Building the Blockchain Ecosystem: Fundamental Components of Web 3.0

Our first article set the stage for understanding how blockchain technology is impacting industries like automotive by providing new solutions for identification, tracking, and transactions. In this article, we will cover some of the foundational elements of blockchain technology and briefly review several of the building blocks that have emerged in the early stages of this development.

Core to every blockchain system is a consensus mechanism that allows the validation of a set of data such that it can be recorded into an unchangeable "block" and added to a record. This can be viewed by anyone but remains immutable. The consensus mechanism removes the need for a central authority to validate and verify transaction data and turns that over to the distributed system to handle.

Reaching Consensus: Proof of…. Work, Stake, Coverage, and many more.

Bitcoin, as well as many early blockchains (Ethereum, Litecoin, Monero) use a Proof of Work (PoW) consensus model in which computers on the system all solve a complex math problem and the first one to solve it correctly receives a reward, distributed in Bitcoins. There are many concerns with PoW methods, as they require expensive equipment, consume large amounts of energy, and are not as environmentally friendly as newer methods.

Many next-generation blockchains, like Harmony , Cardano , Solana , and Polkadot , use a Proof of Stake (PoS) consensus model, in which token holders delegate their tokens to validators to assume the responsibility of legitimizing based on the quantity of holdings, all in an effort to achieve distributed consensus. PoS models use far less energy but also loses some of the benefits associated with decentralization.

There are many other forms of consensus, like the one used by the Helium Network called Proof of Coverage (PoC) in which users operate small radio units that validate the locations of each other to achieve verification of blocks. Location verification on the blockchain may be particularly important for autonomous, last-mile delivery services on the ground like Nuro or in the air like UPS’ Flight Forward . Two others we are watching are XY Labs and FOAM.?

Consensus mechanisms provide the foundation of the blockchains’ ability to deliver on the decentralized, transparent recording of transaction data, while tokens serve as the medium of exchange to receive or pay for data moving across one or more blockchains. As these systems grow and evolve, the price of tokens tends to fluctuate and this gave rise to the need for a more stable form of token, called Stablecoins.

The Advent of Stablecoins

Stablecoins represent one of the first killer applications of the blockchain worlds by providing a consistent and reliable value store, allowing traders and investors to reduce their risk to crypto-assets without the need to leave the crypto ecosystem – also known as a safe harbor. The core belief amongst the Stablecoin entities is that these crypto currencies will one day be widely utilized as the main currency of future daily transactions.

Currently there are (at least) four kinds of Stablecoins that are differentiated by how they are collateralized. The four primary types of Stablecoins are:

• Off-chain: Backed by a fiat currency like the US dollar, some examples are USDT (Tether ) and USDC (Circle and BUSD (Paxos ). ?
• On-chain: Backed by cryptocurrency assets, these Stablecoins use tools like collteralized debt positions , with the most prominent being ai by MakerDAO .
• Algorithmic: These Stablecoins are not backed by an asset but achieve price stability from the use of algorithms and smart contracts that manage the supply of tokens in circulation. Two examples include UST (Terra ) and AMPL (Ampleforth ).
• Commodity: Stablecoins that are backed by a physical asset like gold, include XAUT (Tether Gold ) and PAXG (PAX Gold ).

With a wide range of token types from payment to utility and then Stablecoins, markets were created for buying and selling these tokens, with some of the larger names being Coinbase, Binance, Gemini, and FTX. These exchanges work much like stock exchanges and provide a central order book for institutions and individuals to buy and sell tokens. Given the nature of blockchain communities, a centralized solution was viewed as less than appealing by the early adopters, and the need to direct Peer-To-Peer cryptocurrency transactions online and without an intermediary became apparent. Soon Decentralized Exchanges (DEX) were created and the Decentralized Finance (DeFi) boom was underway. From a crypto perspective, one can note the evolution by acknowledging the players in both spaces – at first it was centralized through the entities like Coinbase, Gemini, and Binance – but through the evolution of decentralization, we now see Uniswap and SushiSwap (amongst other DEXs) capturing transaction volume and mindshare in excess of the Centralized Exchanges.

Decentralized Finance (DeFi)

DeFi is a broad-based killer app for blockchains and allows individuals and institutions to provide liquidity, receive dividends, and borrow and lend tokens without needing the typical central company structure. Since the summer of 2020, DeFi entities have taken off, with Uniswap leading the way. Uniswap is a leading decentralized crypto exchange that runs on the Ethereum blockchain, completely open source, and has its own native token, UNI, which is known as a governance token. DeFi provides an additional avenue for token holders to monetize their tokens without selling the underlying assets and provides a more efficient market for the exchange of tokens.

There are several common features of DEXs and a few aspects that make some different than others. The common features include the ability to swap tokens and to create pair Pools of tokens which allows for rapid and low-cost token swapping. Users can contribute token pairs to the Pools and earn a percentage of any fees generated from other uses swapping those paired tokens. Uniswap was the first DEX to achieve broad-based popularity by providing these features.?

