Citi recently hosted a gathering of industry experts and businesses to explore the latest trends and future developments in the digital money market. According to the bank, the crypto space is nearing a critical inflection point where the long-promised potential of blockchain technology may soon become a reality.
The investment bank analysts suggest that blockchain technology will soon see billions of users and trillions of dollars in value due to its potential for daily activities, according to Citi's latest report, “Money, Tokens, and Games: Blockchain's Next Billion Users and Trillions in Value.”
The upcoming wave of crypto adoption is expected to be driven by two major factors: the emergence of central bank digital currencies (CBDCs) and the increasing trend of tokenizing real-world assets.
CBDCs the Way to Crypto Adoption?
One key driver of this adoption is the growth of central bank digital currencies (CBDCs), which are alternatives to cryptocurrencies. CBDCs are pegged to a fiat currency, exist digitally, and are controlled by the issuing currency's central bank.
CBDC projects are already underway for major currencies, including the euro, British pound, and Indian rupee, among others. These four jurisdictions represent over a quarter of the global population and 22% of global bank deposits.
With Europe, India, and the UK alone accounting for 2 billion individuals and businesses, the potential user base for CBDCs is huge, the report noted. Businesses in countries with multi-CBDC bridge arrangements would also use DLT-linked CBDCs, although their domestic CBDCs would be non-DLT-linked, it added.
While only smaller CBDC projects have been based on DLT so far, it is envisioned that major banks could issue DLT-based (or partially DLT-based) CBDCs. For instance: India's retail CBDC could have some sort of DLT, while China's participation in the mCBDC Bridge is based on a DLT.
It is estimated that by 2030, major economies across the globe could have up to $5 trillion worth of CBDCs in circulation, out of which as much as half of the value could be associated with distributed ledger technology. According to the report, this growth in CBDCs will enable people to experiment with digital currencies and become more comfortable using blockchain technology without even realizing it.
Tokenization is the Key
Another driver of blockchain adoption is the growth of tokenization in financial and real-world assets, as per Citi's March 2023 report.
Although the possibility of tokenization through blockchain technology has been promoted for a while now, it has not yet reached the stage of widespread adoption. But tokenizing financial and real-world assets could serve as the “killer use-case” that blockchain requires to make a breakthrough, especially for private market assets.
The report highlights that it is already on the rise, and almost anything of value can be tokenized. Currently, the tokenization market has a marginal market share of less than 0.1% in annual issuance. But in private markets, it is expected to increase by 80 times its current value, reaching almost $4 trillion by 2030.
Tokenized assets in gaming and blockchain-based payments on social media are also expected to drive adoption.
The report distinguishes between two main types of tokenization: Tokenized Outstanding Securities and Native Digital Security Tokens.
Tokenized Outstanding Securities are the immobilization of an underlying traditional security in digital infrastructure and reissuance in a tokenized format, while Native Digital Security Tokens are the issuance of new securities directly onto DLT infrastructures and holding them in DLT-linked wallets.
The bank forecasts an impressive $5 trillion in tokenized digital securities and $1 trillion in DLT-based trade finance volumes by the end of this decade. The bank's analysis suggests that out of the total projected value of up to $5 trillion, $1.9 trillion will be tokenized debt, $1.5 trillion will be in real estate assets, while venture capital and private equity will account for $700 million. Additionally, tokenized securities such as stocks are estimated to be valued between $500 million and $1 trillion.
While mass adoption of blockchain technology may still be six to eight years away, we have seen a positive shift in momentum towards adoption as governments, large institutions, and corporations start experimenting with tokenization, said the bank.
The report detailed the significant benefits of tokenization, especially for private funds and securities, noting that it provides operational efficiencies, fractionalization, and accessibility to a wider range of market participants while leaving behind expensive reconciliations and settlement failures.
The report also takes a deep dive into tokenization for certain types of financial assets, including digital securities, and examines the main ingredients beyond the blockchain tech needed to scale securities tokenization, such as an entirely digitized workflow, support from traditional finance (TradFi) layers, tech-neutral laws, standardized taxonomy, interoperable platforms, and standards, among others.
In the world of financial services, trade finance and blockchain have had an uncomfortable relationship, but change may be underway, it said.
Encouraging regulatory developments are designed to pave the way for trade documentation to be digitized, and upcoming UK legal reforms will make the acceptance of digital documents legal under common law, a huge step for the global trade finance industry, as around 80% of global volumes are governed by English law, the report added.
NFTs & Games to Play a Crucial Role Too
Besides CBDCs and tokenization, gaming is another area where blockchain is expected to make a significant impact, given that there are over 3 billion gamers globally. Only a small proportion of these gamers need to participate in blockchain-based games to succeed. Thus, gaming is expected to lead the way in making blockchain adoption mainstream from a bottom-up perspective.
The report highlighted that gamers are generally not concerned with the underlying technology and innovation powering their favorite games. They do not typically seek to understand the benefits of cloud computing or which particular multi-player game is hosted on a particular cloud service. As long as Web3 games can offer an equivalent experience to their existing games, with the added ability to earn while playing, gamers are likely to switch to Web3 games.
While the play-to-earn (P2E) model has interesting concepts, it also has challenges. The economics of such games can be complex, while the gameplay tends to be rudimentary and not much fun. Furthermore, the first generation of Web3 games lacked content, which resulted in gamers not sticking around long enough to make a game a big hit.
With over 3 billion gamers currently, it is estimated that 50-100 million could be Web3 users by 2025, with estimates rising as Web2 hits incorporate tokens into their offerings.
