Blockchain technology is often viewed through a purely monetary lens but the largest paradigm shifts will likely happen in other aspects of society. The blockchain properties of disintermediation, real time settlement, and credible neutrality offer a wide variety of benefits to any service or industry that allows two unrelated parties to interact in a defined way. This broad definition describes much of the world we know today from finance to governance and any bureaucracy or aspect of society that distills a set of shared rules into an enforced framework that an organization uses to maintain its structure. Any such system can be codified into a smart contract with the blockchain performing the enforcement of the rules in an unbiased way at an infinite scale that no department of bureaucrats can hope to match. The efficiency gains and variety of use cases this aspect of blockchain technology unlocks will be the focus of this chapter.

Decentralized Finance

Decentralized finance, known as DeFi, is the rebuilding of the existing financial system on top of digital platforms to provide greater fairness, transparency, efficiency, and safety. Blockchains are entire economies operating in a digital space without physical entities inside of nation state borders and thus the participants need all of the same financial services such as lending/borrowing, investing, asset management, and insurance that we take for granted today.

The first major DeFi protocol was released in December 2017 with the launch of MakerDAO which allowed users to create Collateralized Debt Positions (CDP) which collateralize ETH in order to mint the US dollar pegged stablecoin DAI. The system worked by forming an hourly ratio between the USD value of the backing asset (ETH) and the current USD value of the debt (DAI) which must be kept above 150% by the owner of the CDP or else the assets would be sold by market participants known as Keepers to repay the debt and keep the system wholly funded. DAI was the first decentralized stablecoin and became the foundation for the future DeFi ecosystem.

Many other DeFi protocols were developed and released in the following years with the bulk of the usage and experimentation occurring during what's known as DeFi Summer. On June 15th 2020 the Compound lending and borrowing protocol began rewarding its users with its own governance token COMP on top of the existing interest income. This provided an incentive for lenders to deposit extra capital into the protocol to receive higher than market yields and allowed Compound to rapidly grow its user base and liquidity pools. This alignment of incentives proved to be a powerful tool for bootstrapping protocols with many other projects releasing their own yield farming incentives leading to an explosion in DeFi usage and a competitive market for new and innovative protocols.

A foundational component of a market is the trade of assets between two market participants and DeFi takes this head on with the Uniswap protocol. Uniswap is an automated market maker which allows for any two assets to be priced along a mathematical curve based on the “constant product” formula x * y = k. Unlike a traditional order book model which requires buyers and sellers to list positions with a market operator facilitating the flow of orders, Uniswap allows a trader to unilaterally interact with the liquidity pool backing the two assets which enables asynchronous trades at any time.

Credit managed by lending and borrowing is also an important base layer of what most people imagine when they think of finance. This market is highly competitive with banks competing to provide collateralized loans on assets like cars and houses as well as uncollateralized personal or business loans based on credit history. DeFi currently serves the collateralized loan market with protocols such as Compound and Aave as identity and credit history systems have not been developed but some early experiments with uncollateralized loans are ongoing. These lending protocols function in a similar manner as Maker with the value of the backing collateral and the value of the debt forming a ratio that must be kept above a certain threshold to prevent liquidation with the key difference being the collateral and debt may be denominated in any two assets. As these protocols connect the borrower and lender without an intermediary the overhead of the loans are at a minimum which allows for much better rates than are seen in the traditional financial system.

The largest market segment of finance is derivatives which allow novel financial products to be created based on an underlying base asset. These virtual assets are valued for their power and flexibility which integrates well into programmable and expressive markets like DeFi. Synthetix is a notable derivative protocol that couples off-chain assets like stocks, commodities, and currencies with a corresponding price oracle and tokenizes them into synthetic assets that can be freely traded, leveraged, and integrated into the rest of the DeFi ecosystem. Liquidity is provided by SNX token holders who provide the counter-party for trades and recapitalize the system if needed. Synthetic assets provide a huge increase in usability for the many parts of the world that lack easy access to stocks like AAPL, commodities like gold, and currencies like the euro.

