As another year wraps up, I started writing an email to close friends and investors on the “state of crypto” and my forecasts. As it got longer, it turned into this sprawling post. A few notes:
- This write up contains wide-ranging theses and obvious biases (my own) and is by no means authoritative. Please don’t nitpick.
- Where I make predictions, I try to be as specific as possible (inspired by SlateStarCodex’s format). Not all predictions are quantifiable. Some will be off and many will likely be directionally incorrect. That’s OK.
- Unless otherwise specified, my criteria for a liquid, actively-traded project “dying” is either (1) < $100k volume/$20m market cap or (2) primary development abandoned, whichever comes first.
- None of these predictions are normative; in many cases I see momentum in products or approaches I consider fundamentally flawed. C’est la vie —this is an attempt at a descriptive 2019 outlook.
- Other Tokens
- Private Projects
- Product Potpourri
- Crypto Companies
- Closing thoughts on prices and adoption
1) After a strong launch in 2018, I see Lightning Network growth continuing into 2019. I predict the number of Lightning nodes with channels will be ≥ 10,000 from ~2,100 now ( 60% confidence ) due to the proliferation of node hardware and hosted solutions (e.g. Nodl.it, CasaHODL) and easy-to-deploy GUIs like Pierre Rochard’s node launcher. I predict network capacity will increase even more from ~$2m notional to ≥ $25m+ notional ( 75% confidence ) due to the lifting of maximum channel limits, dual-funded channels, etc.
2) At least one major exchange will launch a Lightning Network hub for their users as confidence in the stability and security of the network grows over 2019 ( 50% confidence ). If this occurs, my money is on Binance given their iteration speed and product chops or Coinbase, due to increased focus on adoption and “usage” of cryptocurrencies. I’m particularly excited about Cash App’s potential here given 1) they’re a business that understands Bitcoin 2) Jack sees Bitcoin as a path to “financial inclusion” and 3) Jack’s investment inLightning Labs’ 2018 seed round.
3) A working implementation of Schnorr signatures, for which Pieter Wuille released a draft BIP in July, will make its way into Bitcoin via soft fork by the end of 2019 with ≥ 5% node adoption ( 75% confidence ).
4) Low volatility and lower prices always attracts concern trolls and people who believe they can “change” Bitcoin for the better. The last two years have seen a lot of forks where the codebase is changed but the UTXO set is kept intact. In 2019, I expect to see the opposite: forks with technology kept intact (to merge future upstream changes) where the monetary policy or UTXO set is modified ; an example being the Zclassic team forking Zcash to remove the Founder’s Reward). I predict 2019 will see a major fork proposal from Bitcoin OGs “fixing” post-block reward fee market sustainability either by re-appropriating Satoshi’s Bitcoin (e.g. my tongue-in-cheek tweet-proposal for “Bitcoin Freedom”) or by adding predictable, low inflation in favor of the fee-market ( 50% confidence ).
5) 2018 was a big year for Bitcoin privacy and fungibility R&D, with proposals for Taproot and Graftroot from Gregory Maxwell in Q1, a draft BIP for the Dandelion protocol in May, and an emergent path for a soft fork upgrade to Schnorr-based signatures. By the end of 2019, there will be a clear roadmap for “good enough” fungibility and privacy on Bitcoin’s base layer across a meaningful set of trade-offs (e.g., speed, confidence level, etc.) ( 50% confidence ).
7) 2018 was a big year for proof of stake research with June’s deprecation of EIP 1011 (Hybrid Casper FFG), scrapping the hybrid PoW/PoS step in favor of moving to pure PoS. The next phase for Ethereum—first termed Shasper (Casper + Sharding), now called Serenity (Ethereum 2.0)—has six distinct phases, which stretch over several years. There are 8+ dev teams working on independent implementations including:
- ChainSafe Systems, building a JS implementation called Lodestar
- 50-person ConsenSys-backed PegaSys, building an enterprise-grade implementation in Java
- An independent group called Harmony, building a Java implementationbased on the original EthereumJ client
- Parity Technologies, building an Ethereum 2.0 client in Rust
- Prysmatic Labs, building a Go client (recently, Raul Jordan announced the team had full test coverage with the latest spec)
- Sigma Prime, building a 2.0 client in Rust
- Status, makers of the Ethereum-based messaging app, building the first mobile-native client in the language Nim
- Trinity, a team predominantly backed by the Ethereum Foundation, building a client in Python
Despite seeing major setbacks and changes to the Ethereum 2.0 roadmap, I think the first phase will ship some time in Q4 2019 ( 70% confidence ), albeit with friction.
