When we talk about an economy, we usually refer to countries or regions in relation to their production, consumption, imports and exports. Well, that meaning seems to be changing lately; and fast, too. While some people still consider the metaverse as something far out and unrealistic, others are already living it. For some, the metaverse is just another social media, an overhyped platform, sort of. In spite of how it is seen, people are already moving in, building businesses and empires that are leveraging the blockchain.
On the surface, the geographical country and this ‘decentralized network of computers’ may seem unrelated but a closer look will reveal otherwise. At least, the only major difference is that the former is not a physical territory. Just like every nation has a native currency, every blockchain has a native token, without which, one can’t carry out a transactionFrom what players on the blockchain can see, the ‘fiscal’ and ‘monetary’ policy of the blockchain may even be performing better than the economic policies of some governments.
The trustless and programmable nature of public blockchains makes it possible to easily implement policies where governments struggle with process and time. The proof-of-stake mechanism adopted by second-generation public blockchains introduces a de facto “universal basic capital income” for their network “citizens.” This is a better income distribution strategy than the traditional tools employed by governments.
Public blockchains allow anyone to deploy decentralized applications (DApps) on top, which users can interact with. Currently, decentralized finance (DeFi) applications and non-fungible token assets (NFTs) are the two main economic activities on layer 1 blockchains and associated layer 2 chains. At the end of November 2021, gross total value locked from DeFi in the top 10 layer 1 blockchain platforms exceeded $250 billion, a 1,400 percent growth from the previous year. And according to NFTGo.io, the market cap of NFT projects on Ethereum alone reached over $7 billion in November, increasing over 14,500 percent from a year before.
Unlike the first smart contracts which started in 2014, which required proof of work (PoW) to protect network security, newer layers boast cheaper transactions and faster settlement, and they employ proof of stake (PoS) systems. These require transaction validators to lock up an amount of their holdings of the blockchain’s native tokens to prevent malicious attacks. Validators/stakers then get rewarded in the platform’s tokens for providing the transaction validation service. For instance, on the Avalanche blockchain, validators stake at least 2,000 AVAX tokens (around $220,000 by 2021 AVAX price). The high staking cost makes it prohibitively expensive for an attacker to gain control of enough validators to compromise the chain’s security.
Every economy has it’s share of booms and busts. Physical nation-states employ policies to smoothen out recessions and booms. The blockchain does much the same using fiscal (transaction fees) and monetary (staking yield, token issuance and burn) policy tools. However, in geographical nations, the policies may be hard to implement due to limited time horizons and poor judgement of decision makers, as well as lack of discipline and political will. The on-chain economy on the other hand, executes its policies by codes, without human interventions.
Conventionally, a country’s GDP is distributed to its citizens through labor income and capital income. With the emergence of labor-replacing technology, globalization and demographic shifts, income-sharing is being greatly reduced and the inequality gap is widening. On-chain economies use PoS to arrest this situation. Part of their revenues are paid as staking yields to citizens, allowing everyone that participates in the platform to share the output of its economy as non-labor earnings. It’s a capital income for the masses. These yields are a lot more attractive than the saving rates offered by traditional banks.
Conclusion
Although, the blockchain nations are still small, they are doing great, nonetheless. The DeFi total value locked (TVL) on Ethereum was $150 billion as at the end of 2021. If we assume the Ethereum GDP is a third of its TVL, that puts the size of the Ethereum economy at par with Slovenia. Combined with the advancement in AR/VR, metaverse use cases of public blockchains, including online gaming, decentralized communities, and tokenization of traditional assets, are expected to grow exponentially in years to come. It’s likely that we’re only seeing the beginning of the growth of blockchain national economies.