With the increasing complexity of the financial system there has been a rise of professional money managers such as hedge funds, family offices, and other wealth management services. DeFi exposes even more complexity to the average investor and projects have been created to simplify the experience of money management and yield farming by pooling assets together and providing a meritocratic system of generating strategies to grow and protect the shared capital. Yearn.finance is the largest such project and formed during DeFi Summer to provide a more efficient and scalable method of coordinating large scale yield farming strategies. The project has expanded to provide the highest yield on the most popular DeFi tokens by incentivizing community members to create the most effective strategies with the developer receiving a small percentage of the overall profit. Another notable project is the Set Protocol which allows users to create and share either automated trading strategies or manual fund management that others can choose to use based on the fund’s history and reputation. Index and hedge fund investing are preferred by most investors to bypass the complexity of actively investing so decentralized money management protocols will become an increasingly important segment of DeFi.

Prediction markets are a relatively new and powerful utility that are often overlooked in the traditional system due to regulatory and inefficiency issues. These systems allow markets to be created based on questions such as “Who will be elected president?” and “Will it rain in London on Monday?” where anyone can bet on what they believe the result will be. Betting participants are incentivized to obtain and use detailed and possibly proprietary data to make the most accurate predictions possible in order to increase profits. These accurate predictions and the resulting outcomes can then be used by society to judge the effectiveness of different governmental policies or to use the verified outcome as an oracle in other applications. The Augur protocol allows users to create decentralized markets for any topic and incentivizes event resolution and conflict resolution with the REP token.

Safety is crucial when dealing with financial markets and especially so when a smart contract is deployed and responsible for billions of dollars. Insurance is typically used to mitigate risky financial transactions and provide peace of mind when planning for the long term and while financial protocols are typically audited by multiple well known security firms there is no guarantee of bug free code so decentralized insurance has been designed to cover this use case. Nexus Mutual, Cover, and Etherisc are a few examples of projects offering smart contract risk with rates set by market participants and dispute resolution handled by members of the DAO managing the protocol. Insurance protocols are also developing instances of parametric insurance using decentralized oracles to report weather, news, and other event data that triggers a payout when a certain event occurs.

DeFi is being built out at a rapid pace and with its properties of public accountability, guaranteed reliability, composability, and accessibility it will likely become the foundation of much of the existing financial system over time.

Programmable Media

Humans have been creating media such as art, music, and memes since the beginnings of civilization itself though the medium through which it is shared has evolved continuously throughout history. Today most of our media creation occurs in the digital realm with music streamed to any device you own, video games sold and downloaded at your convenience, and new art shared across social media at a blistering pace but while the distribution of media has prospered from the creation of the internet the creation and licensing of media has not kept pace.

Digital assets are representations of unique items, physical or digital, whose ownership is tracked on a blockchain and are referred to collectively as Non-Fungible Tokens (NFTs). NFTs can represent any piece of unique information and as a concept are extremely broad but current implementations fall into a few major use cases such as collectibles, digital art, video game items, media licenses, and real world assets. The power of NFTs comes from applying the properties of programmability and composability to items in the same way DeFi applies those properties to finance.

Collectibles have been an important industry throughout human civilization whether it be shiny pebbles from the beach, baseball cards of top players, or postage stamps from around the world so the popularity of collectibles in the digital world is no surprise. Because blockchains are public and verifiable the number and details of every item in the collection is known and immutable which provides assurance of authenticity to collectors. CryptoPunks were an early pioneer of digital collectibles and provided a fixed number of 10,000 portraits with attributes of differing rarity such as cigarettes, hoodies, and even a small number of alien, ape, and zombie punks. These portraits are prized for their rarity and frequently used as avatars on Twitter and internet forums.

Art has become one of the most important use cases of NFTs with artists releasing limited editions, creating art that holds its own distribution rights, and even programming art to display different visuals based on external inputs such as the time of day. Artistic creativity and the freedom to experiment are two sides of the same coin and new uses of NFTs and their corresponding markets are developed daily and can be hard to keep up with. Digital art is also beginning to merge with the traditional art world with the auction house Christies’ selling a digital only piece by Beeple for 69 million dollars in March of 2021. Digital marketplaces like OpenSea provide an accessible pathway for any artist to sell their digital creations.

