A lot of people have already chimed in with their crypto recap for 2019 or prediction for 2020. I wanted to provide some commentary on one theme that most crypto funds and investors are keeping an eye on this year. Will 2020 be the year of Proof of Stake blockchain launches? How will these projects fare?
The following table shows a select number of projects that are planning to either transition to Proof of Stake or launch their mainnets. This is by no means the exhaustive list of projects, especially considering the dozens of projects building on Cosmos SDK or Substrate (Polkadot).
A good portion of projects in the pipeline are conducting incentivized testnets at the moment. The success of Cosmos’ Game of Stakes (GoS) jump started a new trend that pushed most Proof of Stake projects to slate something similar into their roadmaps. Incentivized testnets provide a great testbed for stress-testing the software and also bootstrapping the network by on-boarding prospective validators early on. Here are some of the incentivized testnets that have been announced or are ongoing.
Since incentivized testnets are conducted near the very last stages of protocol development, they serve as good guidance to narrow down the time frame of mainnet launches. Unless there are any critical bugs discovered during the incentivized testnets, it is reasonable to expect a mainnet launch in a matter of weeks after their conclusion. So, the projects that have begun incentivized testnets are serious about launching in 2020.
Flourishing staking ecosystem
Community interest in staking has spiked significantly in the past year. Binance and Coinbase, which both have the largest crypto customer base and serve as a good proxy of community sentiment, have announced [I, II] staking support on their exchange wallets. There is debate over the security implications of exchanges participating in staking, but it is undeniable that they have made staking accessible for everyone. Staking support on exchanges, wallets and custodians will become a necessary feature and newly launching Proof of Stake blockchains can take full advantage of these on-ramps.
A new class of entities rose in the past year: professional validators. The basic responsibility of these teams is to run highly available and secure infrastructure. However, their role has expanded from simply running servers to making code contributions, steering governance discussions, advising on best practices, providing market research, growing community, helping educate newcomers and the list goes on. Validators have become essential to the health and growth of Proof of Stake blockchains. Professional validators that have survived through 2019 are now well seasoned veterans and have aggregated a decent amount of insight and data points that will help provide better feedback and guidance to new protocols.
There are also interesting DeFi products being built around staking. The most prominent theme has been around providing liquidity to assets locked in staking. Different approaches such as delegation vouchers, bonded coins, and tokenization of the validator business have been introduced in the past year. We will see many of these products coming to production in 2020. Since most of these are proposed in a chain-agnostic approach, they can be applied to any upcoming Proof of Stake blockchains.
However, despite the promising signs of launches and flourishing staking ecosystem, there are extreme challenges ahead, mostly stemming from the fact that there will be an oversupply of base layer protocols in 2020. I highlight a few major challenges below.
- Projects will have a hard time attracting builders or product teams. Having superior tech in of its own is no longer enough in the current markets. This is evident by how the “Ethereum killer” narrative has substantially died off in the past year. It seems like the better strategy would be to try to make it as easy as possible to absorb developers who are already building on decentralized protocols, such as Ethereum or EOS. Even then, proper grant/funding and dev community support will need to be fully available in order to incentivize a constant stream of new builders and product teams.
- Attracting multiple professional validators will be difficult. Professional validators are being spread thinner and thinner. The validator business is not as lucrative as the mining business back in the day. Professional validators without deep treasury or crypto fund partners will not aggressively expand their operations unless there is a bull market such that the commissions collected add up to a decent revenue stream (even then, these margins will be short lived). We will see more validators simply choose not to participate in a project in the face of weak conviction or weak economic incentives.
- Market liquidity will be dry. Given the sheer number of projects that are launching, there is not nearly enough market demand to absorb the entire supply of tokens that will be unlocked. Facing net selling pressure, a sustained price decrease will cause a downward spiral as retail community morale, project team treasury, developer interest, and validator revenues drop in tandem.
I look forward to seeing how Proof of Stake blockchain teams will strategically approach these challenges. The successful projects’ strategies will eventually serve as good guidance for all other teams. This is also a light wake up call to any projects that have yet to formulate a game plan on how to come out strong from the “Protocol Wars”.
I expect a lot of hype around Proof of Stake project launches. However, 2020 will be extremely challenging for these teams as they try to attract more attention to their blockchain. I believe the vast majority of projects gearing for mainnet will choose not to launch in the first half of 2020. More projects will postpone to late 2020 to fix technical issues, time the launch with a sustained bull market, or properly address some of the challenges I have outlined above.
Please reach out to us if you are curious to learn more or if you have any questions. Also, if you have strong interest in these upcoming Proof of Stake protocols, I encourage you to talk with validators, one of the most undervalued groups in terms of perspective and insight on upcoming blockchain projects.
Special thanks to Ric Garcia and Red Luo for helping gather information for this article.