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  • Writer's pictureJames Dean

Should Utility Drive Value? The Case for Functional Token Smart Contracts and Cryptocurrencies in the Real World

Updated: Apr 6

We often hear cryptocurrencies have exploded in popularity, but not all digital coins are created equal. And tokens are technically different from cryptocurrency, it all seems just a little too confusing. But a growing segment of business is intrigued by smart contracts, the self-executing code that automates functions on a blockchain. Still it all raises the question: do cryptocurrencies with functional smart contracts inherently deserve any significant value?


So let's start by first clarifying the difference between cryptocurrency and tokens. Here's an analogy:


  • Imagine a shopping mall (the blockchain) with its own currency (the cryptocurrency). This currency allows you to shop at stores within the mall (pay transaction fees).

  • Now imagine stores within the mall issuing coupons (tokens). These coupons can represent discounts (utility tokens), ownership in the store (security tokens), or a limited-edition product (collectible tokens).


In short, cryptocurrencies are the native currency within a blockchain ecosystem, while tokens are built on top of existing blockchains to serve specific purposes. Watch Video ...



The Power of Programmable Money


Smart contracts offer exciting possibilities. They can facilitate secure transactions, automate complex processes, and even create entirely new financial instruments. For example, a smart contract could power a decentralized exchange, eliminating the need for a trusted third party. And secure digital smart contracts become particularly important with the rise of the metaverse economy, and the likelihood of the U.S. Dollar lasting another 100 years is rapidly waning, as sovereign debt continues to rise seemingly with no end in sight.


In essence, functional smart contracts inject cryptocurrencies with utility. They become more than just speculative stores of value; they add stability that can be used to access and interact with decentralized applications (dApps). This utility can drive demand for the cryptocurrency, potentially leading to significant value writes author, James Dean.


Here's a real-world example of a smart contract cryptocurrency in action:


Imagine Alice wants to rent out her apartment to Bob through a decentralized application (dApp) built on a smart contract platform like Ethereum.


The dApp would hold a deposit in cryptocurrency (let's call it "RentCoin") in a secure escrow. The smart contract would be programmed with the following conditions:


  • Rental Agreement: The terms of the rental agreement, including monthly rent amount and duration, would be written into the code.

  • Automatic Payments: On a predetermined date each month, the smart contract would automatically transfer RentCoin from the escrow to Alice's wallet, assuming Bob continues to occupy the apartment.

  • Security Deposit: The smart contract would hold a portion of the deposit as collateral. If Bob damages the apartment or breaks the lease agreement, Alice could, through a pre-defined dispute resolution process built into the contract, access a portion of the deposit held in escrow.

  • Automatic Release: Upon lease termination and confirmation of no outstanding issues, the remaining deposit would be automatically released back to Bob's wallet.


Benefits of using a Smart Contract:


  • Reduced Friction: Eliminates the need for a middleman like a traditional rental agency, potentially saving on fees.

  • Security: The funds are held securely in escrow until the pre-defined conditions are met.

  • Transparency: Both parties can trust the automated execution of the agreement based on the code.

  • Efficiency: Automatic payments streamline the rental process, reducing paperwork and delays.


Limitations to Consider:


  • Technology Reliance: Relies on a stable internet connection and the security of the underlying blockchain platform.

  • Dispute Resolution: Complex disputes might still require human intervention through pre-defined channels within the dApp.

  • Regulatory Uncertainty: The legal implications of smart contracts are still evolving in some jurisdictions.


Entangled Vibrations is currently working with business partners to demonstrate how smart contract cryptocurrencies can potentially automate tasks, increase transparency, and streamline transactions in various real-world scenarios. Watch Video ...



Here are some of the top cryptocurrencies that offer smart contracts:


Although, there are not yet many real-world transactions involving smart contracts directly within brick-and-mortar retail stores, note below some interesting possibilities on the horizon that I have currently under-development. Here are two more potential business scenarios:


1. Supply Chain Transparency with Smart Contracts:


Imagine a clothing store like "Eco-Fashion" that prides itself on ethically sourced materials. They could leverage a smart contract on a blockchain platform to track the journey of their garments, from cotton farms to factories and shipping containers.


  • The smart contract would be programmed with data points like origin of materials, fair labor practices at production facilities, and sustainable manufacturing processes.

