Questions For Crypto In The 2020s
One of the many things that makes cryptoassets so fascinating is the level of uncertainty and the large number of unanswered questions surrounding them.
A lot of people have put forward predictions of what the future might look like but their ideas often conflict with the equally compelling thoughts of others and ultimately no one knows how any of these things are going to evolve. All we can do is watch and wait.
In the coming years and decades, we’re slowly going to discover the answers to these big crypto-questions and we’ll finally be able to see how everyone’s thoughts and predictions actually map onto reality.
So, here are some of the biggest questions that I’m hoping we start to see answered in the 2020s.
Will Proof of Stake Work?
It seems likely that the 2020s will be another decade of experimentation, building, failing, and learning for most cryptoassets, with many projects still in an embryonic phase and a huge number of important design questions still unanswered. One of those design questions — arguably the biggest right now — is ‘will Proof of Stake work?’, or at least ‘under what conditions is Proof of Stake viable?’
They may seem like silly questions, given there are already a number of PoS system operating in the wild, but it’s really too early to say that any of these are or will be successful given they’ve not been running for that long and none of them have yet provided a particularly large incentive to break them.
However, just as the first decade of cryptoasset development has shown us when and where Proof of Work can be successful, the next ten years will hopefully inform us which flavours of Proof of Stake are workable and under which conditions they perform best. We’re going to find out if the economic incentives of staking can be undermined by larger rewards that might be available through lending platforms or DeFi products. We’re going to find out if slashing is an absolute requirement for Proof of Stake, or if new interpretations without it — such as Cardano’s Ouroboros — can be successful. And, we’re probably going to find out how quickly things unravel when someone creates a weird new token representing the coins you’ve locked up to stake.
It’s certainly going to be a fascinating period of experimentation across a range of projects, and I really do hope we see a lot of successful implementations emerge. But, before we can really become comfortable with any of them, we need to see networks of substantial value operate flawlessly for multiple years. So, if Ethereum (or something else of similar size) can get PoS up and running in the next couple of years and then manages to make it through the whole decade without any significant troubles, we can start to feel confident that there really is another, more environmentally friendly, way forward.
Will We See Blockchain Wars?
Something that could really test the reliability of a network’s Proof of Stake mechanism is a focused and well-funded attack launched by a competitor. Right now that seems an unlikely scenario but, with billions of dollars potentially up for grabs in a winner-takes-most game, the gloves may well come off in the next few years.
People have talked about ‘Protocol Wars’ or ‘Blockchain Wars’ for a few years now, but in most cases I think they really mean to say ‘competition’ instead of ‘war’. Generally, when talking about this, people are thinking about the race to deploy first and attract developers to begin building crucial network effects — things that will be interesting to watch, but won’t be much more dramatic than any other business or sporting competition. It’s entirely possible, however, that tensions will boil over and evolve into something much more brutal and intense, something that will make the word ‘war’ much more appropriate.
With a handful of ICO-era projects still hanging on and a new wave of VC-backed chains in their early stages, the next few years may well be the zenith of relatively well-funded but largely undifferentiated smart contract platforms. With many of these attempts likely to die off, various members from each of their communities could try to undermine the progress and developments of competitors in an effort to protect their own interests.
Just as you can use services like NiceHash to rent computing power and attack Proof of Work networks, coin-lending services could be weaponised to launch Proof of Stake attacks against vulnerable projects. Alternatively, attackers could look to corrupt on-chain voting either by borrowing the coins necessary to swing a vote — potentially using effectively free flash loans — or, more interestingly, using bribes or even prediction markets to create perverse incentives for voters. These are just a couple of fairly obvious scenarios that could play out, and I’m sure others will come up with much more inventive methods of attack.
To a large extent I hope this doesn’t happen; I think the overall industry would benefit much more greatly if everyone worked collaboratively. But, if the blockchain wars do take place, at least we’ll know the surviving projects are truly robust enough to handle any trouble that can be thrown at them.
Missionaries vs Mercenaries, or: Will War Chests Matter?
However the battle between competing projects ultimately plays out, it seems likely that there’s going to be a financial element to it. The question, though, is how exactly will money actually impact and affect things?
The ‘obvious’ answer is that the most well-funded attempts will have a better chance of success. Not only will they have a longer runway than less well-funded projects, but they can afford to hire more high-quality developers, they can throw more money at marketing, and they can offer greater incentives kickstart a community and benefit from the compounding network effects that come with it.
