5 Legitimate Use Cases for Cryptocurrency
Last year, James Jani (who gained a large following by making YouTube videos about pyramid schemes) released a scathing video about cryptocurrencies, where he called the entire industry a giant Ponzi scheme. If you haven't seen it, you can find it here. He’s not alone in this evaluation. Crypto has been getting a lot of negative press in the last two years, and much of it is deserved.
But with high-profile backers/investors like Marc Andreesen, who built the world's first web browser, Elon Musk, Jack Dorsey, Mark Cuban, Kevin O'Leary, Michael Saylor, and even Gary Gensler (who used to teach a course on cryptocurrencies at MIT prior to becoming the SEC Chair), which of the following scenarios is more likely?
- The entire $1.6 trillion crypto industry is made up of wealthy, high-profile scammers (many of whom made their wealth way before crypto and don't even need the money anymore).
- The entire $1.6 trillion crypto industry is ran by a small cartel of scammers from the shadows, and all of the successful businessmen investing into it are idiots oblivious to the fact that they're being conned (despite the wealth they accumulated before crypto, showing that they know a thing or two about finance).
- James Jani doesn't actually understand cryptocurrencies, despite claiming to.
I have nothing against James Jani, and I've enjoyed watching his videos, but let's be realistic. He has done over a dozen videos on Ponzi schemes (mostly MLMs), and has been asked by his audience to do a couple videos on Bitcoin, at the peak of its hype.
His first video was cautious one, talking about the technology, and his latest video was him attacking the entire crypto industry, when hating on Bitcoin became the popular thing to do. Perhaps James Jani, who specializes in making videos about Ponzi schemes is too eager to lump everything into a Ponzi scheme. To a hammer, everything is a nail.
While Jani makes good points in his video, calling out slimy projects and NFTs of dubious value for what they are, he intentionally picked on rug pull projects, neglecting all of the legitimate projects.
Jani naively glazed over many of the benefits of smart contracts, explaining that similar mechanisms already exist (courts for enforcing contracts, banks for handling money). Clearly, Jani is too young to remember 2008 (when centralized lenders committed fraud), and has never actually been in court (where $20k+ payment to attorney is the norm) if he's claiming that the current systems cryptocurrencies aim to replace are working fine. It's akin to someone who never reads books claiming that there is no need for Amazon in 1998 because he can find any book he wants at a local bookstore.
The current financial system consists of blind trust in entities that do not have your interests at heart and have been causing systematic erosion of middle class wealth since the 70s. Similarly, the legal system mainly benefits the lawyers. It's more of a deterrent against bad behavior by good actors than a solution against bad actors. These are legitimate problems that smart contracts aim to solve.
What are Cryptocurrencies?
The word cryptocurrency is a misnomer that many people get stuck on. While Bitcoin may have started as an attempt at a better currency, that's not the main use case for most of the projects today - which is why crypto proponents started calling it Web3 instead.
Web3 is basically a new internet protocol, focusing on tokens and transactions. But why do we need transactions if Amazon and other large players already solved that problem with Web2? For the same reason we needed Web2 and Facebook at a time when AIM seemed to have already solved the interaction problem with Web1. Just because something is doable with old tech, doesn't mean it's scalable or reusable. Web3 helps us solve a new class of problems which governments have failed to.
Use Case 1: Store of Value
Inflation is a fact of life in every country. Luckily US has been mostly shielded from it because the dollar has been the reserve currency of the world for decades. This is changing, however, and people are already seeing their savings erode. We've seen numerous articles like this one talking about 40-80% of dollars in existence created post-COVID. Why would you put the well-being of your children in the hands of a politician whose goals are limited to the next 4 years?
While most protocols can't claim to be a store of value, Bitcoin can. As inefficient as it is for transactions, so is real estate and physical cash. Yet we still manage to make use of them through other mechanisms (lending, borrowing, etc.). You don't need to trade physical portions of Bitcoin for transactions, there are "layer 2" networks that treat the assets from layer 1 as collateral. It's like opening a HELOC against your home.
Use Case 2: Franchise System
Blockchain is a natural extension of the sharing economy. Smart contracts represent a digital franchise system, where we can sell anything as a service. We can take any business, and with a proper set of smart contracts digitize it. Instead of hiring employees, we create incentives that service providers can plug into. And if you’re a small business just getting started in a niche, it’s easier to plug into an existing distribution network rather than building your own.
