The Digital Decade Signs Off with a Glimpse of the Future
The lesson of history is to look forward you also need to look back. Merely looking at 2019 would miss the fact that it’s the end of a decade. It’s been an extraordinary one, which we can call the Digital Decade, as we have shifted to a digital networked society and economy. We all now communicate, shop and interact digitally. The other evidence of this change is provided by the clear shift in market capitalisation of the top ten global corporates. Fossil fuel companies like Shell and BP have been replaced by digital and software companies like Apple and Microsoft with companies like Facebook, Amazon, Netflix and Google (the so called ‘FANGs’) on a relentless drive.
The decade also started with the explosion of Bitcoin into the world. Bitcoin has subsequently spawned thousands of decentralised ideas and dreams bringing to life exciting new economic models.
Bitcoin solved the age old problem of digital trust using the concept of person to person file sharing and torrenting, like Napster from the late 1990s, and then adding an unhackable consensus mechanism to transactions. Now we are looking forward to the next decade of new services and dreams that will go mainstream using that core principle. According to Coinshares, ‘early internet commercialisation was driven by eyeballs, early blockchain is driven by transactions’. We now have privacy focused currencies and messaging technology, smart contract services, decentralised financial services and many more to come over the next decade.
The predictions for 2019 were that — regulation would tighten, institutions would join the party, and it would be the year of the stablecoin. Regulation to help stop scams, institutions to bring volume and stablecoins to stop volatility in many decentralised services. These all played out to some extent. We did get much more clarity around regulation from the UK’s FCA and USA’s SEC. The FCA released a whitepaper in the late spring and it was quite enthusiastic for crypto, apart from derivatives which it saw as the devil. The SEC was notable in some of the cases it brought against ICOs like Paragon. But we are still waiting for the volume institutions will bring.
The biggest stablecoin news was Facebook’s Libra which scared the hell out of everyone from governments to normal hodlers. However, its seems destined to have a multi year wait, if it ever happens. While China’s release of its PBOC coin in 2020 will kick start a race for digital national currencies, we will see this make dramatic moves in 2020. But will consensus based currencies gain even more value? The Bank of England calculates that running a national digital currency can add 2% on your GDP. So just releasing a digital euro, dollar, yuan or pound can have a positive boost to your local economy.
Su Zhu, the CEO of Three Arrows Capital, had an interesting theory on ‘fedcoins’, as they are being called, which is that national digital currencies being released may see a split between them and consensus based coins like Bitcoin or Ether, which are not controlled but a single company or government. Which one are you more likely to trust?
Being an investor in the space, the big switch-up in 2019 was the dwindling of the ICO return model of 2017–18. Formed in March 2016, KR1 were pioneers of the ICO model, sorting the wheat from the chaff. We could recycle profits quickly from one project after holding for a few months with a double-digit return. 2019 has been a tougher year to be an investor. Amazing returns are still there, you just have to be canny and patient over a longer cycle. As Pantera VC summarised nicely in their December newsletter: “Bitcoin and blockchain are like early-stage venture — but with a real-time price feed (…) view it like venture, a five-to ten-year investment.
We have however seen the overall quality of projects pick up. There are less projects around with better technical teams and great innovative technology. We have entered its late phase of Layer 1, the ‘road and rails’ infrastructure of blockchain, with notable mentions to Cosmos and Polkadots and their technology frameworks to support an interoperable network of multiple chains. I doubt if many more than around ten or so major infrastructure blockchain projects will grow any meaningful developer communities. The fight for developer hearts and minds will be dominant in 2020, an example of this battle was Algorand’s recent hackathon which only had one entry.
Large capitalized cryptocurrencies had a strong year and have been one of the greatest investment success stories of the last decade. The crypto markets are a paradox as the price action seem to act independently of what’s actually going on in them. But Bitcoin is still the bellwether. In price action Bitcoin lifted from a miserly low in January 2019 to a semi lift-off hitting circa $12,000 before falling back down to $7,260 at the end of this year. The big debate around Bitcoin continues. Is it a purely digital store of value like gold or does it want to be a main-stream day-to-day used currency? If you look at the market and crypto discussions, the community is split on this. Surely, if the BTC price continues to go up then no one will want to spend their Bitcoin? Following this logic Bitcoin seems to be slowly taking a side. Bitcoin could become an institutional asset reserve and private Bitcoin transactions become a rarity. This was prophesized by one of Bitcoin’s earliest-ever advocate (and maybe Satoshi?) Hal Finney.
