2020 Crypto Industry Questions

Most year end crypto industry posts take the form of predictions for the coming year. This post will be more about asking questions.

I made one informal prediction at the beginning of 2019. Relatedly, I extended that prediction to suggest that it would bring the “ETH flippening” back in the discussion by 2020:

Now with hindsight, I think that prediction looked pretty prescient. I believe the growth of ETH locked in DeFi shows that the flippening should be back in play. But ETH’s price is flat over that period while BTC is up by ~100% and more money and effort keeps pouring into various flavors of ETH-killers.

Even if the general public can’t see it yet, progress is rapid and exciting, but one thing that working in this industry makes clear is that predictions are something of a fools errand. So for this 2020 crypto industry preview, rather than making predictions, I’m going to ask some of the questions that are the most interesting to me in tracking the industry’s progression this year.

Is Ethereum’s biggest competitor….Ethereum?

A lot of smart contract blockchains were built assuming that Ethereum wouldn’t be able to scale. That’s increasingly looking like a bad bet. Others assumed that ETH2 would never ship. That’s also increasingly looking like a bad bet.

But there are some questions remaining about the ETH1 -> ETH2 migration and whether it might impact composability, which is a key aspect of DeFi. If there are any challenges there, ETH1 could live on as a dedicated DeFi blockchain.

Could the benefits of standardization (ERC20 and ERC721 in particular) make ETH1 and ETH2 complementary blockchains, versus a more complicated approach like Cosmos or Polkadot? Do gaming or other use cases that require high throughput justify enough reason for blockchains like NEAR or Algorand to exist as standalone blockchains? What will we know about ETH2 at the end of the year?

What will become of the various Bitcoin payments efforts

It may be unfair to group disparate efforts such a Bitcoin Cash (any of the iterations), Litecoin and the Lightning Network into a single group, but is it really?

All have their origins in the Bitcoin maximalist philosophy that, obviously, Bitcoin would be the only true blockchain and cryptocurrency, and scaling Bitcoin to handle the payments use case was a requirement to make that vision a reality.

But Ethereum is making more progress bringing Bitcoin into the DeFi/ETH ecosystem then those three projects have made progress combined. That’s not to say there aren’t good teams making progress on the Lightning Network, but not even close to the progress being made on Ethereum while stablecoins are clearly emerging as the preferred crypto payment medium.

Will Bitcoin maximalists come to see Ethereum as highly complementary to Bitcoin, and DeFi as the optimal route to facilitate hyperbitcoinization? After all, the best way to encourage “stacking sats” is to not encourage spending them.

What will be the state of geopolitical risk and regulatory arbitrage

Going all the way down the crypto rabbit hole requires playing out the game theory of how decentralization and digital money plays out. Any way it plays out, it all ends up at the same destination, unless centralized institutions are able to stop the ascent of a decentralized technology for the first time in history.

We’re seeing the first major aspects of this play out with the Chinese efforts to create a national digital currency on top of WeChat’s rapid ascent into banking and fintech. Congressional and other regulatory pushback against Facebook’s Libra, the IMF signaling concern about “one” stablecoin (when there are multiple in the market) among other examples.

Sovereign-level actors move glacially, but the crypto industry is quite agile.

Uniswap, now a venture-funded US startup, complied with US regulations by blocking access to its underlying smart contracts for citizens of 10 specific countries on a sanctions list. It only took a few hours for new (and decentralized) front ends to emerge, ensuring that everyone, including citizens of those 10 countries, will be able to access the Uniswap smart contracts that live on a public blockchain.

It’s much easier for regulators to police centralized architectures and yet they’ve spent many years unsuccessfully deterring illegal live sports streams. And in that case, the regulators and entrenched business interests are completely aligned. Enforcing economic sanctions in an era of public blockchains seems closer to impossible.

The toothpaste isn’t going back in that tube. Will the end game of decentralization still be mostly a secret held amongst crypto nerds at the end of 2020? Or will the establishment and incumbents’ panic have officially set in? And what steps and pushback might that trigger?

Which insane 2017 ICO bubble concepts will survive?

The crypto industry is still deleveraging and emerging from the ICO bubble. Similar to the aftermath of the dot com bubble, it’s a necessary step in the industry’s maturation process and important process in distancing legitimate efforts from the scammers, unserious market entrants and “irrational exuberance”.