As your business grows, you can build your own services on top of this distribution network, effectively creating your own network on top - without fearing lock-in, because even if the original operator goes out of business, their API and customers stay around (This is the core value proposition of Web3). There are plenty of services in crypto industry that have done exactly that, they built a more efficient network on top of an existing one. Aave, Curve Finance, and Polygon are all examples of this.
Use Case 3: Anything as a Service
I've already touched briefly upon this concept in the previous section. Let's look at the concept of a sharing economy. Person A wants some service, and person B has some excess capacity they can provide. The problem is they have no way to communicate, or facilitate the transaction in a way that they both trust. This is where middlemen like Uber and AirBnB come in, taking a significant share for their services. But what if we could replace the middleman with a protocol that facilitates the transaction? This is one of the main use cases for Web3, and we already have multiple examples of companies doing just that:
- Helium Network allows residents worldwide to share their internet bandwidth with others, and get paid for it. Imagine traveling abroad and not having to worry about roaming charges, because you can just connect to a local hotspot.
- Filecoin allows you to rent out your unused hard drive space to others.
- Fetch.ai allows you to build/deploy AI agents that can be used to automate tasks, and get paid for it.
- Akash is a decentralized alternative to AWS, allowing you to rent out your unused computing power.
Even in real estate, Web3 opens up doors to fractional ownership, easier investing/syndication (effectively crowdfunding with no middlemen), as well as better alternatives to REITs with more transparency and liquidity. Even AirBnB itself can be completely replaced with a Web3 protocol.
Use Case 4: Better Legal System
We've all heard of exhorbitant fees lawyers charge. I myself was involved in 2 expensive real estate lawsuits. One cost me close to $30,000 due to disagreement with the seller on the terms of a contract. Another cost me over $15,000 suing a deadbeat syndicator, and even though I won, I was never able to recoup a penny of my initial $50,000 investment because the guy fled the state. Civil lawsuits are only good in the state they've been filed in. Our legal system is broken, the legal fees are the equivalent of using nuclear weapons to keep the peace. It only works when the other side has something to lose.
Imagine if instead the money was handled by a protocol, one that bundled the concept of a credit score with it, which you could use to determine whether you want to do business with someone. Instead of having to sue someone after the fact, you could just have a smart contract that automatically enforces the terms of the contract (a proactive approach to guarding against conmen rather than the reactive approach that our legal system is). This is the promise of Web3, and it's already happening. A good example of this is OpenLaw.
Use Case 5: Better Voting System
The current voting system is archaic. It's not secure, it's not transparent, and it's not efficient. Imagine a pseudonymous voting system that could update in real time and would not require recounts. Better yet, imagine a system where you could vote on any issue, not just the politician who will vote on your behalf. Your vote could be weighed based on your expertise in the field, because there are issues you have no business voting on just like there are issues that I have no business voting on.
Yet the way our system is setup, that's exactly what happens every voting cycle. We talk about how bad fossil fuels are, oblivious to the safe and clean solution that we've had access to for almost a century: nuclear energy. And yet, majority of the population still doesn't understand that we've come a long way from Chernobyl and Three Mile Island. Our political system favors stagnation because expert views keep getting watered down by fears of the masses. This is the kind of problem that Web3 can help us solve. Imagine having to take a competency test on each topic before being allowed to vote on it. We'd have a lot fewer people voting for short-term solutions that do more harm in the long run.
Indeed, the concept of DAOs (Decentralized Autonomous Organizations) is an extension of this idea. A DAO encourages participation in governance, but requires buy-in into the protocol. Imagine if each industry/sector had a DAO rewarding members for participation and sharing experience. Instead of a single government entity, we'd have a network of micro-governments represented by DAOs, each with their own set of rules and incentives.
Conclusion
These use cases are just scratching the surface. There are currently hundreds of thousands of various crypto projects, and while many of them are scams, the same can be said for any industry. How many startups have no legitimate business model? How many real estate "investments" lose money? How often is art used to launder money? There are bad actors in every industry, but that doesn't disqualify the industry as a whole.