KR1 has been an early advocate of Ethereum, but there’s no escaping 2019 was for disappointing the community due to the delays in scaling. If you take the start of the year to the end of this year Ethereum price hasn’t moved, starting off at $135 in January it peaked at $354 in June and is hovering around $132 now in December 31st. Here are the numbers on Ethereum in 2019;
For the development of Ethereum it’s been a difficult year but the end of this year saw a significant milestone for Ethereum with the release of the Istanbul hard-fork, which brought more efficiencies and throughput. In October Joe Lubin, Ethereum’s unofficial CEO, set a target at Ethereum’s annual conference in Osaka Japan of trying to inspire 1 million developers to join in. There are currently 200,000 active developers on the platform, so five times this amount doesn’t seem that outrageous. During 2020 we should see applications on Ethereum that are seeing one or two orders of magnitude more transactions per second than current performance, killing the scaling debate once and for all. The big Ethereum 2.0 upgrade goes live next year and many are divided to its potential success, as it may require the current DeFi interoperability of services to tweak a few things and adjust accordingly to ensure compatibility. However, don’t forget some of those Ethereum detractors have other agendas. Ethereum is still the one to beat and watch out for, as it too could have a huge peak in interest and subsequent spikes in price next year.
Staking is a new cryptoeconomic model and technical method to secure a crypto network. It’s different to lending. If 2020 is going to be the Year of Staking then 2019 was its birth in March with Cosmos launching its staking network, the first sophisticated Proof-of-Stake network to launch fully mainnet since it was were theorized a few years back with Peercoin.
Cosmos has one of the best teams in crypto and they absolutely smashed the launch starting with it’s incentivized Game of Steaks testnet. We love staking as a software architecture choice (especially versus wasteful and energy intensive Proof-of-Work mining) and also as a reward mechanism for long-term aligned hodlers, it opens up a lot of additional design space with regards to token distributions and mechanisms like we’ve seen with the Lock-drop earlier this year. Pioneered by Commonwealth Labs the Lock-drop was perhaps the best innovation of decentralised value participation since the ICO. We posted about it in October. Let’s hope Staking in general and the Lockdrop holds out for any security dramas and keeps growing!
DeFi was not on the list for the prophecy of 2019. Which makes you think what other crypto area might explode in 2020. DeFi is a group of decentralised finance projects that allow new types of financial products to exist such as Maker’s Dai, which is a decentralised stablecoin not owned by any central entity. We at KR1 seed-funded many of the DeFi services you see around (before the DeFi term/theme was even a thing) and were recognized in Camila Russo’s ‘The Defiant’ newsletter as the world’s leading DeFi investor! We are excited by the new DeFi services we are seeing in our deal flow. We have moved from Layer 1 excitement to DeFi as being the most exciting of opportunities. There is so much innovation oozing out of this area of blockchain.
DeFi at its current stage is primarily driven by Maker DAO, which has found a product-market fit. Compound was a tear-away success and will figure out its model after a rocket-fuelled start. Argent, which we seed-funded, performed strongly on its new wallet release, natively integrating the before mentioned. Nexus Mutual, a decentralised insurance alternative has really started to boom. We also seed-funded Nexus and saw it struggle for many months until eventually it just clicked. Now it’s flying along with over a million dollars of smart contract cover issued. The continuous performance of Uniswap was a clear standout success providing a simple automated service that allows people to swap ERC20 tokens (or launch cool bonding-curve crypto swaps like socks or shirts). Finally, a notable mention must be given to the Melon Protocol for fully decentralising in February and being at the leading edge of decentralised governance and trust-less asset management. We will see almost all innovation of DeFi hopefully eventually converging into Melon.
It felt like there was more stability, fewer hacks and generally less drama on the whole compared with last year, maybe everyone is growing up. Alongside the 90-year jail term of one of the Onecoin founders, the recent charge against a US citizen and Ethereum developer ‘helping’ North Korea evade sanctions, the biggest drama of 2019 was the QuadrigaCX scandal. Quadriga’s CEO and founder, Gerald William Cotten ‘died unexpectedly’ in December 2018, after travelling to India. Up to US$190 million owed to 115,000 customers were missing or could not be accessed because allegedly only Cotten held the password to offline cold wallets. Conclusion? 80% probability really dead, 20% probability on an island with a new face. Unfortunately, due to the nature of any new emerging technology, we are likely to see similar such stories in 2020.
To end, the most exciting news in 2019 for advocates of decentralisation was that Jack Dorsey, CEO of Twitter, gave a clear signal that they were serious about decentralising their service, Twitter, the protocol.
If the 2010s was the Digital Decade, could the 2020s be the decade of Decentralisation?
— by Keld van Schreven, KR1 plc co-founder & Managing Director
KR1 is Europe’s leading digital asset investment company supporting early-stage decentralised and open-source blockchain projects. Founded in 2016, KR1 has been a notable first investor in many key projects that will power the decentralised assets, platforms and protocols that form the emerging Web3 infrastructure.