Every year, we get slightly more clarity into understanding what blockchains are actually useful for — from supporting new types of money to coordinating humans via blockchain-based programs. We have seen some applications explode in prominence and others fail, and we are gradually getting better at discerning real from fake. Making predictions about the future is always difficult, but I have found it a useful exercise in critically thinking about what is actually working and what is not.
1. Bitcoin is still king
Bitcoin has remained the most prominent cryptoasset in the eye of both insiders and outsiders of the industry. Over the last 2 years, majority of cryptoassets have plummeted in value relative to Bitcoin — as markets tanked, people became more willing to sell their assets for Bitcoin. Bitcoin has also been the most liquid and least volatile cryptoasset.
In my opinion, Bitcoin is the only cryptoasset with product market fit. There are a core group of believers and a clear, singular message about the value proposition of Bitcoin — that it is a new type of store of value which will be valuable in the politically and economically volatile world we live in. This narrative is extremely powerful because it makes Bitcoin simple to reason about — if you place some probability that more governments and economies will collapse in the future, you can estimate with some probability, the future demand for this cryptoasset. This type of reasoning lets portfolio managers have some understanding of the risk/reward of holding Bitcoin, and may allocate some portion of their portfolio accordingly.
I believe that Bitcoin still has the clearest value proposition and best reputation/brand, making it the first asset new institutional and retail customers think about when considering investing in crypto. I believe that if we see growth of crypto markets in 2020, this growth will largely be captured by Bitcoin.
2. The DeFi story
The primary use case of these applications today is to increase one’s long exposure to Ether — by putting $ETH as collateral to borrow a different cryptocurrency, then exchanging that for more $ETH. This appeals greatly to a class of people I call “Ethereum enthusiasts”, who have both the desire to increase their Ether exposure and also the willingness to become early adopters in these new applications.
If these applications continue to improve their utility and liquidity, I have high confidence that they will continue to grow in 2020 and capture a larger share of the “Ethereum enthusiast” market. They may even capture the broader “Ether holder” market, which is orders of magnitude larger than the former. This is where I think the growth of these applications may start to plateau — they will likely struggle to create enough utility to convert people who are not already in the Ethereum ecosystem to use their applications.
For example, one of the prominent narratives is that decentralized lending applications will be able to break into the mainstream because they offer higher interest rate savings accounts to regular savers. This meme had a lot of mindshare when stablecoin interest rates were between 8–11%, but rates have continued to fall since then, and is currently sitting at around 4% on Compound.
This is still significantly higher than rates offered by most banks in the world, but if we assume rates continue to fall, account for the cost of smart-contract insurance and the cost of moving dollars from fiat to crypto, the difference in interest rates will unlikely be worth the friction of the entire process. Although I am bearish on this idea attracting large swaths of US customers, having a USD-denominated savings account is still an extremely attractive value proposition to people in developing countries. If this is true, companies like Dharma and Linen have little value being in the USA and should double down on acquiring customers elsewhere.
Despite this reality today, I consider it foolish to be long-term bearish of DeFi simply because of how empowering it is for entrepreneurs and developers. The fact that teenagers can build new types of financial instruments in their dorm rooms, or that entrepreneurs can combine and compose different DeFi products & protocols in new and interesting ways is extremely powerful. Although I struggle to have the capacity to imagine DeFi-based applications that will appeal to the mainstream today, I have little doubt that someone else will in the future…just maybe not in 2020.
3. Trading still dominates
Trading is still by far the biggest “use case” of crypto. The most significant news item for crypto trading this year is the growth of derivatives products. Binance’s Bitcoin derivatives have grown and surpassed the volumes of their spot offering. New exchanges like FTX have been created to offer more diverse products and capture the market demand for these instruments, and have seen significant growth.
