2023 outlook for blockchain and digital assets in business

Most business leaders have continued to hear and learn about blockchain technology’s benefits, risks and opportunities. Recent news about failures of cryptocurrency companies might make some of those leaders think that the technology remains unproven for business applications. However, there’s much more to consider.

Right now, blockchain technology is quietly empowering new business solutions with more trust and resilience than traditional database structures can offer. Tech-savvy leaders know that there are already proven use cases where blockchain has delivered business value, and it could deliver more value next year. New advances in cryptography and solution-enabling technologies, along with growing understanding and adoption, will continue to yield more new solutions.

While the push for oversight and regulation grabs the headline for 2023, there are areas where blockchain technology can still drive business value in 2023.

Smart contracts will offer a first use case for many businesses

Smart contracts are one of the most important use cases for blockchain technology in business. Smart contracts are essentially programs that automatically execute transactions based on certain conditions. That sort of automation could seem like a risk, but blockchain technology helps to ensure the security and trust required for business solutions.

Smart contracts are a powerful tool to streamline and eliminate the delays, manual interactions, cost and other friction in agreed-upon contractual transactions. Auditors and regulators might ask about the auditability and controls for these transactions, but proven solutions have shown that there are established answers in place.

As with other blockchain technology solutions, there is a growing number of partners and services that can help businesses establish smart contracts without developing all of the capabilities in-house. These services can help ensure that your contract designs include robust controls and the latest capabilities for cryptography, access management and anomaly detection.

Blockchain technology can be thought of as an operating system, enabling individual contracts and other solutions that run on the system. Most blockchain technology solutions use the technology at their core, but also incorporate off-chain interfaces, functionality and systems. These off-chain elements offer more control over what is being transacted on a blockchain, but they can introduce security weaknesses.

Businesses must learn how to establish controls that help ensure the security of contracts and other transactional systems. If discrepancies are discovered, businesses must learn to use the native blockchain technology path for asset tracing and recovery.

dApps and Web3 will spread

Decentralized applications (dApps) operate on multiple nodes in a blockchain network, distributed much like the blockchain ledger itself. Like the ledger, they can stay online even if some of the nodes go offline, which means they offer stability and trust that centralized applications do not.

dApps can act upon smart contracts or other programmatic terms automatically, but their capabilities are typically more complex than a contract. For instance, they can replace typical internet applications that are cloud-based but centralized, offering instead a decentralized model in line with what people envision as “Web3” or “Web 3.0” — a model that can stay online and validate itself by using an infrastructure that is duplicative and decentralized rather than dependent on one remote server with limited backups.

Businesses can take advantage of dApp providers that offer solutions, or capabilities with APIs that enable larger solutions, to achieve the reliability and trust of decentralized applications. This can be especially important when businesses develop new proprietary solutions that need to tap into decentralized capabilities.

Decentralized finance (DeFi) will continue toward revolutionizing financial services in 2023. DeFi can include a range of financial products, services and capabilities that are decentralized (rather than controlled by one central authority), often through blockchain technology. DeFi solutions are dApps which are specifically focused on financial capabilities, sometimes replacing functions that have traditionally been the realm of banks or other financial institutions. While DeFi solutions are an emerging area, some businesses are already using them to reduce the delays and costs of standardized financial functions — like the origination and subsequent sale of mortgages on blockchains or raising funds via DeFi apps as well as utilizing DeFi for Treasury purposes. As DeFi solutions become more established, their business adoption is likely to grow.

Asset tokenization will become more practical

Blockchain technology can be used to create a secure and unique digital asset, or token, that is a representation of value. This allows the tokenization or fractionalization of assets that previously did not permit fractional ownership. Securities can be bought, sold and settled faster. Real estate and other assets can have fractionalized ownership, with asset classes that were not germane to fractionalization before.

Cryptocurrencies will be more regulated

While it is true that cryptocurrencies (other than a stablecoin or central bank digital currency) are volatile, and recent failures slowed interest in cryptocurrencies, cryptocurrency adoption could grow over the next decade and generate more reasons to develop the capability to accept cryptocurrencies. As recent failures are expected to drive the development of regulation and oversight in 2023, there is hope that a clear framework and safeguards will re-establish trust in platforms, and the flow between fiat and digital currencies will become more commonplace and effortless.

The metaverse, virtual reality, augmented reality and Web3 will foster use cases that could motivate businesses to engage with cryptocurrencies. Many businesses have engaged in brand-building and exploratory efforts on metaverse platforms, but cryptocurrencies can play an essential role as businesses develop more direct transactional use cases.

Governance will grow

Blockchain technology and cryptocurrencies have inherent qualities that track transactions and aid in forensics that can resolve disputes. However, we will see an increase in cryptocurrency guidance and regulations from regulatory agencies like the SEC, Commodity Futures Trading Commission, and the US Treasury Department’s Financial Stability Oversight Council. We will also see businesses begin to develop more advanced and mature internal governance around their own blockchain technology solutions.

Validation will become more environmentally friendly

Traditional blockchains, like the one Bitcoin is running on, have been notoriously resource-hungry — for instance, many estimates indicate that validating one cryptocurrency transaction can consume more than 1,700 kilowatt hours of energy, or about the same amount consumed by the average U.S. home over two months. This is because the “proof-of-work” validation method that many traditional blockchains use requires many computers to process an enormous amount of data to ensure the security and validity of each transaction. However, developers are seeking other validation methods that are more carbon footprint friendly.

There are clear motives to develop and offer these alternatives, since the massive energy consumption of traditional validation methods remains a barrier for organizations that are now examining and reporting their ESG impact. As we have seen with the Ethereum blockchain (the second most popular blockchain after the Bitcoin blockchain), transition to a more environmentally friendly proof-of-stake (PoS) blockchain system is viable. PoS protocols are consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency, rather than energy-hungry proof-of-work protocols.

As blockchain technology and its promises continue to evolve in 2023, businesses could see a growing range of use cases, simpler points of access and increasing competitive pressure that will continue to encourage them to adopt blockchain solutions with real and practical business value.