8) Augur, whose launch everyone awaited with bated breath, seems to have gained little traction (outside of niche markets around the election). I suspect it will be the breakout dApp of 2019, leaping from ~$1.5-2m notional at staketo ≥ $10m ( 70% confidence ). My bullishness is due to (1) a full year elapsing with a working product (2) improved UX/choice of clients (3) increased brand awareness (4) demand in the market for a non-custodial prediction market (5) stablecoin integration and (6) better market-making and liquidity provisioning.
9) The “crypto-collectibles” narrative which gained major steam in Q1/Q2 (peaking in March’s $12m raise for Cryptokitties) will lose traction despite the orthogonal interest for tradable in-game items. While collectibles are interesting, they feel like a solution looking for a problem (though worth noting: I’m not a tastemaker) and gamer adoption feels like a pipe-dream as companies are unlikely to replace their existing monopolies. I suspect several of 2018’s niche “X-for-Y” Cryptokitties imitators (e.g. Etheremon, Cryptopunks, etc.) that are less well-funded will shut down next year ( 85% confidence ).
10) Despite the hype going into the new year, consumer adoption of decentralized exchanges (DEXs) have materially lagged expectations. Relayers leveraging 0x — viewed by many as the best exchange protocol — in aggregate have traded < $2m notional most days in 2018. I predict December 2019’s aggregate volume on 0x will lag a single day’s volume from Coinbase ( 90% confidence ). The big problem with DEX adoption in 2018 is that it’s unclear who the target user is.
While non-custodial trading feels like a boon, the trade-offs presented (e.g. in matching/execution speed, the potential for front-running, decreased privacy, the difficulty of accounting, etc.) make it an unappealing product for institutional investors, not even considering the UX curve. Whether retail investor participation will be sufficient for long-term sustainability remains to be seen. In addition, many DEX protocols with fee-based tokens will get forked (like 0x has by their top relayer), though I predict we’ll see a surge in cross-chain swaps and similar non-custodial trading options sans token.
11) A lot of early prominent projects promised new types of markets, e.g. forcomputation or storage. Along with the “utility token” narrative, demand for these solutions appears dead, as it’s unclear whether (1) demand for un-censorable XYZ is compelling enough given increased cost relative to centralized alternatives or (2) any of these new marketplaces will be sufficiently bootstrapped to hit the economies of scale necessary for their adoption. Not a single one of the new decentralizing marketplaces promising to marshal distributed or idle resources pose a threat to AWS, Microsoft, Dropbox, etc.
12) I anticipate we’ll see major pushback from disenfranchised ETH miners, who will propose a contentious hard-fork ( 60% confidence ). This is distinct from Ethereum Classic — which itself is (hilariously) forking in January. Ethereum’s roadmap is already relatively antagonistic to miners: January’s planned Constantinople upgrade (which, among other changes, reduces block rewards from 3 to 2) hurts miners currently at the margin, likely putting them out of business. While a supply reduction is generally bullish, the upgrade may be short-term bearish (given increased miner inventory sales) if it’s not already priced in.
13) “Governance tokens” will be less popular than ever by the end of 2019. To me, they appear misaligned incentive-wise: in practice, it feels like rational token holders should be oriented around (1) entrenching existing power structures (as original token holders have out-sized sway in future protocol decisions, including future value-capture design) and (2) maximizing token value rather than what’s often cited as the goal (maximizing token utility ). The excitement around the governance token (e.g. “We don’t need to worry about value-capture, we just need to build something worth governing.”) was a by-product of a never-before-seen crypto bull market and will warrant meaningful skepticism in 2019 ( 60% confidence ).
14) On the face of it, decentralized finance (a.k.a. “DeFi” or “Open Finance”), a dominant narrative of Ethereum in 2018, is compelling to me in spite of my Bitcoin bias. A goal of the cryptocurrency movement has always been to increase financial inclusion and the core premise of the “DeFi” movement—to provide crypto-native financial products to the unbanked—has obvious appeal. However, I don’t understand what product market fit looks like for the vast majority of “DeFi” products.