More interestingly, I predict that decentralized derivative products in crypto will start to gain traction in the new year. Dydx, the decentralized exchange that offers ETH-based derivative products, has seen volumes grow to approximately $70MM in Q3 this year. There are teams working on offering instruments like options and other derivatives in a decentralized fashion, which will hopefully launch in the new year as well. I predict that these decentralized protocols will see growth because users and operators can avoid the regulatory hurdles in engaging with derivatives products, as well as the potential for developers to create new instruments which suit their needs by utilizing these protocols.
4. Scalability is still a non-factor for blockchain usage
Many new blockchains are poised to launch in 2020 and finally allow decentralized applications to scale. These blockchains will probably work from a technical standpoint, but will likely struggle to attract any significant usage. The high cost of educating developers and the lack of developer tooling or interoperable smart contracts make it a poor choice for most developers who are thinking of building new applications. There are strong reasons to believe that the native currencies of these new blockchains will also significantly underperform in the short term. Chris Burniske has good writing on this.
I predict that many developers will try to replicate the breakout Ethereum applications such as Compound, Maker, and Uniswap on other blockchains in 2020 — but will fail to get traction. The quality of collateral in the Ethereum ecosystem is orders of magnitude better than the types of assets on other blockchains, making it difficult for other blockchains to compete on the DeFi front. A controversial opinion I hold is that the Tron blockchain may be the only blockchain that could compete with Ethereum on DeFi, simply because of the large amounts of USDT issued on it — stablecoins are the backbone for creating any type of synthetic asset or building financial products. I place low probability on this being true, but even lower on other blockchains.
Most of the aforementioned blockchains will be based on proof-of-stake. The jury is still out as to how secure these chains will be, and whether or not an attacker will be able to pull of a malicious block reorganization for profit. Because of this, incentivized testnets are now table stakes for new blockchain launches, where validators are rewarded with coins for setting up infrastructure to start producing blocks at launch, which helps with bootstrapping security. Many teams are also focused on building secure validator infrastructure, some taking the form of software providers and others as staking shops, which should help to foster fairly robust security on the various blockchains. Despite this, I predict that at least one proof-of-stake chain will be attacked in 2020, the same way proof-of-work chains are attacked to double spend exchanges.
Staking will also continue to become commoditized, as the space will be crowded with many undifferentiated staking-as-a-service businesses. Exchanges or custodians have an unfair advantage here because they can vertically integrate from their core business to offer staking, becoming a one-stop-shop for customers to park and stake their assets. I work on this, and am bullish about Coinbase Custody’s role in this space.
6. More on-chain governance sophistication
Throughout the year, we have seen both successes and failures in on-chain governance/co-ordination for different systems. Blockchains like Tezos and Cosmos upgraded their networks via coin-weighted voting mechanisms, and systems like MakerDAO adjusted interest rates through it’s own Ethereum-based coin-weighted voting system.
I personally feel that Tezos is the leader in on-chain governance sophistication, as the blockchain went through two protocol upgrades over the course of the year, both of which come close to a truly autonomous upgrade. Two noteworthy accomplishments:
- The Tezos Athens upgrade successfully tested the “invoicing” feature, meaning protocol developers can get paid in inflation funding for upgrades they make to the blockchain.
- These second protocol upgrade was co-written by the core team of Tezos developers, Nomadic Labs, and an independent company, Cryptium Labs. I expect to see more diversity in protocol developers in 2020, and more serious utilization of the invoicing feature.
We also saw some interesting decentralized organizations get formed such as MolochDAO and SAINTFAME DAO, although I would assert that these were nothing more than experiments. Jacob Horne has interesting predictions on where these will go in the new year, and is a lot smarter than me on this.
The growth of financial products in crypto, both centralized and decentralized, have clearly outpaced everything else this year alone. The surge in the number of derivative products and exchanges offering them within the last year alone are directionally indicative of the maturation of crypto markets.
On the decentralized web front, I feel that we still have close to no idea of what blockchains can accomplish other than financial use-cases — most things are still experiments. Furthermore, even for these financial use-cases, I do not have a good idea of the path to world domination for today’s class of DeFi protocols/apps. I would love to see a DeFi founder write a coherent Master Plan.