Progress in various areas
2019 was another interesting year for Bitcoin, Ethereum, other cryptocurrencies and blockchain technology and we’d like to give a short recap what happened and what we are looking for in 2020. New research on privacy and scalability is being implemented in layer 1 protocols. The middle-layer protocols have grown significantly. A few areas such as DeFi and players such as Binance or Chainlink have performed extremely well while other areas such as STOs are more slowly progressing than expected.
What happened in blockchain in 2019
Often blockchain and the cryptocurrency market are simply determined by the current Bitcoin or overall market capitalization. This neglects the developments and rapid improvements the industry is making on the technology side. The year 2019 can be described as a year of consolidation and building. It was very interesting to see lots of innovation and development happening no matter how the market was performing. Innovation happened not only at the center (here: at Bitcoin or Ethereum core) but on multiple layers. Kyle Samani shared a great blog post about the evolvement of the Web 3 stack and the rise of middleware. One very important takeaway for builders in blockchain is the decoupling of individual components to create solutions that can easily be matched with other compatible, interoperable components of the Web 3 stack. Protocols such as the Lightning network and new developer tooling, e.g. from Alchemy, offer major improvements. Especially in DeFi, we are already seeing new applications that build on various other components.
Let’s take a look at the most important developments and projects from 2019.
ICOs, IEOs and STOs
The ICO market slowed down since the overall crypto market remained in a bear market and many of the previously funded projects have not yet provided a significant return. At the end of 2018 and beginning of 2019, STOs were supposed to replace ICOs due to their compliance with existing regulations. Indeed, infrastructure projects have been started, tokenization has become a well-known term, and a few STOs have been successfully launched. However, regulatory hurdles remain high and the STO market did not live up to the expectations and will require a few more years to fully take off with more institutional investors and available liquidity. IEOs on large exchanges and specific token listing platforms performed well and became an interesting new model. The adoption of this business model by smaller exchanges was not as successful and offerings also slowed down.
The Libra project – a permissioned blockchain with a stable coin – was started by Facebook and the Libra Association. It received massive attention from the blockchain industry, from regulators and the US government. Many discussions evolved around the value of such a project for blockchain adoption and the centralization of the project. After US Senate hearings and a strong push back from the government, some of the well-established financial service providers such as Mastercard, Visa and Paypal left the association. The launch is anyways planned for 2020 and may help many people get started with cryptocurrency.
In 2019, most central banks had touchpoints with cryptocurrency. While the US has acted rather defensive, other countries and currency zones have taken a more active stand. In Europe, the bank of Lithuania has started working on a collector coin and another group has conceptualized a digital EURO. In China, a digitized version of the YUAN has already been issued. We expect to see more projects and more details about privacy and functionality of central bank currencies in 2020.
Decentralized Finance is rapidly growing and one of the areas with the highest user adoption in blockchain. DeFi largely focused on Ethereum and quickly showed network effects. Most financial applications and financial instruments require a stable coin and MakerDao’s DAI started becoming the DeFi “stablecoin standard”. Other services, e.g. from Compound or Uniswap, are complementary and enable new solutions for investors, traders and builders. User growth and locked-in values rose significantly throughout the year and there is much more potential to be unlocked by DeFi in 2020. We expect people to turn to exchanges and solutions that give additional interest for holding and lending crypto.
Regulators took a more active stance in 2019 and engaged with blockchain associations and projects in order to provide more clarity and protect investors. Existing regulations are being adjusted and extended in order to cover blockchain technology. Overall, there is steady progress but specific applications of blockchain such as STOs and zero-knowledge proofs pose great opportunities, e.g. for investment and data privacy, and threats, e.g. for criminal financial use. Coverage of these edge cases will take more time. A few countries such as Malta and more recently Germany, or states in the US such as Wyoming have been very proactive in regulating blockchain and gain a significant advantage. We expect great progress from larger jurisdictions such as Europe, the US, and China in 2020 since they are in global competition and regulatory clarity helps local solution providers.
