Ten Narratives for 2019
A happy new year from Circuit Capital! In bear markets, there are months that go by that feel as though nothing of importance seem to be happening, and certainly it may feel the case for casual observers of the crypto market. From our vantage point however, we’ve never been more excited for the possibilities for Web 3.0.
These are the 10 narratives for the rest of the year we believe to be the most important in driving our capital allocation decisions.
1. Protocol Turf Wars
2019 is a year where we expect to see multiple large Ethereum-competitors come to market. Incumbents like Ethereum, EOS, Stellar will have to begin competing for and retaining developer mindshare through marketing, ecosystem funding etc. The overall ease of building on the platform and having that access to a large community and resource/documentation repository where developers won’t feel like they’re lost when trying to develop on a blockchain for the very first time is paramount.
There is a narrow 1–2 years window of opportunity for blockchains like EOS or Tron to take the lead and gain market share against Ethereum, especially in Asia, possibly by positioning themselves as a special-purpose chain for gaming despite concerns over centralization and governance. People in the West continue to underestimate the likes of EOS/TRON, which may be the surprise outcome for 2019. Expect to see negative media pieces and even outright attacks such as spamming a competitor’s blockchain, but it’s always best to hear first-hand from developers about what they care about most — decentralization, governance, security and ecosystem support.
2. Privacy Coins 2.0
There’s been a lot of talk about GRIN recently, and BEAM to a lesser extent. These new coins represent the new generation of privacy coins launched in 2019. We’ll likely see the first generation of coins like Monero and Zcash lose some market share, but one may argue this is not significant in the grand scheme of things if we expect the market for privacy-focused coins to grow.
The bigger question here to ask ourselves is this — Bitcoin itself is becoming more privacy-focused and with incremental improvements like Dandelion++ (IP masking) and Coinjoin (cleans “tainted” coins, restoring fungibility), it may reduce the attractiveness of specialized privacy coins. A quick search of websites on the dark web peddling contraband informs us that Monero isn’t used quite as much as one would expect. Bitcoin tumblers exist such as ChipMixer (www.chipmixer.com). We’ll develop a better understanding of the privacy coins market by continuing to monitor metrics like the # of transactions on the two incumbents Monero and Zcash in 2019. This is a space where we would also have to pay close attention to the regulatory environment.
Better tech doesn’t always win.
3. PoW/Undifferentiated chains to be flushed out
In a previous article we discussed Proof-of-Work coins briefly. With even larger-cap coins like Ethereum Classic ($500M market cap) coming under 51% attacks, it is becoming clear that rogue mining farms and rentable-hashpower are a necessary evil that will ultimately show us which PoW chains are truly secure and becomes the major base protocols of Web 3.0. Most PoW-based coins are likely not to survive this extinction event.
At the same time, blockchains and cryptocurrencies utilizing Proof-of-stake with no unique reason to exist will begin underperforming the general market. By the end of 2019 we would have likely seen some major shakeups in the market capitalization ranking among the Top 50 coins. Consider that most of the Top 50 coins from a few years ago have been long-forgotten today. Expect to see mass coin delistings from exchanges throughout 2019.
4. Decentralized Infrastructure and Gaming
2019 is probably still not the year where we would see major breakthroughs in decentralized applications, but infrastructure will see major improvements. By infrastructure it doesn’t necessarily mean pattern matching and finding the “next Ethereum” or the “next Bitcoin”, but instead focusing on Layer 2 scaling solutions, oracles, and other Web 3.0 components.
Successful decentralized applications with significant DAUs are likely still going to be mostly gaming/gambling-focused. We’re confident we’ll see a similar viral app the likes of CryptoKitties appear, but there’s a better than 50–50 chance it will not be launched on Ethereum.
What we really like to see: A game accessible for kids everywhere in the world from the ages of 6–16 who may not have bank accounts, probably don’t get much allowance from their parents, and have no real way of earning fiat money except for working at their local cafe. If there was a game/gamified crypto-economy they could be interacting with from their PC/phone, they could earn cryptomoney by farming for game items /items of value and then transact p2p with anyone around the world without using the legacy banking system using permission-less cryptocurrency. This opens up a whole new world of commerce!