Additionally, art and collectibles, NFTs, and digital collectibles could create new paths for content creators and unlock new monetization opportunities, the bank said.
The rise of NFTs has already brought the art world into the blockchain space, allowing digital art to be tokenized and traded like any other asset. NFTs allow for proof of ownership and authenticity, which has been a longstanding issue in the art world. This opens up new opportunities for creators to monetize their work and for collectors to invest in and trade unique art pieces.
The emergence of the metaverse, a virtual world where individuals can interact with each other and digital objects in a 3D space, has further expanded the possibilities for art in the blockchain space. Art can be experienced in new and immersive ways in the metaverse, blurring the line between the physical and digital realms.
In fact, major consumer brands such as Nike, Uniqlo, and Amazon are already embracing NFTs and in-game assets to capture younger generations and keep their businesses relevant. Amazon, for instance, plans to launch an NFT marketplace for its 167 million Prime users in the US in 2023. As per the report, these trends are expected to drive billions of users toward blockchain technology, leading to significant growth in the space by 2030.
The music industry is also expected to leverage blockchain technology in the form of NFTs, providing a new path for content creators, be they artists, singers, dancers, or fashion brands, to connect directly with their fans or audiences, creating new revenue streams.
According to Citi's report, Web3 will nestle inside Web2, driven by mass-market consumer brands. Art and collectibles are also moving onto the blockchain, enabling the fractionalization of investments and enhancing trust and provenance.
Digitization & DAOs
The bank's blockchain report also talks about the acceptance of digital documents for trade finance to help drive blockchain adoption. It noted that digital identity and document digitization using blockchain could improve supply chain visibility and authentication of ownership.
Meanwhile, the use of smart contracts, digital documents, and digital currencies can potentially address the disconnect between trade financing, settlement, and goods movement. Also, existing networks like SWIFT can contribute to an open blockchain ecosystem in trade finance to accelerate adoption and interoperability.
The Citi report further touched upon the potential of DAOs to drive blockchain adoption and transform the way communities govern and manage themselves in the Web3 era. The report explains that DAOs could allow individuals to rent their talent or time to specific projects and earn rewards through fractional ownership in a community-governed ecosystem.
DAOs can also promote inclusive access and potentially unlock access to private investment opportunities previously only available to wealthy investors. In the Open Metaverse, DAOs can allow content creators to own and monetize their original creations as NFTs or tokens.
Furthermore, DAOs can provide increased autonomy, better monetization, and more fulfilling employee work.
By granting ownership in projects, it said that DAOs could mitigate conflicts of interest between employers and employees, giving employees more control over where, when, and how they work. DAOs could also offer different compensation streams and structures, such as contributing to content moderation in the virtual world and earning native DAO or Metaverse tokens.
The report further predicts that as Web3 infrastructure proliferates, more communities will be governed by DAOs, challenging traditional paradigms of organizations and promoting self-governing businesses. Even if existing corporate structures do not disappear, DAOs represent a mindset and ethos that may influence existing structures to become more participatory.
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Technology Enablers Needed for Successful Adoption
According to the report, for blockchain to achieve mainstream adoption, it needs to meet several technological specifications, ranging from transaction scale to user experience and user interface.
Decentralized digital identities, zero-knowledge proofs, oracles, and secure bridges are listed as the key technology enablers for blockchain technology to gain widespread acceptance.
Decentralized identity is mentioned as a crucial component in blockchain technology because it enables users to control their digital identity without relying on a central authority, which forms the backbone of any digital ecosystem. With decentralized identity, users can create, own, and control their digital identity, making it more secure and private. Digital identities are a core building block to deliver the decentralization promise of Web3.
Zero-knowledge proofs (ZKPs), on the other hand, are cryptographic techniques that allow a party to prove something without revealing any additional information. This has been one of the major stumbling blocks for public blockchain adoption faced by large corporations, noted the report, adding ZKP offers an elegant solution that capitalizes on the promise of blockchain without compromising the confidentiality and privacy of information.
Oracles are essential for blockchain applications that require external data. They are a way for blockchain applications to communicate with off-chain data sources and bring external data into the blockchain.
The document emphasized that oracles serve as a vital bridge between the blockchain realm and real-world off-chain data, acting as a powerful connector between these two worlds. Without them, the blockchain's progress would be hindered. Consequently, oracles are essential for the blockchain to fulfill its potential in providing unparalleled transparency and security.
Secure bridges are also necessary for blockchain technology to reach its full potential, according to Citi. Different blockchains are being built for different use cases on different chains, and there is a need for these to interoperate and not be working in silos to avoid fragmentation and limited adoption.
They offer a solution to this problem and enable blockchain to become more accessible to a broader range of users. These bridges enable different blockchain networks to communicate and exchange information securely. They are especially important for DeFi applications, where interoperability between different blockchain networks is critical, it said.
In addition to these technology enablers, the report pointed out that blockchain technology also needs transaction scale and throughput, strong guarantees of security, and good user experience to succeed in the mainstream market.
Moreover, changes to the legal infrastructure are also necessary to facilitate the use of smart legal contracts, which will pave the way for a new set of global commerce and finance rails to operate on. As per the report, regulatory considerations are further necessary for blockchain technology's widespread adoption and scalability to facilitate innovation without creating undue obstacles.
In conclusion, while blockchain technology, which has been touted as a transformative force for several years now, hasn't yet realized mass adoption, its potential is immense, and we are fast approaching an inflection point where blockchain's promised potential will be realized, Citi said in its report.