Rachel Ranjith

In a rapidly evolving digital world, the advent of cryptocurrencies, blockchain technology and decentralised finance is reshaping the global financial landscape. These technologies aim to decentralise power, with the intent of promising financial inclusion and accessibility, challenging traditional banking norms. Yet, they also raise pressing questions about security, scalability and sustainability, especially as emerging technologies become potential disruptors. 

To demystify the concepts surrounding crypto and make it more approachable, Dr. Martha O’Hagan Luff of the Business School and Dr. Hitesh Tewari of the School of Computer Science and Statistics were interviewed to learn more about the future of cryptocurrency. 

The Building Blocks: Crypto, Blockchain, and DeFi

Cryptocurrencies like Bitcoin and Ethereum represent a shift from centralised money controlled by governments and banks to decentralised digital assets. Built on blockchain technology, they allow for peer-to-peer transactions without the need for traditional financial intermediaries, offering greater transparency and user control.

Blockchain is the backbone of cryptocurrencies: a decentralised, distributed ledger that securely records transactions. Its immutability and transparency have made it a cornerstone of digital finance. Beyond powering cryptocurrencies, it also enables the smart contracts – self-executing code for certain banking procedures – that DeFi platforms rely on.

Decentralised Finance (DeFi) leverages blockchain to recreate traditional financial services – such as lending, borrowing and trading – without intermediaries. By using blockchain and smart contracts, these services are automated, making them faster, more transparent and accessible. Together, these components form a symbiotic network; cryptocurrencies operate as the medium of exchange, blockchain serves as the infrastructure and DeFi platforms utilise both to deliver financial services in a decentralised, trustless environment. 

A New Era of Financial Services

Traditional banking systems are built on centralised control by governments and financial institutions. This structure provides stability, insurance and regulation, but it also has its downsides. High fees, slow processes and limited access for millions of unbanked people worldwide are a few notable flaws. DeFi addresses these very issues by offering accessibility to anyone with an internet connection, it offers transparency, lower costs and user control. Since it’s automated via smart contracts, and operates without the need for trust in centralised institutions, it has evoked a lot of interest in the public. However, the lack of regulation and protections in DeFi means higher risks, such as losing funds to hacks or bugs in the system, as well as the volatility of crypto assets.

As traditional financial institutions explore blockchain technology- like JPMorgan’s use of blockchain for settlements- it’s unclear whether DeFi will coexist within traditional banking or replace it entirely. The likely outcome may be a hybrid system, combining the best of both worlds. There is a certain convenience to the efficiency of Smart Contracts that is inarguably positive. However, the reassurance and reliability of traditional banking cannot be easily replaced. 

Another possibility is the rise of CBDCs – Central Bank Digital Currencies. This was proposed as a potential solution to the crypto ecosystem. The proponents for this technology argue that the convenience of crypto is preserved while also solving the issue of unregulated currencies. However, a deeper look into this idea provides a number of disturbing concerns. If CBDCs become legalised tender, many transactions become more traceable due to regulatory requirements. The extent of this traceability can vary based on the design choices made by central banks, however, this contrasts with the ideology of cryptocurrencies. Pro-CBDC proponents often argue, “why worry if you have nothing to hide?” But, in an era of increasing concern for digital privacy, it might be safe to say CBDCs may not become popular.

Quantum Computing: Threat or Opportunity?

Quantum computing is a revolutionary leap in computing that solves problems far beyond traditional computational powers that, unfortunately, threaten the crypto environment. It has the potential to revolutionise many industries, but due to its capability of solving complex problems exponentially faster, it also poses a serious threat to blockchain technology. Since blockchain security relies on cryptography and cryptographic algorithms, quantum computers can eventually break past these walls. For example, private keys used to authorise crypto transactions could be decrypted, exposinging assets to theft. This is understandably a serious compromise of the integrity of blockchain networks.

Researchers are already developing quantum-resistant cryptography to safeguard these systems. Post-quantum encryption and hybrid cryptographic models are widely being discussed in the current tech climate, with a widespread understanding of a need for preemptive measures. While the threat is real, quantum computing also presents opportunities. From optimising scalability, efficiency and speed to the implications of a transparent ledger for business transactions, the blockchain ecosystem definitely has significant future applications.

There are parallels to be drawn between the current rise in popularity of crypto and the 90s Dot-Com Bubble. The internet’s commercial potential sparked an unprecedented wave of investment in tech companies in the late 1990s and the promise of connectivity and innovation drove massive valuations. However, when the market realised that many dot-com companies lacked profitability or sustainable models, stock prices plummeted, wiping out trillions of dollars in value. Similarly, quantum breakthroughs could trigger a re-evaluation of crypto projects, exposing vulnerabilities and weeding out weaker systems.

What is Self-Sovereign Identity (SSI)?

Self-Sovereign Identity (SSI) enables individuals to control their own digital identity, a key element while discussing DeFi platforms. Instead of relying on centralised services like banks or governments, users manage their own identity data. Blockchain’s decentralised nature makes it an ideal platform for implementing SSI, allowing users to securely store their identity data without ceding control to intermediaries. 

SSI has the potential to transform traditional Know Your Customer (KYC) processes in the crypto ecosystem by allowing users to control and share only essential data without relying on centralized institutions. While KYC regulations are currently enforced in many crypto transactions, SSI could reduce the burden of sharing sensitive information by enabling pre-verified credentials. Users could prove their creditworthiness or reputation without exposing sensitive personal information while also reducing the hassle of procuring documents from multiple institutions for any formal procedure.

However, challenges remain, including the complexity of implementing SSI on a large scale and ensuring interoperability between different systems. Additionally, the inherent lack of trustworthiness that comes with self-identification is certainly a significant obstruction to its practical application. Overcoming these hurdles will be crucial for its widespread implementation.

The Future of Crypto

Cryptocurrencies, blockchain and DeFi represent an exciting frontier in global finance and technology, offering unprecedented opportunities for innovation, accessibility and autonomy. However, their sustainability depends on addressing inherent challenges and should be approached with caution considering past trends wherein massive bubbles in the financial market often burst when oversaturated with interest. 

Meanwhile, as traditional institutions adapt to this new paradigm, the question remains: will DeFi become the dominant financial system, or will it integrate with existing frameworks to create a hybrid future? Emerging technologies could either disrupt or enhance this ecosystem and whether this decentralised world will coexist with traditional banking or replace it entirely remains to be seen. What’s clear is that the way we think about money and finance is evolving, and the journey has only just begun.