we as individuals should prepare for the future that is quickly coming to us all.

Over almost 20 years, companies have developed a wide range of digital capabilities. However, all these solutions were designed for the internet we have at present, generally called Web 2.0, or a digital landscape where the drivers of value are separate entities. The result is more activity offline than online.

The next internet generation will not be restricted by offline thinking or limitations but focus upon connection. Web 3.0 and the metaverse are changing the foundation of our virtual world.

Rather than seeing the internet as a collection of separate websites and applications, only connected by a browser on a desktop or laptop computer, tablet, or phone, the new metaverse is a persistent 3D environment for work and home.

Building the Future’s Metaverse

The future’s internet, or metaverse, will only be created through hard work. This involves building new platforms, creating novel products and services, developing strong partnerships, and actioning the required technology.

The identification of these new business models and use cases is going to require intense effort and much risk-taking. However, there are tremendous opportunities. Many of risk takers who led the shift from Web 1.0 to 2.0 are trying to lead the way to Web 3.0.

The tech titans had narrow business lines. Amazon only sold books, Netflix mailed out DVDs, and Google felt like just a browser. They evolved. What’s more, the metaverse is open to disruption from all entrants, new or old.

The metaverse will likely be a combination of an immersive digital-only world and augmented reality. Internet “browsing” in this context would blend the digital with the physical.

Creating a Digital Domain

Web 3.0 is a reinvention of how data moves, and the metaverse is a new way to experience and interact with that data.

The changes that Web 3.0 is making will result in data with value, authenticity, and provenance. The main goal of all Web 3.0 projects is to create a blanket of trust covering the web, giving data owners assurance that their data is theirs.

The metaverse focuses on solutions that offer life-like experiences. Major companies are reimagining operations to develop use cases for these new technologies.

German Automaker BMW has taken Nvidia’s metaverse development platform Omniverse to construct digital copies of 31 of their actual factories. These models are 3D recreations that include everything from people at their workstations to machinery with which they interact.

They are utilized as virtual test centers allowing engineers to train real-life robots to navigate in the environment. They also allow designers from around the globe to experiment with line layouts.

The real value of Web 3.0 and the metaverse will depend on their final iterations and mutual interactions. A simple and intuitive experience is required to gain widespread adoption–if we are going to reimagine how Web 3.0 data is moved through the internet.

Bringing the Physical to the Digital World

Simultaneously, there are other companies and projects that are moving the physical world closer to the digital world, creating a “programmable real world.” Their goal is based on fundamental software elements, such as customization, control, and automation, and applying them to the non-digital environment around us.

For the past decade, digital technologies have flourished across the physical world, and with the Covid-19 pandemic, this has only accelerated. Cameras are now everywhere, through smartphones, cameras, vacuums, and cars.

The advances in natural language processing, computer vision, and data analysis are building the capabilities of these technologies, making them a persistent layer of our environment. As the rollout of a global 5G network continues, there will be an even wider network of low latency connected devices that are helping (monitoring) us.

Business leaders must bring the real and digital worlds closer together, such as through augmented reality glasses, smart (interactive) materials, and nanotech-based devices.

Making the Real World Programmable

To build a new generation of products and services that are incorporated into the digital world, we will need to work with three elements:

· The connected

· The experiential

· The material

With new technologies in manufacturing, such as 3D printing and self-assembling machines, we are changing how and where physical goods are created.

In the past, internet of things (IoT) devices have had limited abilities, constrained by limited computing power. Emerging tech, including 5G, is redefining those limitations through increased processing power and simultaneous, multiple connections.

Experiential refers to utilizing IoT devices to provide a holistic, immersive experience by creating digital representations of real-world counterparts. These representations provide organizations with real-time insights into environments and operations. The digital twin market, which was valued at $3.21 billion in 2020, is expected to grow to $184.5 billion by 2030.

The second piece to the experiential component is augmented reality. Even at this early stage, the value of combining AR glasses with digital twins is evident: they can overlay any environment with a digital experience.

Material refers to the on-demand and customizable products that are now possible with 3D printing technology. This leads to the possibility of using programmable matter, able to change their physical properties on demand.

Moving Toward the Programmable World

A leader moving toward the programmable world must embrace its three components: connected, experiential, and material. Different businesses will prioritize one element over others but should have competence in all three.

As 5G grows, the programmable world will benefit from industry-wide alliances shaping new technology standards and enabling devices to increase their connectivity and response times.

The experiential component will begin with the continued expansion of digital twins, already providing beneficial use cases and competitive edges. In time, they can be harnessed to design products and experiences providing novel business models. Interactive avatars, terminals, and screens represent only a beginning.

The material component will pair technologies such as IoT or 3D printing with ambitious startups and their ideas.

Closing Thoughts

The digital and physical worlds are coming together. When this marriage will be complete depends on the progress of the metaverse and Web 3.0. Together, they will reinvent how data is created and transferred across the new digital experience.

Having the ability to customize a digital experience through interactive, physical manipulation, now referred to as “browsing,” could create massive new revenue streams for leading tech titans and disruptors alike. The opportunities are vast, but they require vision grounded by solid use cases.