In Search of the Holy Grail

Editor’s note: This article was originally published in July 2018 by BitGulu, one of the founding members of DeGate DAO, and translated into English with the permission of the author in 2021. BitGulu was an early investor in Bitcoin and the original co-translator of the Ethereum whitepaper into Chinese. In this much-quoted piece, he makes bold predictions about the future of Cryptocurrency, some of which have already come true. We thank Gulu for allowing us to republish this historic article in translation for the first time.

A similar article I wrote to this one is the October 2015 review, “Why You Should Invest in Blockchain”（https://medium.com/degate/why-invest-in-blockchain-bitgulu-519ae6d151fa). In October 2015, Bitcoin was worth $245; today, it is worth $7,880. BTC value has multiplied by 32 times. To gain a more in-depth understanding and better context of the following article, do read the 2015 article first.

Although I was part of the Crypto community since its genesis, I only started writing articles in recent years. Fun fact: this is because I adhere to the Chinese elders’ advice, namely “ keep silent when making a fortune”. Logically, sharing insights would not elevate my wealth, worse still, I might be in trouble if my readers lose their profits. Hence when Ethereum ICO came out during the summer of 2014, I did not publicly advocate and was an active silent participant. However, the future outlook was optimistic and I really wanted to encourage my close peers to join Ethereum ICO.

Personally, I adhere to the first attribute of blockchain: consensus and community. It is better to celebrate success with others rather than achieving results in isolation. Therefore, the purpose of this article is to A) rejuvenate your faith and encourage you to invest and grow your wealth this winter with peace of mind; and B) take a peek into the future market.

Speaking of winter, the data predicts that the harshest winter has yet to knock on our doors. The true rock bottom is usually not a room full of noise but absolute silence. For long-term investors, however, the low point is the chance to create the greatest impact.it. The critical thing is to identify areas of certainty in the future. The ability to capture one or two certainties is enough to make a good investment.

Here, we start with some conclusions:

1) The total market cap of crypto assets approaches or surpasses that of gold within 4 years, which currently stands at $8 trillion.

2) The total market capitalization of a particular smart contract platform overtakes the world’s highest listed company in terms of market capitalization within 4 years, which is currently Apple at $938.2 billion. That is, the total market value of the underlying tokens for a single smart contract platform exceeds US$1 trillion.

3) Blockchain-based mega-applications emerge within 8 years, with individual projects having a market value of over $1 trillion.

You may question why these predictions are in a cycle of 4 or 8 years. This is because the longest cycle from Bitcoin’s historical data is 48 months. From December 2013 to December 2017, the longest period between the two peaks was 4 years. The last four peaks occurred in June 2011 ($30), April 2013 ($266), December 2013 ($1,243), and December 2017 ($19,188), with an average cycle of 26 months. Seven months have passed since the last wave and there will be at least one more wave within 4 years from now, with a very high probability of two waves. There is also a high probability of 3–4 cycles within 8 years. Does it seem like a coincidence that Bitcoin production halves every 4 years, the Olympics and the World Cup are both held every 4 years, and that leap years also happen once every 4 years? If you adjust your time scale to 4 years instead of 4 days, you would be able to participate in the blockchain business with more ease. 4 years is just as long as a period for an undergraduate to complete his university degree.

Conclusion one

Let’s begin with the first conclusion: within 4 years, the total market capitalization of crypto assets approaches or exceeds that of gold, which currently stands at $8 trillion. From June 2011 to December 2017, a total of 78 months, the geometric mean of Bitcoin price growth per month was 8.64%. If we project the future based on historical trends, it would be roughly 53 times within the next 4 years. Today, the total market capitalization of Bitcoin is $140 billion, $140 billion * 53 = $7,420 billion, which is $7.42 trillion. Given that the market capitalization of Bitcoin in digital assets has been declining, from over 95% in 2011 to 52% today (including the market value of BCH), the market value of Bitcoin as a share of total crypto assets will continue to decline overtime. Assuming it would be 30% in 4 years, the estimated market value of total digital assets would be $7.42 trillion / 0.3 = $24.7 trillion. Do note that this figure may be overly optimistic, as it assumes that crypto assets will continue to grow exponentially over the next four years at the same rate as in the past.