The thing is, none of that has played out in reality — at least, not yet. And, while there’s a bunch of possible reasons for wealth not being a differentiator so far, it’s entirely possible that it just isn’t and won’t ever be a differentiator for cryptoassets. Primarily, that’s because the thing that seems to matter most is the development of a large, organic, and genuinely passionate group of users and developers: an army of zealots that stick with a project through thick and thin, who evangelise, use, and build things faster, better, and more creatively than any sized group of hired muscle ever could. Most attempts to buy that kind of community and dedication — by using airdrops, for example — have failed, suggesting the reserves held by the central team mean relatively little.
However, there are ways that war chests could make a big difference in the years to come. With a boatload of cash in hand, struggling war chest projects could set out to buy and integrate less well-off but buzzier efforts, using remaining funds to support the existing community rather than squander it trying to build their own. These buyouts and mergers could happen in a few different ways, from fairly traditional and boring cash offers made to core teams to much more interesting approaches like buying a large portion of the circulating supply to become a kind of activist investor that drives the community towards a merger. I’m intrigued to see both if this sort of thing happens, and how it’ll be carried out and perceived by the wider crypto space.
The obvious project to watch for this sort of this is Tron, who’ve already shown their willingness to get their chequebook out whenever an opportunity arises. EOS is another likely candidate, given they have billions of dollars on hand and seem to be floundering at the moment — perhaps a well-thought-out acquisition could help them turn things around.
What Is The Future of Fundraising?
Most of the war chest projects accumulated their wealth using Initial Coin Offerings, which later mutated into similar (but arguably worse) Initial Exchange Offerings. While both of these approaches became grotesque and exploitative pretty quickly — and thankfully they’re both almost dead today — there were some good thing about them, things that could have a lasting impact on the way investing and fundraising evolves in the years to come.
The popularity of ICOs could be taken as a sign of the general public’s desire to be involved in risky but potentially lucrative early-stage investing, the sort of thing they currently can’t access because of accredited investor rules, indicating these laws are outdated and in need of change. This certainly seems to be the conclusion the SEC has come to, with the agency proposing amendments to those rules last year. It’ll be interesting to see what other changes are made in this area in the coming decade.
The more interesting question, to me at least, is how will crypto-projects move forwards? ICOs allowed all sorts of things to raise money, including downright foolish ideas and scams, but they also enabled a number of legitimate projects. In fact, some of the most important and exciting projects in development today wouldn’t be around — or at least wouldn’t be anywhere near as far along — without a token sale to raise money.
But, there’s got to be better, less risky, less exploitative ways to support the development of both base layer protocols and the applications built on top of them. And, ideally, these funding methods should eliminate the need for proprietary tokens that have to be jammed into whatever is being built and should even allow important applications to sustain themselves while capturing little-to-no value.
One approach that saw significant growth in 2019 was Gitcoin, an Ethereum-based platform built to incentivise and support open source development. While they’ve created a suite of products including bounty programs, hackathons, and non-fungible tokens (NFTs), they’re best known for their grants program, which uses a concept called quadratic funding to allocate money from a $200,000 pool to a range of projects. These grants have already seen $1.2m distributed to efforts across the Ethereum ecosystem.
Another option could be to leverage the products and services created as part of the DeFi movement to fund public goods, just as the recently announced rTrees is doing. The idea here would be to lock stablecoins in interest-generating smart contracts and, while everyone maintains ownership and access to the underlying stablecoins at all times, all of the interest would be siphoned off and used to fund a given project. If necessary this idea could be combined with a Lockdrop, which increasingly rewards users with new tokens the longer they keep their money locked up.
Alternatively, it might be better to integrate developer funding as a central aspect of the underlying blockchains. A fairly clunky and primitive version of this idea already exists in the form of block reward funding, but things like Near Protocol might be doing it better by simply redirecting a sliver of given transaction’s fees back to the developers of the smart contracts called in it.
In the coming years, these kinds of novel funding approaches will mature and be joined by even newer, more innovative ideas that will compete with pre-existing funding mechanisms, ultimately moving us closer to the best business models for decentralised, open-source projects.
Will The Industry Shape Up?
A transition away from ICOs in favour of better, more sustainable, and ultimately more wholesome funding mechanisms is just one way that cryptoassets could improve and mature in the years to come, but we all know that there are many other aspects of this industry that could do with some improvements.