Some DEXs offer a community token that can be Staked to earn additional fees from DEX transactions and can be used for governance. A notable example of this can be found within SushiSwap, which started as a fork of Uniswap and then used the infamous k to attract users from Uniswap.

Another key service some DEXs offer is Lending; SushiSwap has this capability but DEXs like Aave and Compound specialize in providing this. A very interesting additional development of the move to DeFi exchanges and other financial entities is the corresponding move to a decentralized ownership model for governance and fiduciary management known as Distributed Autonomous Organizations (DAO). Simply put, a DAO is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members, and not influenced by a central party.

DAOs offer a new path to decentralized teams and venture organizations [WPA2] ?but they require new modes of interaction and tools that support those modes. To run a successful DAO, members need to manage contribution tracking, compensation distribution, decision making, and treasury management, in addition to strategic planning and product or service improvement or creation. We are still in the early stages of understanding the dynamics and feature requirements of each of these tasks, and companies have only just begun creating tools and platforms to help manage these. Many DAOs use Discord to communicate, Snapshot for voting, Gnosis for multi-signature bank accounts, and Coinvise for token creation. One entity to watch that is accelerating adoption and stirring transformation is SuperDAO.

Uniswap, SushiSwap, Curve, and Synthtix are all DAOs. These organizations are collectives that use blockchain tools to propose and vote on new ideas and to allocate funds in the DAOs treasury. As of January of this year, the Uniswap treasury held around $4 billion worth of assets that its collective DAO can allocate to projects. One project several DAOs have recently allocated money to fund is a lobbying group to fight the crypto regulation language in the new U.S. infrastructure bill.

Application within Industry

In general, it’s very early for these new constructs, but already we are seeing the groundwork being laid for adaptation and change within our industry. With regards to DeFi, one entrant to note is CarrDefi , which has brought DeFi to auto loans and relies on a decentralized blockchain system where users can buy and sell loans and assets without relying on an intermediary (bank). CarrDefi puts the user in control, allowing easy, peer-to-peer transactions in an automotive marketplace by allowing users to securely connect with borrowers and lenders through loan pools created by financial experts. Every loan pool is secured within a blockchain with a public history that can be checked and verified by users.

We have noticed a few Tokens being issued around this problem/opportunity as well: Carr and Car Coin Market.

Stablecoin Application within the Automotive Industry

CarForCoin is a newly created startup that allows customers to bid on vehicles, indexing towards exotic makes and models, in a used-car auction format, using cryptocurrency. The buyer can review vehicles and see prices in both Bitcoin and US dollars and purchase the vehicle using any cryptocurrency – however the platform utilizes Stablecoins to reduce volatility during the transaction. CarForCoin takes a 1.5% fee for currency conversion as well as a 1.5% fee from both buyer and seller upon completed transaction. CarForCoin additionally offers a payment and title escrow service within the platform. Lastly, each vehicle will be accompanied by an NFT issued by CarForCoin.

DAOs Within the Automotive Industry

DAOs in the automotive industry seem to be the blossoming sign of a web3 spring. There are a few that touch on investing in vehicle assets to open-source charging – both at differing levels of fidelity. The first to note is Share and Charge, which is building a decentralized network of charging stations for electric vehicles. Within the network, individuals can install an electric vehicle charging station utilizing the Open Charge Point Interface (OCPI) where it can then set and manage charging fees for public utilization. All transactions are processed on a blockchain network, and the individual owner of the station receives compensation in the form of digital tokens that can be converted to euros or spent at another charging station within the Share and Charge network. Though this network is open and decentralized, the project is not fully autonomous (as of yet), and Share and Charge has stated it is in the process of transitioning it to a DAO governance model. ?

The second instance of DAOs to note comes by way of CurioInvest, a company that is in the business of the tokenization of real-world assets or, in more layman language, it identifies assets that are believed to appreciate and then fractionalizes the ownership. For instance, CurioInvest has tokenized vehicles, its first was a Ferrari F12tdf, and leveraging blockchain has created a path to investment by allowing individuals to purchase shares in that vehicle. Tokens, Stablecoins, Centralized Exchanges, DEXs, and DAOs are all key building blocks for the new web3 economy. These can be viewed as design primitives that enable higher-order use cases that will become practical for everyday use. Just like the early internet, when the discussion was around packet switching, the TCP/IP protocol, or client/server architecture, applications were too technical for everyone to enjoy. However, when we developed graphical user interfaces like web browsers and tools like search engines, the internet transformed from a computer-science project to a mainstay of our economic and cultural lives. Similarly, the web3 technology now being developed will transform the way we interact with each other and with connected objects and networked systems.

In our next piece, we will review how these building blocks have come together to provide new asset classes that will be used in automotive, mobility, and transportation, as well as in the broader economy, to create a vibrant and resilient web3 ecosystem.?

Wagmi.

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