Let’s dive into the $24.7 trillion figure in some other dimensions. Currently, the M2 in USD is USD 14.1 trillion （https://tradingeconomics.com/united-states/money-supply-m2). The total market capitalization of listed companies worldwide in 2017 was US$79.2 trillion (https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?view=chart)，and the total market capitalization of the global real estate market in 2016 was US$217 trillion (http://fortune.com/2016/01/26/rea-estate-global-economy/). Today, according to Coinbase, there are roughly 30 million people who have ever held crypto assets. With a global population of 7.63 billion and 4.16 billion internet users as of December 2017, (https://www.internetworldstats.com/stats.htm), crypto-asset penetration among internet users is and global population penetration is 0.7% and 0.4% respectively. Evidently, we are still in the stage of Innovation with a threshold of 2.5% at the Early Adopters stage. With a total crypto market cap of $287.1 billion today, according to coinmarketcap.com, we are 86 times further away from $24.7 trillion. 0.7% * 86 = 60.2%, i.e. which means that to reach $24.7 trillion, we should be at the Late Majority stage. These figures may be underestimated since the total market value of crypto assets today highlights great potential. Therefore, most of these predictions are the expectations of the future outlook. Logically, it is not possible to reach 50% of internet users in 4 years. Hence, the $24.7 trillion figure is too far fetched. Similarly, the projection of Bitcoin reaching a market capitalization of $7.42 trillion in 4 years is overly optimistic.

Discounting the $24.7 trillion figure by 70% off, which would be $7.4 trillion, is much closer to reality. This figure is about the current total market cap of gold. Let’s calculate again. $7.4 trillion / $287.1 billion = 25.8 times, 0.7% * 25.8 = 18.06%, which is the stage between the Early Adopters and the Early Majority. Considering that the current valuation includes a lot of future growth expectations, the Early Majority stage is a reasonable projection.

To summarise, conclusion one: the total market value of crypto assets will approach or exceed that of gold within 4 years. I would argue that this conclusion is 90% plausible.

Conclusion two

Moving on to conclusion two: the total market value of the underlying tokens for an individual smart contract platform will exceed $1 trillion in four years. This conclusion is generally stated.

Ethereum is currently the number one smart contract platform, accounting for 16.1% of total crypto assets. Assuming that the ratio remains constant, then according to conclusion one, $7.4 trillion * 16.1% = $1.1914 trillion, or roughly $1.2 trillion. Do note that I did not say that Ethereum will be worth $1.2 trillion in 4 years. I hope that this avoids any confusion.

A hyper-scale smart contract platform is one of the holy grails we are searching for. The most crucial issue with the current smart contract platforms is the ability to scale and increase capacity. Scale and capacity, translated into technical terms, are scalability and throughput. Huge capacity enables cost saving and leads to an explosion of applications. Looking at tech, the explosion of applications was possible because of the accessibility of 4G mobile traffic. This led to a boom in short-form video applications such as Douyin/TikTok. Prior to that, applications such as messenger, e-commerce, and ride-hailing were the top searches. This analogy relates to the current smart contract platforms. We are in the early stages of “text messenger”. Hence, smart contract platforms are only able to develop applications like email, pass-through transfers, and at best, CryptoKitties.

The current smart contract platforms mirror the early service hosting of the internet, where 20 websites were all set up on the same server, sharing resources such as computing, storage, bandwidth, etc. When the traffic of one website crashes, it would severely affect the provision of services of the other websites. The way Ethereum allocates resources is “the highest bidder wins”; while the way EOS approaches the problem is through the sale of ownership to guarantee a minimum share of use. When there are spare resources in the network that are not in use by others, they can be allocated to those in need.

There are only two ways of scaling: Scale-up and Scale-out. Scale-up refers to improving the performance of a single server and strengthening the CPU, memory, bandwidth, and other resources of a single server.

