What is the Blockchain Economy?August 11, 2023
One of the core philosophies of the web3 space is the basis of decentralized ownership over vital infrastructure. The goal of ownership in Web3 is to limit the power of centralized entities and work to ensure the Internet remains a censorship-resistant, permissionless, and secure medium.
At the pinnacle of web3 is the blockchain economy fueled by the cryptocurrency and digital asset markets. Within this economy and associated markets exist the necessary infrastructure to make web3 a standalone economy that can serve as an alternative financial ecosystem owned by the users.
In this emerging internet is the opportunity to own (and profit from) the core protocols and infrastructure that has previously been centralized. By decentralizing the vital components of the internet, those providing the capital to sustain and secure these components are compensated for it.
This is the basis behind the ownership economy i.e. the ethos of internet business models moving to distributed ownership models where the users can participate in the value creation process.
Core Infrastructure of the Blockchain Economy
The following components are those that have been identified as critically important to the Blockchain Economy and in ownership in Web3, providing the means to move data and value:
Money and finance arguably have one of the widest impacts on the blockchain economy and ownership in Web3. Cryptocurrencies were born from Satoshi Nakamoto’s idea for an alternative financial system to help place checks and balances on the traditional economy. Of course, this vision emerged as Bitcoin (BTC).
Today, two core concepts within blockchain financial services make up this component. Those concepts are decentralized money (i.e. a stable, inflation-resistant store of value) and decentralized finance (financial applications and derivatives with distributed ownership models).
The concept of decentralized money has taken great strides with that of stablecoins, although the current iteration of stablecoins is far from perfect. A truly decentralized internet economy needs money of (relatively) stable value that is completely independent of traditional fiat currencies. This money also needs to be a trustable, inflation-resistant store of value (SoV) and a reliable medium of exchange.
Stablecoins such as USD Coin, Tether (USDT), and even crypto exchange currencies like BUSD all rely on the fiat currency of the USD. Therefore, they are subject to the same authorities and properties of the USD. When inflation is high, inflation persists in the USDC and USDT cryptocurrencies.
Truly decentralized money is also not answered by Satoshi’s Bitcoin, Buterik’s Ethereum, or any other major asset currently on the market. However, as of 2023, the Ampleforth protocol released an asset that does finally meet the criteria to be described as decentralized money: SPOT.
AMPL / SPOT
For the first time, truly decentralized money (and the corresponding decentralized monetary system) has emerged via the AMPL and SPOT tokens. It is worth mentioning that this is in collaboration with the Buttonwood Tranche protocol, though it is a bit out of scope for this article.
The Ampleforth protocol is a cryptocurrency protocol that aims to provide a stable unit of account by adjusting the supply of its native token, AMPL, in response to changes in demand. It uses an elastic supply mechanism that expands or contracts the token supply based on changes in market price to target a specific price point. The protocol does not use pegs, collateral, or feedback loops and is based on supply elasticity rather than price stability. It is a decentralized, non-custodial, and open-source protocol.
The AMPL token provides the base collateral necessary to create decentralized money as it is immutable, unbreakable, and independent. This paved the way for SPOT.
The SPOT protocol is a set of instructions on the Ethereum blockchain that produces a decentralized store of value (SoV) token called SPOT. The SPOT token is a freely redeemable, non-custodial, stable asset that can safely wind down to zero users under stress and later resume use without interventional bailouts.
One of the key benefits of the SPOT protocol is that it is inflation resistant and does not rely on continual growth. This stems from AMPL’s price target of a 2019 USD adjusted for inflation. As of Q1 2023, this value is around $1.14.
The SPOT token is a freely redeemable claim on a basket of on-chain collateral. For example, suppose there are 1000 SPOT tokens in total circulation, and Alice holds 10 SPOT tokens. In that case, Alice owns 1% of SPOT’s circulating supply, and she can redeem her 10 SPOT tokens for 1% of the collateral set through a smart contract at any time.
The price of SPOT is determined by the market and will ultimately reflect the value of what the token is redeemable for in a collateral set. If the value of the collateral set goes up, the price of SPOT will likely go up, and if the value of the collateral set goes down, the price of SPOT will likely go down.
The SPOT protocol does not use pegs, feedback loops, or liquidation markets in its design, meaning no price point can break the system or trigger bank runs. In this way, it can never unwind like Terra Luna did. Due to the unique properties of how the system’s collateral is prepared and rotated, the redeemable value of 1 SPOT token will tend towards 1 CPI-adjusted dollar.