Exchanges are an obvious one. For years people have warned of all kinds of unscrupulous and irresponsible behaviours from cryptoasset exchanges but, for the most part, these concerns have been lost in the noise or fallen on deaf ears. Occasionally, though, something breaks through and draws everyone’s attention to some of these problems. Last year, for example, the Bitwise Report focused minds on the issues of fake trading volume, while the Quadriga fiasco served as a reminder of a whole host of exchange-related problems. Still, though, numerous exchanges report fake volumes, numerous exchanges have questionable listing policies, numerous exchanges have poor security practices, or refuse to provide proof of reserves, or allow people to leverage their trades to ludicrous levels without warning them of the dangers.
Another area in desperate need of improvement are coin ranking sites like CoinMarketCap, sites that proliferate and support the lies and poor practices of exchanges, taking trading volumes at face value so even the most obscure trading venues can rank higher than Binance or Coinbase. In fact, they even incentivise the falsification of volume data through poorly thought out exchange and asset listing policies. Worse, they continually shepherd users towards any dubious and sketchy exchange that offers them a referral link, and further their revenues by hosting the adverts of anyone who comes asking — something that caused a lot of controversy back in the days of Bitconnect. Thankfully progress is already here in the form of vastly superior alternatives like Nomics and Messari’s OnChainFX and hopefully, as the years pass by, subpar websites like CoinMarketCap will shape up or be replaced by them.
Messari also offers a disclosures registry that’s intended to be the central repository for detailed information and disclosures about every cryptoasset, something that could help reduce the fraud, exploitation, and other unethical behaviours that have tarnished this industry’s reputation. I really hope this, or something just like it, sees decent uptake in the years to come, and I think the level of success it’s able to achieve could be viewed as a kind of barometer for the moral health of the industry.
There are numerous other things I could talk about here, such as content creators failing to disclose sponsorships or ushering users towards incredibly risky leveraged trading products without a word of warning, project teams realising they’re not going to meet their goals and simply walking away with investors’ money instead of redistributing it as DigixDAO did, or the fact that no-one ever wants to take responsibility or accept criticism, dismissing anything remotely negative as ‘baseless FUD’ instead of actually fixing anything. If all of these things are allowed to persist, if we don’t see any efforts to improve on them, then I’m not sure cryptoassets can ever truly be considered ‘successful’, no matter how many people start using them.
Will The Crackdown Come?
It wouldn’t be unfair to say that some of the crypto OGs can sound paranoid at times, always on edge about some upcoming government-level attack on Bitcoin. The thing is, though, they’re probably right to be worried — at least a bit. After all, we’ve already seen several countries unsuccessfully attempt to ban Bitcoin, so it’s not much of a stretch to think their efforts could be ramped up as Bitcoin becomes a greater menace in the years to come.
Of course, it’s also true to say that many countries haven’t taken an anti-Bitcoin stance. Perhaps they’ve introduced some poorly thought out regulation, and they probably have a harmful attitude towards privacy and want to force KYC on everyone, but at least they’re happy for people to access and use Bitcoin easily. So, maybe we’re all good. Maybe we don’t need to worry.
I don’t think so, not yet at least. Bitcoin has benefited from its complexity and relatively small scale so far, but it seems likely that the criticism and scrutiny will intensify as it becomes better known and understood. Add a catalyst or two into that situation and new regulations outlawing or heavily restricting the usage of Bitcoin becomes a realistic possibility. But what could those catalysts be?
An obvious possibility is an uptick in criminal behaviour and terrorist funding. It’s almost certain that dollars remain the dominant kind of criminal money for the foreseeable future, but that fact probably won’t matter much if the narrative becomes ‘Bitcoin just enabled a terror attack’.
Another candidate is Bitcoin’s extreme energy usage, which obviously looks terrible to the masses that are finally taking climate change seriously. Some Bitcoiners have tried to get ahead of the criticism by claiming that mining is somehow beneficial for the environment and that it incentivises renewables, but these arguments are both deeply flawed and unlikely to win people over when the counterargument is ‘Bitcoin uses more energy than Belgium’. Bitcoiners will have to hope that the focus of the climate movement is on energy generation instead of energy usage, but even then a backlash against Bitcoin would be understandable.
An alternative, more insidious, and I think a more likely possibility is that a full-on regulatory crackdown never comes because it won’t need to. Instead, a steady trickle of regulations aimed at custodians and exchanges will effectively smother all of Bitcoin’s ‘undesirable’ and ‘dangerous’ features, not exactly killing it but transforming it into just another payment network. Bitcoin would remain legal and usable for the majority of people, and it’d probably still satisfy the ‘number go up’ crowd, but it would no longer provide any benefit to the people who actually need it.