  • Consumers could scan a QR code on the clothing item, which would link to the blockchain record stored in the smart contract.

  • This record would provide transparent and verifiable information about the product's journey, building trust with eco-conscious customers.


Benefits:

  • Increased transparency in the supply chain for both retailers and consumers.

  • Combats greenwashing by verifying ethical and sustainable practices.

  • Empowers consumers to make informed purchasing decisions.


Challenges:

  • Requires collaboration across the entire supply chain, which can be complex.

  • Maintaining data accuracy and security on the blockchain.

  • Consumer adoption of blockchain technology for product verification.


2. Loyalty Programs with Smart Contract Crypto:


A sporting goods store like "Sporty's Corner" could implement a loyalty program that utilizes a custom cryptocurrency token built on a smart contract platform.


  • Customers would earn "SportyCoin" for purchases, participation in events, or social media engagement.

  • The smart contract would manage the issuance and distribution of SportyCoin based on pre-defined rules.

  • Customers could then use SportyCoin to redeem exclusive discounts, access members-only events, or purchase limited-edition merchandise.


Benefits:


  • Gamifies the shopping experience and incentivizes repeat business.

  • Offers a more secure and transparent loyalty program compared to traditional points systems.

  • Creates a community around the brand through the use of a unique cryptocurrency.


Challenges:


  • Requires educating customers about cryptocurrency wallets and using them for rewards.

  • Ensuring the value of the SportyCoin remains stable and attractive to customers.

  • Regulatory considerations surrounding the issuance and use of a custom cryptocurrency.


These are just a few real-world examples, and the technology is still evolving. It's important to note that widespread adoption of smart contracts in retail stores might take time, but they offer promising ways to enhance transparency, customer engagement, and loyalty programs with an eye towards increased revenue and efficient operations management.


Not All Smart Contracts Are Created Equal


So, not all smart contracts are equal. Here are some factors to consider:

  • Real-world Use Case: Does the smart contract solve a genuine problem or offer a valuable service? A niche application with limited adoption may not translate to significant value for the cryptocurrency.

  • Security: Smart contracts are complex code, and vulnerabilities can be exploited by hackers. A history of successful hacks can erode trust and value.

  • Network Effects: The more users a dApp powered by a smart contract has, the more valuable the cryptocurrency becomes. Network effects create a virtuous cycle, attracting more users and driving up value.


While cryptocurrencies with functional smart contracts are gaining traction, their impact on the global economy is still relatively small. Here's why it's difficult to quantify their influence:


  • Nascent Technology: Smart contracts are a relatively new invention, and their use cases are still being developed. Widespread adoption across industries hasn't happened yet.

  • Limited Scale: The total value locked (TVL) in DeFi (Decentralized Finance) applications, a major area for smart contracts, is a significant metric, but it represents a small fraction of global financial activity.

  • Traditional Dominance: Established financial systems and institutions still handle the vast majority of economic transactions.


Here are some estimates to give you an idea:


  • DeFi Pulse tracks the TVL in DeFi applications, which often rely on smart contracts. As of March 2024, the TVL is around $100 billion, which is a sizable sum but dwarfed by the trillions of dollars flowing through traditional finance.


While the exact percentage of the world economy driven by smart contracts is hard to pinpoint, it's safe to say it's currently a small but growing influence worldwide.


Beyond Hype: Evaluating True Value


Just because a cryptocurrency has a smart contract doesn't guarantee significant value. Investors should carefully assess the underlying utility, security, and potential for network effects. Hype and speculation can inflate prices in the short term, but true value comes from solving real problems and offering a compelling use case. Overtime, I expect the promise of cryptocurrency and digital token smart contracts to play an increasingly major role in the world economy within the next 15 years or so, particularly with the advent of the metaverse.


The Future of Functional Smart Contracts


As blockchain technology matures and smart contracts become more sophisticated, we can expect to see a wider range of innovative applications. Cryptocurrencies that are tightly integrated with functional smart contracts could become the backbone of a decentralized future. However, careful evaluation is critical to separate genuine utility from mere hype.


About Author


James Dean, author / eCommerce guru is located in Northeast Ohio with over 35 years of experience in Business Development. He is a graduate of Boston University. J Dean leads a team helping entrepreneurs, corporations and non-profits to succeed in a changing world. Questions contact 440-596-3380 or Email jdean@entangledvibrations.com   


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