5. Ancillary and Protocol-adjacent Infrastructure
Sometimes investors focus too much on the crypto-market itself but there’s a lot of innovation happening in the traditional tech space that is supportive of the broader ecosystem. Traditional VCs may appreciate this better than most. We like areas such as blockchain data analytics, Blockchain-as-a-service (BaaS) etc, and there are some incredibly exciting startups we’re speaking to.
6. Experimentation of on-chain/DAO governance
With decentralization the raison d’etre of blockchains, governance and coordination are the two most important dimensions that investors still don’t pay enough attention to. The winning chains and coins of the future are going to feature (1) equitable + clear + strong on-chain governance, and (2) efficient + non-messy coordination. Just as it took a long time for corporate organizational structures settle on having a Board of Directors, Independent Directors, Audit Committees etc. and having a CEO as the coordinator of the actions of a company, albeit imperfect, we will see similar experimentation in 2019 that lays solid foundations for the DAOs (decentralized autonomous organizations) of tomorrow.
7. Funding shifts towards equity
Everyone recognizes that ICOs are dead, and very unlikely to come back a la 2017. Projects are now of much higher quality, token economics more sound, and are typically raising money through equity ownership with a token option. Equity fundraising remains fairly strong overall. Not every new idea needs to mint its own token!
Just like Ethereum was born in the last bear market of 2015, some of the projects building today will be the unicorns of tomorrow, and now is the best time to go around looking when nobody is paying attention and focusing way too much on Bitcoin’s price. Look where nobody is looking.
8. Platform-agnosticism & Standardisation
There will be a lot of resources and attention spent on cross-compatibility and standardisation across blockchains. Not just in terms of interoperability between chains, but founders ensuring that the fate of any project is not tied to any particular chain or unique-standards. Developers will want to ensure that they can quickly deploy on a different blockchain if necessary. In that regard, once the multiple-language-friendly WebAssembly (WASM) becomes the base layer for blockchain computing (a highly likely scenario), then we will see renewed explosion in innovation as new developers joining the ecosystem now begin experimenting with smart contracts written in C/C++, C# etc. Some developers in the Ethereum community are reluctant to let go of the Ethereum Virtual Machine (EVM) in favour of an Ethereum flavored WASM so this may be integral to the fate of the Ethereum blockchain.
We see protocol-adjacent projects build themselves to be protocol-agnostic, willing to integrate with any blockchain as necessary.
9. Increasing Sovereign and Institutional involvement
While most of the crypto community may find Central Bank/Govt-backed Digital Currencies (CBDCs) such as Mizuho’s stable JPY-coin terribly uninteresting (and so do we), but this is a natural and expected response. This is positive for the crypto market as digital fiat money will accelerate the public’s awareness and acceptance of digital representations of value, breaking the final logical link between physical notes <> money.
There’s also a high likelihood in 2019 we see trials of government-backed real use cases such as those that of digital identities, and more thought given to private/consortia blockchains vs public ones such as Ethereum.
10. This year, most will still continue to miss the whole point of it all
Wall Street will push hard for security token offerings (STOs), but is likely to face muted response as this is at least for now a solution looking for a problem. e.g. Fintech startups have been trying to sub-divide real estate even before Ethereum existed, haven’t really gotten any traction, and not for lack of trying. Economic value will be created from the blossoming of Web 3.0 and novel use-cases we cannot even begin to imagine today. not from creating a STO issuance platform, and certainly not from force-fitting “blockchain” into a business model from the 2000s.
This is analogous to the post office in the 2000s trying to reinvent themselves against email by making their snail mail deliveries faster or offering fancier envelopes (<> more liquidity for STOs), when they should have been thinking about fundamental changes in how people communicate.
The most economic value is created by investing in quantum leaps in innovation, and not in the little incremental ones.
This summarizes in brief the narratives that we think will come to the forefront in the year of 2019. This list is not exhaustive, and there are many non-obvious and second-order implications of our theses that go undiscussed here.
We’re always happy to discuss our ideas, how our understanding of the landscape from a technology, regulatory, risk, social perspective impacts our overall asset allocation decisions, and ultimately, how to grow the ecosystem together.