The core blockchain technology is becoming more and more secure and performant. However, there are many attack vectors in the field of cryptocurrency and blockchain and they are getting exploited. Assets on exchanges are at risk – even on the well-known exchanges which have covered most losses in 2019. Exchange hacks included some of the most established players such as Cryptopia (16M USD), Bithump (13M USD), Binance (40M USD), UpBit (48.5M USD), BitPoint (32M USD) and many more. Larger security incidents were also reported about phishing emails, crypto scam coins, ponzi schemes and “investment clubs” – most notably the size of PlusToken and OneCoin scams became public. PlusToken was a High Yield investment program that offered huge rewards on investment per month (9-18%) and better returns for larger investments. In OneCoin, members were able to buy educational packages (100 – 100.000 USD) and were promised tokens to mine OneCoins. The size of the PlusToken pyramid scheme is estimated to be more than 2B USD and the size of the OneCoin ponzi scheme is estimated to be at least 4B USD. Stay safe and double-check what you are investing in. If you share private keys or give your Bitcoins or another crypto to scammers, there is little chance to see them again. In 2020, we will see more agents & banks offer crypto custodian services that may enable the “not-so-techie” people to participate and reduce some risk factors.
In 2019, we saw some acquisitions in blockchain – most notably Chainspace by Facebook and Neutrino by Coinbase. Projects and foundations have matured and started more transparent reporting of financial years, professionalizing organizational structures and even reworking key areas such as tokenomics. The pace of innovation in technology, incentive mechanisms and community building is impressive. It will be interesting to see if blockchain is becoming a cross-border solution or if Chinese, South East Asian, European, or US-specific solutions will dominate.
What can we expect from 2020?
Many VC-funded layer 1 protocols will launch in 2020. It will be interesting to see how new projects fit into the existing ecosystem, add value and compete with each other. We expect some projects to utilize blockchain without even communicating it. In the following, we share some of our crypto theses for 2020.
- More blockchain foundations will be managed like “normal”, centralized startups and aim to become professional growth companies while building a decentralized network.
- We will see more consortia from traditional businesses around use cases in various industries – most likely led by the financial industry but we also expect cross-industry initiatives. Businesses will move beyond the PoC stage and build enterprise-grade solutions.
- Games and gambling will grow significantly and leverage non-fungible tokens for digital collectibles.
- Consolidation will also continue in 2020 through mergers & acquisitions. Especially large exchanges, such as Binance and Coinbase, generate profits and aim for blitzscaling. They are in a good position to onboard dominant local players, add trading tools and improve the user experience and time on exchanges through functionality or games …
- More third-party custodians will start their businesses. For example, due to regulatory changes in Germany, banks will be able to take custody of crypto for their clients. This can potentially attract new retail investors and institutional investors that don’t like to directly work with the technology.
- Crypto holdings will move to exchanges where users receive staking rewards and to lending platforms such as Compound or BlockFi where they can earn additional interest.
- More financial instruments will evolve from ETFs to DeFi applications and open up various opportunities for high-risk investors and professional traders. But we expect that important growth drivers such as Bakkt continue to focus on Bitcoin and funds.
- Token valuation is still challenging and some of the existing valuation methods are “questionable”. We look forward to more models, frameworks and “objective metrics”.
- Bitcoin is more than 11 years old by now. Litecoin, Nxt, and Ethereum are market-proven for more than 5 years. These core blockchains are quite secure and standards for architecture, scaling, and interoperability are emerging despite critical upgrades from time to time.
- Newer blockchains such as Polkadot, Cosmos and other VC-funded layer 1 protocols are quickly growing their ecosystems. It is difficult to forecast how new ecosystems grow compared to the existing, naturally evolved ecosystems of Bitcoin and Ethereum.
- We expect large demand for modular, private chain setups and private-public chain combinations in 2020 from traditional businesses since their privacy requirements for most use cases can not be met by public chains.
- In our perspective, blockchain alternatives are great at this point in time to ultimately decide on battle-tested, great performing technologies that shall secure the internet of value.
Collection of 19/20 blockchain reviews & outlooks
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