EOS sacrifices decentralization in exchange for scale-up. Of course, other fundamental improvements can also achieve scale-up, such as improving the efficiency of the smart contract processing layer. Web Assembly is a trend in the industry, supported by Ethereum, EOS, Dfinity, etc. Scale-out refers to increasing the number of servers. In blockchain terms, it refers to Sharding, side chain, and two-layer network (Plasma, Lightning/Thunder network, etc.). Scale-out is the ultimate solution for smart contract platforms to achieve hyper-scale applications. The reason being, scale-up has limited improvement space and is limited by hardware and communication efficiency, etc. Whereas, the scope for scale-out is much higher, as long as one is willing to invest more resources. The unlimited scalability that Ethereum 2.0 seeks and the 1 million per second throughput declared by EOS, are referring to the result of Scale-out implementation.

In the foreseeable future, the competition between smart contract platforms is primarily a competition for capacity and scale, which provides a direction of our search for the Holy Grail. While there are some other competitive metrics, capacity and scale are overwhelmingly important.

The smart contract platforms of the future will evolve similarly to the current setup of service hosting — virtualization and the cloud, such as VPS. In the future, with the maturity of smart contract platforms, communication between shards/side chains will be fast, reliable, and accessible. Subsequently, dApps will switch to a shard/side-chain alone, rather than the current shared computing, storage, and bandwidth resources with other dApps. This parallels our current VPS.

Note that the smart contract platform mentioned here includes decentralized storage, as the mainstream smart contract platforms of the future will provide decentralized storage services.

Kyle Samani argues that smart contract platforms do not have as strong a network effect as operating systems, or even that they have no network effect at all. This is because they do not target the final users, but rather are perceived as programming languages. (https://multicoin.capital/2017/08/28/smart-contract-network- effect-fallacy/). I tend to agree with this, but not as strongly as he does.

Since users are able to get ERC20 tokens online on exchanges easily now, and some of the other infrastructure is also shareable, this leads to network effects. Also, the efficiency and cost of communication between shards/side chains in the same system is higher than incross-chain communication across systems. If this hypothesis is true, then the collaboration between dApps in the same system would be easier. This scenario mirrors a city, and the bigger the city is, the easier it is to facilitate internal collaboration due to network effects; The network effect of a city has an index of 1.15. That is to say the output of a city is positively proportional to its population ^ 1.15, cf. Van Wegang’s Elite Daily Lesson #128.

Next, Kyle Samani agrees that some smart contract platforms will become common and useful, that the community will use their underlying tokens as a medium for a general store of value (Utility Hypothesis). Universal stores of value are Kyle’s idea of the holy grail. I completely agree with the idea that the demand for stores of value should be valued in the tens of trillions of dollars in today’s human society. However, considering that the network effect of value storage is not the strongest (https://multicoin.capital/2018/05/09/on-the-network-effects-of-stores-of-value/), the world will have multiple mediums of universal value storage in the future.

Based on the analysis in the above two paragraphs, together with the $1.2 trillion historical data extrapolation we came up with in the beginning of this article, I believe that “Conclusion two” is convincing: the total market value of the underlying tokens for individual smart contract platforms will exceed $1 trillion within four years. The credibility of this conclusion is 70%.

Conclusion three

Blockchain-based mega-applications emerge within 8 years, with the market capitalization of individual projects exceeding $1 trillion. This conclusion is a bit of a long shot and I am not too certain of it. The time frame of this prediction is far off and is based on the assumption of maturity of smart contract platform technology. Therefore, my confidence level for this conclusion is 50% for now.

Let’s examine the reasons. Firstly, blockchain and super dApps are going to be a global collaboration. Multinational companies like Apple ($938.2 billion) and Google ($856.4 billion) are now approaching $1 trillion in market capitalization.

Assuming the comparison of a public chain to a country, super dApps mirror multinational companies, hence are not limited to just one public chain. As mentioned earlier, smart contract platforms do not have super but only certain network effects. Therefore, the pattern of the future will not be fully decentralized, neither will one chain be in full control. Moreover, there must be a cross-chain communication mechanism between public chains. Hence, it is more certain that the super dApp will be based on multiple chains, rather than a single chain. Case in point: WeChat is no longer restricted to China.