Gaming is also leveraging NFTs and digital ownership in a big way with games allowing players to earn items they fully control and can sell to others at any time. Some items like aesthetic clothing, player models, and vehicles are being designed to function across game boundaries where your character can jump from an RPG to a shooting game while still wearing your favorite hat that defines your identity. God’s Unchained is a collectible card game where players unpack and own individual cards that can be traded and used in game with the same properties as analog cards from games like Magic the Gathering. Decentraland, Cryptovoxels, and the Sandbox allow players to inhabit a virtual universe where land is owned and developed by the players themselves and avatars with cross-platform aesthetics roam virtual cities patronizing various social clubs, museums, and even theme parks. The collection of digital versions of people and their personas are known as the metaverse and hundreds of projects are currently working in conjunction on this rapidly evolving ecosystem.

License and copyright remain one of the most complex and inefficient parts of media creation with dedicated staff on most media teams focused on sometimes deep historical research to find the current rights holder with long meetings afterwards nailing down the details of an agreement to use these rights to create a new piece of media. This erects a high barrier to entry for new content creators and is a huge source of friction for large productions such as movies, music, and video games. Codifying rights ownership into smart contracts with defined usage patterns and automatic profit sharing simplifies the act of creating new media and provides a much larger influence for rights holders.

Self-Sovereign Identity

Identity is a fundamental component of many aspects of society from education and a career to voting and participation in managing the social contract. Any system based on public or shared resources requires a strong identity system to prevent one person from assuming many identities, known as a Sybil attack, in order to receive outsized rewards from a fixed pool. Political power is an incredibly valuable resource we all ideally share equally so government backed identity is used to limit each vote to a single person. A strong decentralized identity system that scales globally unlocks the most powerful use cases of blockchain networks and is being actively researched and developed by many projects and organizations.

Blockchains natively provide one element of identity with the public key of user accounts. This identifier is globally unique and acts as a single shared username across all websites and services a user visits. The associated private key is also used to sign messages proving this user performed or approved an action. When a user visits a DeFi application they are not prompted for a username and password but rather they connect their existing wallet which seamlessly works to use the service usually without providing any extra information. This has the incredible benefit of increasing security for users and reducing instances of hacked accounts and password resets. Users no longer need to remember a password so there’s nothing to lose.

Having one unified identity also brings with it the ability to form cross-app connections and cohesive social networks that live outside of any one app and are open for any novel use case where a network effect is important for bootstrapping the protocol. When a user already has a pre-built network of trusted associates the barrier of entry for developers to create something like a location sharing service shifts from “create a large corporation and focus on user acquisition” to “write a simple smart contract that references the user’s friend list”. When barriers of entry are lowered innovation follows.

Identity is one of the most important problems to solve in the blockchain ecosystem so countless projects seek to build networks of verified humans that other dapps can then use to provide valuable rewards such as “1 collectible per member” or a universal basic income to seed their community with talent. BrightID is one such identity graph project which has users verify their humanity to already verified humans via video calls. Idena has verification periods of 30 minutes once a month where all users need to solve unique captchas in a short amount of time. Proof of Humanity requires users to upload a video of themselves holding up a card with specific text and a verified human needs to vouch for the new applicant. These systems are rudimentary and experimental but are already useful to dapps needing basic spam and economic filters.

Scalable Governance

Governance systems have been a core technology since the dawn of civilization and major breakthroughs in communication have generally been followed by revolutions in how society is managed. Writing led to the empires of kings, the printing press led to republics based on ideas, and now digital coordination is leading us into democracy where participation by everyone is secure, instant, and efficient. By leveraging the blockchain’s ability to form consensus among a large and diverse population, Decentralized Autonomous Organizations (DAOs) are allowing users of dapps, members of special interest groups, employees of corporations, and citizens of governmental regions to work together without any central authority or defined member hierarchy. Tools and crypto-economic mechanisms being developed for use by DAOs are also giving us a glimpse into how society might come to consensus and allocate resources in the next century.