Open Finance: Money Lego or Money Jenga?
The Open Finance (or DeFi) movement comes into the 2020s with a lot of momentum behind it; more than $1 billion of value is now locked in DeFi products, a psychologically significant but slightly misleading milestone, and it’s undeniably among the most interesting segments of this entire industry. But there are big questions around it. Can it sustain its growth and momentum? Can it find purpose beyond assisting speculation? Will there be a DAO moment, where a catastrophic failure causes the entire thing to implode? And, if so, how long will it take for people to starting picking up the pieces and trying again?
It’s quite possible that this industry’s first breakout success is a DeFi app, with something like PoolTogther standing as the most likely option right now. (High-interest savings accounts are another option, but it’s unclear how sustainable they will be, or if they can actually compete against centralised lending services like BlockFi that can offer a similar interest rate alongside a better user experience and less obvious danger).
But it’s also possible, perhaps even more likely, that DeFi will collapse like a house of cards. One of the defining features of Open Finance is composability, with DeFi supporters describing the assortment of component apps as ‘money legos’ that can be connected and combined in any way by anyone. That opens the door to an unprecedented level of innovation and experimentation, but it also creates massive systemic risk. A bug or attack on one component, even a relatively small one, could have cascading consequences resulting in millions of dollars worth of losses.
However, I’m hopeful that solutions can be found to mitigate the risk. Improvements in key technologies like oracles will help, as will the emergence of various standards and best practices for testing, implementing, and interconnecting different components. These things will naturally happen with time, but there are other, larger changes could be made in the meantime.
Reducing the total reliance on Dai by diversifying DeFi across multiple decentralised stablecoins would be a good start. The recent announcement of MetaCoin, a governance-minimising stablecoin created to eliminate many of MakerDAO’s major flaws, is certainly a step in the right direction. Add a couple more alternatives, especially ones using entirely different designs (like Ampleforth), and the likelihood of a total system collapse should fall considerably.
At the same time, trust-minimised insurance products could be created to give DeFi users greater confidence in their money’s safety. There are already a few projects exploring this opportunity, such as Nexus Mutual with their DAO-issued insurance and Opyn who have created an options-based insurance product, and I’m sure other alternatives will come to market in the coming years. While these are unlikely to replicate the assurance provided by FDIC or FSCS backing in the traditional world, they could do a lot to make DeFi feel ‘safer’ for everyday people. And, as a great side effect, the insurers would be heavily incentivised to perform rigorous security audits and tests on any smart contract they chose to insure, adding another layer of protection to the ecosystem.
Whether these kinds of changes would stabilise Open Finance and help it take off, or just act as paper over some very deep cracks remains to be seen. But, with the recent bZx attacks potentially indicating open season on DeFi protocols, there may not be much time to find out.
Will Anything Take Off?
If you’re anything like me and you spend much of your time trying to keep up with the latest events and developments in this industry, it’s easy to think that cryptoassets are far more popular, important, and influential than they actually are. Even Bitcoin, by far the most established and best-recognised cryptoasset, exists at the very fringe of pop culture, and most people probably haven’t even thought about it since some family member kept trying to make them buy it in 2017. But will this situation begin to change in the 2020s? Will there be anything that finds some traction and breaks into the mainstream?
Potentially. Bitcoin is the obvious place to look for the first success, not only because it’s already quite established and in the process of financialisation, but because the global environment is rapidly developing a set of characteristics that makes Bitcoin incredibly relevant. This decade is likely to bring most people the triple whammy of negative interest rates, an economic downturn, and centrally issued digital currencies that could each, in their own way, push people in Bitcoin’s direction.
The Lightning Network could make Bitcoin doubly relevant, potentially allowing Bitcoin to fulfil its role as the ‘internet’s native currency’ and enabling websites to begin replacing subscriptions and adverts with micropayments — though it’s unclear if everyday people would actually prefer that setup. At the same time, Sats-back services like Fold* and Lolli* could help onboard users. I don’t think they’ll necessarily create new Bitcoiners, but if Bitcoin is already becoming more mainstream they’ll provide an additional, super-convenient way for people to accumulate and build a better understanding of Bitcoins.
