After many years of investing, experimenting, and improving infrastructure, the intersection of three market trends paves the way for corporate adoption of public distributed networks: tokenization, decentralized financing (DeFi), and layer 2 business logic.
In 2020, it became increasingly clear that these trends, in addition to the harsh lessons from attempted private network deployments, have left organizations open to deploying distributed ledger technology (DLT) in ways they simply weren’t in 2017.
This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Mance Harmon is the CEO and co-founder of Hedera Hashgraph.
DeFi encourages more efficient funding through tokenization that enables economic activity
In 2017, tokens were used almost exclusively to raise capital for startups. The value proposition of tokenization was only just beginning to be understood, with little appreciation of the full range of use cases and types of tokens that could be created.
Fast forward to 2020, and groups like the Interwork Alliance have created a framework to understand the definition and scope of the token concept, including use cases, taxonomy and terminology. Early use cases of DLT focused on the ability to sync a ledger across multiple parties to ensure that all parties are getting the same information at the same time and that every network participant has the confidence that all parties are getting the exact same information.
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For example, an important use case is tracking activities in the supply chain, specifically recording when and where a product was manufactured and how it flows through the supply chain. Keeping track of when and where a product was made can help create transparency and reduce fraud, which has some value.
By creating a token that represents the item being produced, not only can the same information used for tracking be recorded, but the buying and selling of the same widget can be recorded by moving the token between accounts. Digital tokens are designed for economic activity and this trend is accelerating. Soon, products and services will be symbolized throughout the world economy.
One example of this is Coca-Cola’s supply chain, which is partially optimized by its largest technology provider for the 70 franchise bottlers in North America – Coke One North America (CONA). In 2019, CONA used Hyperledger Fabric in combination with SAP’s Blockchain-as-a-Service for node hosting to optimize relationships between the 12 largest bottling companies.
The combination of tokenization, fiat-backed stablecoins and DeFi protocols makes traditional financing processes faster and cheaper.
In 2020, CONA went a step further to accelerate the use of blockchain across the company’s supply chain by deciding to integrate the Hyperledger Fabric solution into the baseline protocol. (A main goal of the Baseline protocol is to enable combined use cases for DeFi and asset tokenization.) The goal of the next phase is to use Baseline to set up a “Coca-Cola bottling port” that can be used by internal bottlers and external raw material suppliers allows you to easily join the network.
The rise of DeFi in 2020 laid the foundation for companies to embed component finance directly into their business processes.
While the DeFi bubble of 2020 is somewhat similar to the initial craze for coin offerings of 2017, the fundamentals of the DeFi movement will change the face of finance going forward. The combination of tokenization, fiat-backed stablecoins and DeFi protocols makes traditional financing processes faster and cheaper.
This could affect the existing processes for order financing, obtaining working capital loans, purchasing shipping and product insurance, securing inventory financing, and invoice factoring.
Business logic moves to Layer 2
Bitcoin first demonstrated the value of decentralization in the form of a token, and Ethereum improved the technology by adding programmability so that counterparties could regulate the terms of their transactions with smart contracts.
Now, in 2020, as the adoption of DLT in businesses grows, there is a strong need for data protection when executing smart contracts – or for business logic that can be executed without exposing the data to the world.
Public networks expose the business logic and data of the smart contracts in the network and potentially reveal sensitive business intelligence or privacy information of the smart contract users.
In addition to privacy concerns, the scalability and costs associated with public networks caused the DLT market to split in 2015 with the launch of Hyperledger and later R3 Corda in 2016.
Given the performance, cost, and regulatory hurdles that existed in the public networks of the time, companies chose to instead create isolated, purpose-built private DLT networks. Over the past five years, the private DLT industry has learned that creating a consortium of independent parties to operate the required DLT network is time consuming, costly and complex.
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During the same period, public networks realized that in order to achieve scalability and cost reduction, the execution of business logic must be moved from layer 1 (the main network) to layer 2 (peripheral networks). Public networks can vary in their architectural design and decisions about where to draw the line between Layer 1 and Layer 2, and make different decisions about how smart contracts and file storage should be included where.
Therefore, a major industry trend in 2020 was for enterprise applications to run their business logic on Layer 2 networks and simply use Layer 1 for consensus and arbitration. This approach combines the advantages of public networks – distributed trust – with the advantages of private networks, namely low cost, scalability, data protection and regulatory compliance.
It is now up to companies to capitalize on these advances
In his speech in Davos in 2018, Canadian Prime Minister Justin Trudeau remarked: “The pace of change has never been so fast, but it will never be so slow again.” His words were aptly received by the blockchain industry in 2020. What became apparent to those working in the DLT space this pandemic year is the combination of tokenization, DeFi, and Layer 2 networks that are being built and quickly become the foundation for businesses to use distributed ledgers in routine business operations.
Integrating this combination of technologies into existing business systems will accelerate corporate adoption significantly in the years to come. These technological advances in 2020 laid the foundation for the introduction of DLT companies. Now it is time for the captains of industry to steer the ship and take advantage of these breakthroughs.
Year in Review is a collection of posts, essays, and interviews about the year in Crypto and beyond.