If these products (in many cases, novel non-custodial derivatives or leverage-oriented lending products) are designed for institutions, I struggle to understand how they’ll achieve product market fit for many of the reasons posed in 10 on DEXs. Bootstrapping liquidity will be extremely difficult (i.e., I don’t want to trade an exotic non-custodial derivative with no liquidity and it’s unlikely a marginal trader will want to do the same— the classic chicken-and-egg problem). If these products are designed for retail investors, I don’t understand the product market fit either. The long-shot thesis may be that the globally unbanked are looking for easy entry points that DeFi can solve, e.g. exposure to US capital markets/equities with synthetic on-chain CFDs, but I am doubtful. Most consumers in the world don’t meaningful savings, mirroring Vanguard-type indices or more complex derivatives doesn’t feel like the right entry point for global adoption.
I believe some of the US-based teams working on the DeFi stack are taking on material risk and will face regulatory scrutiny in the US ( 70% confidence ) given their move into structured products. This will test the runaway killer app of Ethereum: regulatory arbitrage (first with the offering of unregistered securities offerings and now with quasi-legal structured derivatives), as teams “move fast and break [the law].”
While engineers are discussing “compounding financial primitives,” I’m worried about compounding technical (or legal) risk.
15) Two years after pseudonymous Tom Elvis Jedusor posted a paper outlining the Mimblewimble architecture to the #bitcoin-wizards IRC channel, 2 different implementations, Grin and BEAM, are set to launch in Q1 2019. Both subscribe to different design philosophies, from Grin’s Bitcoin-like immaculate conception to BEAM’s Zcash-like foundation model, in addition to differences in monetary policy, stance on ASICs, etc. I expect both will be meaningful in 2019’s privacy wars, with Grin seizing the lion’s share (≥ 70%) of market interest in Mimblewimble ( 75% confidence ). Though its monetary policy isn’t ideal for early adopters due to high early inflation, it wouldn’t surprise me if it finishes ≥ $250m market cap ( 60% confidence ).
16) Given both comments from Zooko about both PoS and the Zcash Founder’s Reward and rumblings from the community, I think it’s possible that (1) Zcash plans a multi-year transition to propose a move to a hybrid PoW/PoS system ( 50% confidence ) or that (2) a change to the Founder’s Reward ( 30% confidence ) takes place. As the Founder’s Reward runs out in 2020, with a lot of research and engineering work left, I can see a proposal to extend it (or lengthen the reward beyond 2020) emerging.
17) It’s not a secret I’ve been hoping most un-differentiated “means-of-exchange” tokens (e.g. $IOTA, $DASH, $BCN, $XVG, etc.) will die for some time. With the exception of Litecoin (which has the benefit of an old brand, widespread integration, and Bitcoin “test-net” status) and Dogecoin (which will never die), I expect ≥ half these un-differentiated payment tokens will be flushed out over the next year ( 70% confidence ) as (1) 2018’s price action shows they are subject to the same volatility issues as Bitcoin (2) growth of the Lightning Network dampens need for a “faster Bitcoin” (3) they don’t have interesting innovation keeping a large community engaged the same way other public blockchains do with privacy (e.g. Monero, Grin) or ecosystem products (e.g. Ethereum, EOS, Tezos).
18) From the days of the Silk Road, dark net markets (DNMs)—along with pornography—have been a hot bed for cryptocurrency innovation. DNMs have gotten more sophisticated than ever, moving from centrally-run sites with single points of failure (e.g. DNS shut-down) to decentralized infrastructures, spider webs of Telegram chats and bots, and better reputation systems. There are still problems: bitcoins are still the pre-eminent cryptocurrency of choice (given lack of customer awareness) despite the lack of better, more private options and the fiat-to-bitcoin conversion is a honeypot for law enforcement agents.
It’s no secret I don’t think there are many real use cases of “blockchain” outside of quasi-legal applications. While it’s directionally clear that the future of DNMs is in moving to a fully decentralized stack (with smart-contract-based escrows, etc.), the lack of privacy on most public blockchains makes this a pipe-dream for 2019. Despite this, DNMs serve as an important crypto mind virus entry-point for many—a painkiller rather than a vitamin.