This is explained more in-depth within the SPOT whitepaper.
Blockchain oracles are critical to many decentralized applications, connecting off-chain data to the blockchain. Oracles are third-party services that feed data from the real world into smart contracts, allowing them to trigger events or execute actions based on external information.
One of the main use cases for blockchain oracles is to provide price feeds for decentralized finance (DeFi) applications. For example, a decentralized lending platform may use an oracle to fetch the current price of a digital asset, which is then used to calculate interest rates or loan-to-value ratios.
Oracles can also connect to external APIs, such as weather data or stock prices, triggering events or actions within smart contracts. Due to its importance, Oracles are a critical part of ownership in Web3.
Chainlink is currently the leading Oracle provider in the blockchain market. Chainlink's decentralized oracle network allows smart contracts on any blockchain to securely access off-chain data feeds, web APIs, and traditional bank payments.
One of the key advantages of Chainlink is its robust and decentralized network of independent nodes that ensures the integrity and accuracy of data provided to smart contracts. This makes it a reliable and trustworthy choice for developers looking to build decentralized applications. Because of this, Chainlink has built a robust ecosystem of on- and off-chain entities.
Just some examples include:
- Associated Press
Chainlink recently announced a reinvigorated economics model called Chainlink 2.0. Chainlink 2.0 builds on the success of the current version and brings new features and improvements to the platform.
Recently, Chainlink has achieved a new economic milestone by launching its staking v0.1, a new economic model that brings value to token holders. This new economic model allows token holders to stake their tokens and earn rewards for providing security and reliability to the network. This aligns the interests of token holders with the platform's long-term success and creates a strong incentive for node operators to provide high-quality data to the network.
Additionally, Chainlink 2.0 also introduces new features such as increased scalability, improved privacy, and new data types to the platform, which will enhance the functionality and usability of the network. With these new features, the platform aims to support the growth of the Web3 ecosystem by providing more reliable and accurate data feeds for decentralized applications.
Indexing & Querying Services
Where oracles provide connectivity between the blockchain and off-chain data, querying / indexing provides the means to locate data on the blockchain.
Indexing is a process used to organize and structure data in a database for efficient querying. It maps the data in the database, allowing for faster retrieval of specific information based on specific keywords or criteria. This is particularly useful when working with extensive data sets as it allows quick and efficient access to the data stored in the database.
It can be computationally expensive for decentralized applications to perform indexing/querying. If this process is inefficient, it can slow down the throughput and overall speeds of the application as it takes longer to find the necessary data to execute smart contracts. This is where indexing protocols come into play.
The Graph (GRT)
The Graph is the leading solution for querying data on the blockchain because it allows developers to easily build and use decentralized applications (dApps) by optimizing indexing/querying services.
The Graph's economics model is based on the use of the Graph token (GRT), which is used by token holders who can stake their GRT to help secure the network, and in return, they receive a share of the protocol's transaction fees. This incentivizes token holders to contribute to the security and development of the protocol, creating a strong alignment of interests between token holders and the protocol.
The Graph deploys a specific query language solution called GraphQL. It is a query language for APIs, allowing for more flexible and powerful data querying than traditional APIs. With GraphQL, the client can specify exactly what data it needs, and the server will only return that data, reducing the amount of data that needs to be transmitted.
One of the main benefits of GraphQL is that it allows for a more efficient and flexible way of querying data on a blockchain. With GraphQL, the client can specify exactly what data it needs, and the server will only return that data. This eliminates the need to go block by block to access simple information like an account's transaction history, which was a major issue with traditional querying methods.
Additionally, GraphQL allows for real-time data updates, which is crucial for dApps that require real-time data processing. It also allows for a single endpoint for all queries, simplifying the development process and reducing the required code.
The above examples serve as core representations of vital infrastructure within the blockchain economy built with an ethos of decentralization. With the introduction of LINK staking, it is possible to own a piece of the emerging internet and profit from the value creation it brings.
By owning AMPL, you profit from the utility of SPOT as an inflation-resistant SoV. You can stake the token by owning LINK to secure the Blockchain Economy’s most widely used Oracle service. By owning GRT, you can stake the token to secure the Blockchain Economy's most widely used indexing protocol.
These are but three utilities that can be found to generate passive income within the blockchain economy, enhancing the meaning of ownership in Web3. The user-to-owner business models and ethos have provided the foundation for unparalleled growth. It creates a flywheel of incentives that include users in the value process for the first time.