Predicting the holy grail of dApps is almost impossible because the timeframe is beyond our sight. An analogy would be trying to predict the advent of apps like Didi Taxi and WeChat in 1997. The potential holy grail for dApps should be apps that solve universal fundamental problems that humanity faces.

With my imagination, I see possibilities for the holy grail of dApp:

1) An algorithm-based stable coin for a decentralized global central bank.

2) Bitcoin itself.

3) Cryptography-based identity systems, such as Self-sovereign Identity, and the derivation Web-of-Trust.

A brief overview for this rationale.

Let’s examine the first point with a simple analogy — the US dollar is by far the most valuable product, with the market valuing it at $14.1 trillion (M2 of the dollar). If money is a product, the product manager of the dollar is the Federal Reserve. The dollar satisfies the need for monetary stability; in addition, with well-established infrastructure and global payment system, it is highly accessible. However, the dollar has disadvantages: A) it is a dominant currency, and “dominance” means oppression and injustice. When there is oppression, there is resistance; B) its global payment system is outdated in contrast to blockchain technology. Although the infrastructure is scalable, based on historical experience, it is often not possible to quickly upgrade successfully. (refer to Kodak)

In the abstract, a central bank signifies a set of algorithms, and each algorithm has differing goals. For example, the Federal Reserve has three overarching goals: price stability and control of inflation at 2%; maintaining sustainable employment; and moderate long-term interest rates. An algorithm-based decentralized global central bank would certainly have different objectives to those of the Fed. Blockchain-based algorithmic stable coin projects include MakerDao, Phi, Basecoin, etc. The current projects are attributed towards a stable coin rather than a central bank. To exceed $1 trillion, more central bank attributes would be needed. The industry is making useful explorations in this regard but is expected to have a long way to go.

Regarding the second point, there is an argument that if Bitcoin’s market cap becomes large enough, its value will become stable enough that it can act directly as a currency for pricing, payments, and as a store of value. As mentioned earlier, money is a product. And Bitcoin itself is an algorithmic central bank with a simple algorithm: the rate of issuance is halved every four years, and the maximum quantity is constant at 21 million. Only time will tell if Bitcoin’s first mover advantage, combined with this simple central-bank algorithm, would be good enough to make it the holy grail of dApp.

Regarding the third point, a crypto identity system. I believe it will be the entry point to the future of Web 3.0, and a necessity for everyone. Moving on, the penetration of crypto assets among internet users and the popularity of blockchain applications will largely depend on the maturity of the crypto identity system. In this regard, the first edition of the Bihu white paper sparked discussion. In the future, there will be an updated white paper for further discussion. Thus, I am not going to expand on it here due to the length of this article.

In addition, a Web of Trust based on the cryptographic identity system can solve the issue of fake news and information that seems to be unsolvable at present. Since both voice and video can be synthesized, the information needs to be cross-verified. Indeed, cross-verification based on a Web of Trust is the most reliable route. Web of Trust would be of great significance as in time to come, false information crafted by artificial intelligence will escalate.

In summary

1) The total market capitalization of crypto assets approaches or exceeds that of gold, which currently stands at US$8 trillion, within 4 years. It has a high (90%) confidence level.

2) The total market cap of an individual smart contract platform exceeds $1 trillion within 4 years. It has a moderately high (70%) confidence level.

3) Blockchain-based mega-applications emerge within 8 years, with the market capitalization of a single project exceeding US$1 trillion. It has a moderate (50%) confidence level.

Since it’s the Holy Grail, it should be priceless. The Holy Grail we’re looking for is over $1 trillion: mega smart contract platforms, and global universal dApp applications. On the surface, $1 trillion may seem far-fetched, but if you conduct substantial analysis, it’s not. To end with an industry cliché: Don’t allow poverty to limit your imagination.

I hope this article has given you the confidence to overcome the coming harsh winter with strength.