Why Scalability Will Decide the Future of Crypto: Three Use Cases

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By Dominik Schiener, Co-Founder and Chairman of the IOTA Foundation

In the beginning there was blockchain, and it was good. It opened the door, and let the rays of light of a new decentralized digital economy shine in. However, the wider we pushed that door open, the less bright that light shined. Part of this is due to the smoke of Bitcoin farms’ untenable carbon footprint. Another serious problem of traditional blockchains is much less present in the public space, and yet it casts the longest shadow on the prospect of a new global digital economy. Its name is scalability. 

Crypto scales or crypto stales

Despite its growing popularity and media presence, distributed ledger technology (DLT) remains a niche space. To realize one of its boldest promises, which is to usher in the new digital economy and the bullion it carries with it, it needs wide industrial and societal adoption. This, in turn, requires scale that traditional blockchain has yet to achieve. Many cast a hopeful look towards Ethereum 2.0 with its move away from energy-intensive mining and various new implementations to improve scalability, like shard chains

Behind the big words and technical jargon, a lot of good innovation is happening, but it is ultimately limited by blockchain’s conceptual framework where scalability was never a priority. Thus, engineering’s best efforts notwithstanding, classic block structures cannot and most probably will not handle the transaction volumes of the new digital economy. For these reasons, crypto that does not scale is doomed to stale. The current narrative around Bitcoin, for instance, claims that cryptocurrency holds intrinsic value that is independent of scalability. Bitcoin’s underlying protocol, however, needs to scale if it aspires to move beyond a basic “store of value” function and achieve wider adoption.

Crypto-protocol development has historically prioritized security and decentralization, and we have made remarkable advances in both areas. It is time to tackle scalability and develop crypto protocols ripe for mass adoption and explosive growth.

Here are three distinct use cases that are eagerly waiting for the scalable DLT of tomorrow, today.

Internet of Things (IoT): Bigger, better, and more closely knit

The first significant application of truly scalable DLT will be in the IoT space. The number of active IoT devices around the world is set to reach nearly 31 billion by 2025. The power of IoT lies in its interconnectedness, the ability of numerous devices to exchange information in real time and to interact with the users and the surroundings, while constantly keeping in touch. In today’s globalized economy, the IoT infrastructure should not only support real-time data transfer, but it should also be standardized, feeless, and location-independent.

Each ask is bigger than the last, but this is what it takes to make the machine economy grow. Even at the current modest levels of scalability, the IoT market will soon be worth $1.56 trillion, with a trend towards exponential growth.

Because most current DLT protocols scale poorly and often remain proprietary, the IoT’s development is not only slow, but also disjointed. IoT devices come with preinstalled software that aims to lock users, both B2C and B2B, into an ecosystem and keep them there. No single tech company can match the intellectual power, imagination, and grit of all others combined. If we put the IoT space on a common stable footing – a scalable, standardized DLT protocol – we will all benefit from the enhanced interaction capabilities of our various IoT devices.  

Smart cities: Smarter thanks to interoperability

The above principle applies even more clearly to smart cities, which are among the most popular applications and extensions of IoT and whose global revenue will reach over $241 billion by 2025. Although the concept means different things to different people, it is generally agreed that a smart city leverages networked technology and automation to improve its citizens’ quality of life by providing better administrative processes, traffic management, public transit, security, and any other relevant public services. In practice, most smart city projects in existence today are fairly specific. They often build new systems on top of old systems and tend to function in isolation from one another. The smart traffic control system cannot communicate with the waste management system. As a result, garbage collection faces regular delays on congested roads.

The above problem is endemic to smart cities of the present. Because they do not have or know any alternative, city managers often partner with tech companies who develop very particular tailor-made solutions based on proprietary, black-box software. Keeping smart city applications “small” and piecemeal helps cover up the scalability problem and keeps business running. However, the smart cities of the future require levels of integration and comprehensive solutions that simply cannot be realized under current conditions. As a small step in the right direction, smart city managers should stop awarding contracts to vendors who aim to lock them into walled-off proprietary solutions and should prioritize interoperability instead - and some already have.

There is no better solution for a comprehensive, interoperable and reliable smart city infrastructure than a common DLT standard. This basal standard, in turn, would need to scale to accommodate the immense volume of information and value transactions in a smart city. It would also have to be versatile enough to facilitate the numerous applications and use cases involved. Until we establish such a standard, truly smart cities will remain a thing of the distant future, and metropolitan governments will run numerous costly and disparate smart projects that do not improve urban life comprehensively and to the extent they could.

NFTs: Democratizing the art market, this time for real

Non-fungible tokens (or NFTs) were all the rage a while back, with the promise of a truly free and open marketplace for digitized assets and particularly for artworks looming large. In early 2021, the market grew by a hefty 800 percent to reach a valuation of $490 million, but the hype soon fizzled out. While many readers would roll their eyes at yet another NFT analysis, the fact of the matter is that tokenized assets are here to stay. Their public debut was largely misunderstood, but their long-term effects can be transformative and far-reaching, if they rest on DLT that allows them to realize their full potential.

Let us consider the market for tokenized art. To begin with, NFTs have not yet become the democratizing force they were meant to be due to the high barriers of entry into traditional NFT marketplaces. Minting and putting an NFT up for sale both incur hefty fees that many indie artists and other sellers of modest means could not afford. For all the excitement they generated, blockchain-based NFTs quickly revealed themselves to be yet another thing for the rich and the famous to play with. Cue Jack Dorsey’s first tweet or Damien Hirst’s collaboration with Palm to put out NFTs with slightly lesser environmental impact.

However, the barriers to entry of the current NFT market can be seen as a blessing in disguise. Without them, the crypto protocol’s inability to scale and handle the minting and transaction requests would create a different, arguably worse kind of frustration. People would have to wait impossibly long to mint their tokens and then infinitely longer to sell them. Not being able to afford a Ferrari may feel bad, but getting into a Ferrari and having to wait a month to start the engine is a thousand times worse.

A low-fee, scalable NFT market would enable everyone to participate in trading tokenized assets and fulfill the original NFT promise to support independent artists and creators and to reach new mass audiences. With scale comes the promised freedom and ability to create and to trade. Scalable DLT can give everyone an NFT-Ferrari and open up a whole new sector of the new decentralized digital economy. Marketplace owners could impose sensible commissions for their services and still generate considerable revenue based on transaction volume alone, while creators would face practically no barriers to minting and trading tokenized assets. It is a use case as close to win-win as it gets.

Scaling new heights

We have seen three distinct areas where scalable DLT will clearly be a game changer. From the devices that support or replace us in a variety of daily tasks, to the cities where we live, to the assets we digitize and trade, the present is already full of opportunities that the future will multiply many times over. Whether we realize them or not largely depends on scalability, a feature of crypto protocols we have neglected far too long. The time to scale new heights is now.

About Dominik: 

Dominik Schiener is Co-Founder and Chairman of the IOTA Foundation, a nonprofit foundation driving open source distributed ledger technology for a new digital economy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.