DAOs can be used for any organization at any scale but the first iterations of this new technology are being used for experiments in running the governance of system parameters in major dapps like Maker, Aave, and Uniswap as the decentralized nature of these protocols precludes the ability of a single company to retain control of the system. These DAOs are not based on member equality but rather how much skin in the game each member has which is represented by the tokens of the protocol. In this way the members with a large amount of equity in the protocol have a higher incentive to actively participate in governance and to make wise, well researched votes on proposals to keep the system, and their stake, healthy.

There are also DAOs based on shared ideas such as Moloch, a quasi-venture-capital fund, and the LAO (Legal DAO which has established paperwork in the traditional legal system) which allow for anyone in the world to join with others to promote a shared goal. Governmental jurisdictions are establishing legal guidelines for how potentially anonymous and digital only organizations can function in current legal systems with some early movers like Wyoming passing laws that give legal status to DAOs to operate businesses.

Public goods funding is one of the largest unsolved problems we face as a society with the current state of the art being entrenched interests fighting over a fixed pool of funding in a representative legislature or quasi-private charities that struggle to get a large portion of donated funds to causes in need. Blockchains themselves are a public good and rely on other public goods built on top to form their utility so this problem has received a lot of attention recently. The most promising solution for scaling public goods funding is Quadratic Funding which is a mathematically fair method of allocating a pool of funds via a democratic process developed by Vitalik Buterin, Glen Weyl, and Zoe Hitzig. The basic idea is that a user donates a small amount of money to a public good they find valuable and through a quadratic function that dampens the impact of a single rich entity that user’s donation is matched with a much larger donation based on how many total users donated to this public good. In this way individual users can donate small amounts to make their preferences known while the public goods receive a large total amount of funding. This system is used by Gitcoin Grants to fund Ethereum public goods a few times a year.

Society is becoming increasingly digital and our governance technology, having been largely unchanged for a century, is ripe for digitization and innovation. Globalization will increasingly push organizations above the jurisdictions of the current nation state system and DAOs are the leading candidate to form new more democratic and fair systems of governance for many parts of society. 

Enterprise Efficiency

Corporations and other large organizations facilitate the majority of the economic activity in society with vast and complex international supply chains and accompanying bureaucracy to keep the entire system maintained and dynamic enough to keep up with a rapidly changing world. While ERP tools such as SAP have helped manage some of this complexity inside of the corporation, the interaction and workflows between corporations are largely still a manual, complex, and error prone process with bespoke deals made with each component supplier and entire departments of accountants to verify inventory, order fulfillment, and adherence to contracts. Smart contracts and standards based protocols on public blockchains promise to automate much of these inter-corporation workflows which will bring increased efficiency, safety, resilience, and real time data availability to this important sector.

The Baseline protocol is positioned to be the primary way disparate cross-organization record keeping and supply line systems interact by providing standard metadata templates and secure messaging channels that allow any business process to be automated while keeping important data private and off-chain. The Baseline project was started by EY in 2019 but is now managed as a public domain standard by the OASIS standards body with the largest enterprise resource planning software SAP integrating the protocol and notable project implementations by Microsoft for Xbox license management and Coca-Cola for supply chain management.

Corporations have found that blockchain does provide some benefits such as guaranteed consistency, built-in auditing, and reliable uptime but the lack of data privacy and slow performance downsides of public blockchains make it untenable for most of their use cases. Baseline provides one solution to this problem but another is running an entire private blockchain system inside of your corporation which provides most of the benefits but also brings high performance and no data is visible to the public. Examples of private blockchains include Hyperledger and Quorum which contain the code of public blockchains like Ethereum but provide tools to customize the inner working and easily deploy to various parts of the organization to run internal blockchain nodes. These systems serve a similar purpose as intranets which allow organizations to have flexible control of their internal state while being able to bridge out to the shared internet when it’s appropriate.

An Ever Expanding Design Space

Blockchains are inherently engines of innovation powered by their credible neutrality, permissionless nature, and seamless interoperability. Many of the fundamental use cases are rapidly evolving at a rate that is hard to keep up with and entirely new ideas and use cases are created on a monthly basis. There’s no way of knowing what the ultimate outcome of this new technology will be but if one thing is for sure it’s that there’s no ceiling on innovation in sight.