State of Crypto: 2018 Market Trends

Making strategic decisions requires having awareness of global and industry trends. Following is a brief review of the state of the blockchain space I shared with the Zeppelin team. Thought it was a good idea to share it with the broader community of entrepreneurs and buidlers.

A bear crypto market

The drastic rise and fall of crypto prices led to:

• Exchanges making lots of money by ushering new users as fiat on-ramps (e.g. Coinbase) and enabling lots of transactions on their platforms (e.g. Binance). They are now reinvesting this money in new products, acquiring companies and fostering the ecosystem on their way to become today’s incumbents.
• Financial infrastructure being built because institutional investors were eager to enter the market when valuations spiked (e.g. qualified custodians). OTC traders and market makers also made lots of money by providing liquidity to exchanges, institutions and whales.
• Speculators (e.g. many crypto trading funds) losing their money and incentives due to focus on short-term returns and high exposure to crypto, leaving only smart and long-term money in the market (e.g. VCs)

In the past eight years in crypto, we’ve seen similar (though smaller) ups and downs in prices.

If we look back in history, technology adoption and markets are loosely coupled. After the dot-com crash, internet adoption took three years while the financial markets (Nasdaq) took twelve years to recover. Like in the past, I’m confident that financial crypto markets will eventually recover and become stronger, but that might take longer than the rate of adoption by users of crypto.

The rise and fall of ICOs

Blockchain’s first killer app saw a rapid decline during 2018 in the number of ICOs conducted and the money raised.

Main reasons include:

• Market saturation led to increasing prices for conducting an ICO: ~$1M in marketing, legal, tax, development, and security.
• Lack of regulatory guidance made ICOs a risky move. Many of the projects that conducted ICOs received subpoenas from the SEC.
• Some projects charged by the SEC settled for small amounts (~$400k for EtherDelta) but had to either close shop or turn their token into a security. In other cases, founders received much harsher penalties.
• Returns for flipping recently-bought ICOed coins to the market decreased due to saturation of coins and declining prices of BTC and ETH.
• 95% of all ICOed coins and tokens didn’t make much sense technically or from a business perspective. It took participants in the market time to appreciate that these projects lacked value.

As an alternative to ICOs, there are some projects working on creating standards and offering services for issuing and trading security tokens. Activity has been super low yet due to unclear regulatory environment — and the fact that most challenges cannot be solved purely with technology.

A growing market of developers

Despite the decline in market prices, the number of developers working with blockchain tech keeps growing.

• Monthly downloads of npm Solidity package:

• New Dapps per month:

Source: State of Dapps-Industry Report: November 2018

• Weekly downloads of OpenZeppelin, the most popular library for smart contract development

New blockchains

Today, almost all smart contract development happens on Ethereum. While Ethereum works on Ethereum 2.0 and layer 2 solutions to scale, new blockchain platforms are being proposed to rival their leadership. Some of the most interesting projects are DFINITY, Algorand, EOS, Tezos, Filecoin, Cardano, Ziliqa, RSK, NEO, Polkadot, and Cosmos, collectively raising ~$5B. Some of them haven’t launched yet and the ones that have, have very few users. Compatibility with technology built on Ethereum is unclear for many of these projects, and there’s some work in blockchain bridging technology yet to be done.

While all these blockchains promise better features, they will need to break with Ethereum’s network effects and bootstrap a community of developers to build on top of their platform. Some of them (e.g. Algorand, Cardano) have a dedicated VC arm to invest in projects building on their platform. They will also use their funds to host developer conferences, give grants, and build educational content, among others.

Today’s popular use cases for smart contracts

Crypto as money

2018 was the year of the Stablecoins. This occurred because many exchanges only trade crypto-to-crypto and not crypto-to-fiat. Trading crypto-to-fiat requires going through the banking sector which charges a higher fee and requires extra KYC/AML processes. Also as bitcoin prices fell, so did most all other coins so if owners wanted to come out of BTC/ETH holdings, they needed to go to another asset which was closer to the valuation of the US dollar.

There are 3 types of Stablecoins:

• Backed by USD, EUR or Gold (e.g. Tether, CENTRE, Paxos). Business model is unclear. Mostly done for strategic purposes, to create liquidity in exchanges.
• Backed by cryptoassets (e.g. Maker). Business model is to have a token where holders receive fees proportional to the activity of the network. Today, nearly 1.5% of the total ETH supply is locked in Maker’s smart contracts.
• Backed by an algorithmic “central bank”. Business model is unclear. It’s worth noting that Basis, one of the most funded stablecoin projects, recently shut down and returned all their capital to investors.

Besides cryptocurrency exchanges such as Coinbase, Circle and Bitfinex, traditional tech companies are jumping into the space and working on their own stablecoins.

Crypto as property

Due to the rise of the Non-Fungible Token (NFT), unique digital assets were made possible. While activity is still low, today’s main application seems to be gaming (e.g. Cryptokitties, Land in Decentraland). There are also companies working with high-profile brands to create branded digital assets and take them to mainstream adoption.

Business model here seems to be either creating and selling these assets or building a platform for others to do so and collecting a transaction fee.

Decentralized Finance

Projects building open source, decentralized financial infrastructure. These include protocols for trading (e.g. 0x), credit and lending (e.g. Dharma, Maker, Ripio Credit Network), and margin trading (e.g. dY/dX), among others.

Main challenges around Decentralized Finance include how to create and manage a decentralized identity and reputation system to access these services, and how these protocols fit with current regulation and KYC/AML requirements.

For these reasons, companies building these kinds of protocols are also becoming their first relayers — centralized entities that connect to the decentralized protocol to provide a compliant and smooth experience for end users (e.g. Coinbase for BTC and ETH). This is the case with Dharma’s Lever and dY/dX’s Expo. Protocol-native tokens don’t make much sense here, where the business model seems to be charging a fee for all transactions happening through their centralized relayer.

Data ownership and exchange

Blockchain tech allows users to hold their data and access applications without relying on centralized entities to do so (e.g. FANG). Once users own their data, they could sell it via decentralized data exchanges (e.g. Wibson, Ocean protocol).

However, UX challenges around data storage and management, coupled with the fact that mainstream users are OK with trusting entities, and that the economic value of their data is relatively low to trigger behavioral change, make adoption for this use case quite challenging.

Final thoughts

While 2018 was more about trading, experimentation and laying out the initial infrastructure, 2019 will be more about solving problems for real users, deploying scalable and robust infrastructure, crafting great user experiences and driving sustainable businesses. I’m curious to see how these trends evolve and what opportunities emerge next year.

Thanks to Connor Spelliscy, Santiago Palladino, Martin Tellechea and Martín Triay ⚡for reading early drafts and providing feedback.