Digital assets are disrupting industries today as this technology continues to evolve in financial ecosystems around the world. It has transformed the infrastructure of our financial markets, the way we buy and pay for things, and what we invest in. Digital assets include cryptocurrencies, NFTs, stablecoins, and security tokens, among others which have now become synonymous with technological growth and innovation.
A new type of economy based on trust and consensus is emerging before us in the virtual world. To better understand it and its future implications, it is essential to go back to the roots and understand how it all began.
The history and evolution of digital assets
1998: The ‘bit gold’ Idea
The emergence of digital assets dates back to 1998 when Nick Szabo proposed the idea of ‘bit gold’, a decentralised digital form of currency. He aimed to create a payment mechanism that was free from a central authority and would act as a long-term store of value. Its decentralised nature was brought about by its cryptographic and mining properties, whereas the proof-of-work mechanism allowed for the recording and verification of time-stamped blocks, similar to Bitcoin’s blockchain. However, Nick never put this proposal into action.
2008: The introduction of the first cryptocurrency; Bitcoin
A decade later, Satoshi Nakamoto wrote a paper on Bitcoin, which led to its introduction as the first cryptocurrency. It is a peer-to-peer digital currency created using blockchain technology, with no intermediary or central authority to govern it. The distributed ledger technology used in Bitcoin started gaining attention from upcoming new players and regulated financial institutions due to the security and efficiency provided by it when transferring currency or digital assets.
The realisation of the benefits of this technology brought about the evolution of digital assets as several new cryptocurrencies and tokenised assets were then introduced. Ethereum was the first public blockchain that introduced smart contracts and sparked the birth of decentralised finance and non-fungible tokens.
2011: The rise of altcoins
Following the success of Bitcoin, thousands of other digital currencies known as ‘altcoins’ or alternatives to Bitcoin (or sometimes Ethereum) were introduced. These either focused on making up for Bitcoin’s shortcomings or faults or focused on a different purpose altogether. In 2011 the first altcoin, Litecoin, was introduced, which used a different proof-of-work mechanism from Bitcoin called Scrypt. It used far less energy and was much quicker than Bitcoin’s consensus mechanism.
2014: The need for stablecoins
As the evolution of digital assets continued, the volatility of cryptocurrencies such as Bitcoin and others was questioned by society as it could harm a firm’s balance sheet health and investors. To address this issue, Stablecoins were introduced in 2014 as they eliminated the risk of volatility while still providing the benefits of crypto and its new capabilities. Stablecoins enable peer-to-peer transfers, digital wallet capabilities, and smooth cross-border transactions. Additionally, its volatility is reduced as its value is linked to traditional assets like fiat currencies or a commodity. Stablecoins have already exceeded $100 billion in market capitalization. This space continues to grow as digital assets like central bank digital currencies (CBDCs), tokenized securities, and more continue to be introduced.
2018-2020: ‘Crypto winter’ is here
Rapid proliferation was seen in the digital asset market from 2016 to 2018. However, following this period, the market witnessed a downward fall in 2018, known as “crypto winter” It was a difficult period as this bear market saw Bitcoin’s value drop by 83% from its highest to a low of $3,217. Similarly, Ethereum saw a drop of 94% in its value. The market began seeing improvements as it moved towards 2019, and by November 2021, Bitcoin had rebounded its value to nearly $69,000.9.
What is the future of digital assets?
Despite concerns regarding their volatility in value, digital assets are here to stay for a long time. As they continue to evolve rapidly, their adoption in both the institutional and retail industry has tremendously increased, given the expansion in use cases ranging from payments, money movement, art, entertainment, gaming, and more. Additionally, about 80% of central banks, including the federal reserve, are looking to launch their own digital currencies. The maturing of digital assets and their infrastructure is attracting a more mainstream audience. The shaping of their regulatory framework plays a significant part in this shift as it eliminates the uncertainty that initially held back these institutions and paves the way for the mass adoption of digital assets. To keep with this momentum, a deeper understanding of this asset class is needed so you and your organisation can become innovation leaders.
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