And what about altcoins? Will something other than Bitcoin finally find an audience and a definitive purpose in the 2020s? Open Finance is a possibility (as we’ve already discussed), but so are NFTs and crypto-gaming — areas that saw decent growth in 2019 and connect to a very forward-thinking industry. Perhaps gambling can be thrown in with them as well, but this isn’t an area I particularly pay attention to or know anything about so I can’t make any strong comments.
Another interesting possibility, one that has generated headlines recently, is celebrity- and self-tokenisation, particularly in the form of Income Sharing Agreements (ISAs) that could provide people with new ways to monetise their time and skills. It’s early days for this, but it’s a good idea and the fact that there’s already one fairly high profile example in the wild is encouraging.
For the most part, though, I think we’ll see another decade of building. Base layer infrastructure is still being planned and created, and it’ll be difficult for anything to gain traction until things stabilise there. Many of the lower- and middle-layer components of what could one day be the Web3 stack (things like Orchid, Golem, Livepeer, and Sia) are still in an embryonic phase, requiring a lot of refinement before they can be integrated into larger, easier to use apps so normal people can benefit from them. Even things that have shown signs of growth and minor usage in the last couple of years, like DAOs, are highly experimental and nowhere near ready for primetime. I don’t expect to see much adoption until well into the next decade, which could be disheartening for some — especially as many of the efforts that do exist now may well fail or fold due to lack of funds, ultimately acting as precursors to much more successful iterations in the future.
Perhaps that’s an overly pessimistic outlook. After all, things can change very rapidly, especially in areas of free and open innovation, and a decade is a long time. But, we will find out, and I would love to be proved wrong about the pace of these developments.
How Will CBDCs & Corporate Coins Change Things?
Bitcoin can be held responsible for all sorts of things, but arguably its most significant impact has been both promoting conversations about and changing the way people think about money. By ‘money’, I mean the very concept of it; Bitcoin has made people reconsider what money is and what it can be, what attributes a good money should have, and who (if anyone) should control it.
Thanks to Bitcoin, the Overton window for money has expanded to the point where companies (like Facebook) can consider launching their own currencies, meaning we’re likely to see a trifurcation of money in the coming years.
First, we have semi-traditional government-issued currencies. I say semi-traditional as many countries may soon follow Sweden and China in launching Central Bank Digital Currencies or CBDCs, essentially natively digital versions of their existing currency. Then, there will be privately issued Corporate Currencies like Libra. These may be pegged to one or many existing currencies, as Libra intends to do, or they could be free-floating. And, finally, there will be essentially publicly-owned cryptocurrencies, like Bitcoin, which are issued and controlled by absolutely nobody, and whose values float freely against all other currencies.
Out of all three, only one (cryptocurrencies) will provide a truly cash-like experience, free from censorship, confiscation, debasement, and surveillance. At the same time, the alternative kinds of money will likely be far easier to use from the off, they’ll be more scalable, and they’ll have name recognition that might make them more trustable. In short, both CBDCs and Corporate Coins could provide some real competition for Bitcoin and other cryptocurrencies, delivering what’s necessary to attract the masses but not the all-important features that make Bitcoin so special, a combination that could one day put a lot of people in a dangerous situation.
Alternatively, things like Libra could be a stepping stone into Bitcoin, getting people acquainted with the idea of holding and using digital currencies. Then, assuming Bitcoin continues to be an attractive investment going forwards, there will be far fewer factors or concerns holding people back from buying in. Eventually, some might argue, Bitcoin would steal market share back from other digital currencies simply because it’ll hold value better than anything else being centrally controlled and manipulated. Perhaps that’s a stretch, but there is a fairly compelling argument in there somewhere.
Really, though, it’s unclear what sort of impact CBDCs and Corporate Coins will have on Bitcoin, or on the world at large. It’s unclear if they’ll see decent uptake, or what sort of form they’ll arrive in, or what stipulations regulators will force onto privately issued money. It’s unclear, even, if we’ll see many centrally-issued digital currencies emerge this decade, or if the glacial pace of government developments and swathes of red tape imposed on private companies will hold back much of the innovation.
Whatever happens, it’s clear that the starting gun has already been fired in this race to define the future of money and that, while it’s easy to see these things going in a rather dystopian direction, it will be fascinating to watch it all unfold.
Summary
There’s obviously a vast number of other questions I could have included on this list, but if I allowed myself to keep going we’d probably be into the 2030s before I finally stopped.
One thing that is certain, though, is that the 2020s should be another massively exciting decade for cryptoassets, one that likely produces almost as many new questions as it answers.
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Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects.
I may own some of the cryptoassets mentioned.