But as the ICO bubble gets further in our rear view mirror, it’s becoming increasingly clear that some of the supposedly absurd aspects of that era will not go away. This is most obvious example is the continued dominance of Tether in the stablecoin market, as it has been well known that Tether was, at the least, very shady, if not completely crooked. Some of those concerns have been assuaged, but there are numerous more trustworthy stablecoins on the market. Most astute observers in the market assumed that Tether’s market share would have faded or outright collapsed by now.

Meanwhile, Dogecoin still has a ~$250M market cap for reasons unknown and Dentacoin is somehow still not worth $0.

The only level of absurdity we can rule out with certainty is BitConnect.

We all assumed that reason would return and crypto assets would need to have real value to maintain real value.

Can you just “print money out of thin air” as long as enough people believe in it that it stays liquid? Perhaps that’s the biggest lesson we can learn from the Fed and the US Dollar. And if the above continues to hold true, what does that mean for XRP?

How much progress can DAO’s make in one year?

While the word is getting out about DeFi on Ethereum, the DAO space is making surprising progress with a lot of momentum (also almost exclusively on Ethereum).

While building crypto and DeFi products is hard enough, building DAO’s is even harder. DAO’s are meant to put structure around the coordination in decentralized organizations, with corporations and governments the lofty use cases.

But one of the significant lessons the crypto industry has learned the hard way is that decentralized governance is really difficult to get right, and it can actually hamper progress in the early stages.

Additionally, history tells us that the most effective decision making structure for an organization actually looks more like a “benevolent dictator” than a pure democracy, which is the polar opposite structure of what DAOs start out looking like.

But dictators are rarely benevolent, as absolute power tends to corrupt absolutely. Successful organizations always reflect some degree of effective top-down leadership, and yet that’s always subject to the unique human nature of those successful leaders.

How many iterations will DAOs need to start melding the best aspects of human leadership within a decentralized structure? “Rage quitting” is a good start, but there are many more subtle human disagreements that happen in mature organizations, much less more chaotic early stage organizations. With ambitious DAO experiments proceeding before we know if these challenges have been sufficiently addressed, will there be a human nature related blow up that sets back progress? There’s only one way to find out.

What happens to the “other” contending blockchains?

This is related to the question about Ethereum. Exciting progress is being made by the teams at Cosmos and Polkadot on interoperability. They have really interesting hypotheses about what blockchain interoperability will enable. But what actual use cases will emerge that will make this functionality useful?

Is tBTC or wBTC sufficient to bring the SOV use case into more fully featured financial services on the DeFi/ETH stack? While Bitcoin is the only store of value use case for now, will Decred start gaining acceptance as another store of value?

Progress on and adoption of the “other” contending smart contract blockchains (NEAR, Algorand, etc) will determine how and when the interoperability use cases come to fruition. And do the benefits of standardization give Ethereum the leg up anyway?

Tezos is well conceived and quietly executing. Tezos has some structural advantages that make it a good fit for tokenized securities, in particular. Can Tezos be the first competing blockchain to put a dent in the DeFi stack being built exclusively on Ethereum?

How much progress will be made on crypto native business models

Crypto native business models remain an open question, beyond simple transaction fees. 2019 saw interesting value capture experiments and revised token models, including major token model upgrades from 0x, Kyber and Bancor and new multi-token models like Synthetix. Unisocks and FAME were interesting experiments in using bonding curves with NFTs.

How many of these models will pan out and how much will we learn? And which ones? More concrete understanding of how tokens capture value could unlock a bull run, but not one based on a bunch of silly and speculative or worthless crypto assets.

What DeFi UX breakthroughs will occur?

UX is certainly one of the biggest hurdles to mainstream adoption. Crypto and DeFi companies are focusing on product and UX and should make great strides in 2020. But UX is not just limited to the user interface and front end engineering techniques.

Smart contract innovation and meta-transactions will actually become the frontier for UX innovation in 2020. That pertains to both crypto-unique financial products but also creative ways to help facilitate users’ transition from fiat to crypto. Will there be a killer meta-transaction that will spur mainstream adoption?