What hasn’t changed this year is our excitement about the possibilities within our industry. We are as optimistic as last year and feel that all the building over the last few years is coming to fruition. Keen to start a tradition, we once again make 10 predictions for the coming year. These can be found below.
1. Institutions make a grand entrance into the space
2020 has definitely been an exciting ride for Bitcoin which ended up in a new all-time-high price and excitement among investors all around the world. However, we are even more thrilled about the institutional capital that entered the crypto space and allocated a (small) portion of funds to Bitcoin as a hedge against the global macroeconomic uncertainty and inflationary fiat currencies. Legendary Wall Street investors, major insurance companies and other professional capital allocators have started allocating parts of their balance sheet into Bitcoin. We expect this trend to continue and grow even stronger in 2021. We are currently still seeing a few funds and companies dipping their toes into the digital asset space. As these become more comfortable with it, others will follow. Especially in the context of the macro economic developments (no interest rates, QE and endless stimulus). What is even more encouraging is the fact that some of the Bitcoin friendly companies decided to denominate part of their treasury in BTC. This not only legitimizes the digital currency itself, but also effectively reduces the circulating supply of Bitcoin making it even more scarce than we thought.
2. Decentralized Finance will surpass USD 100B total value locked
Decentralized finance (or DeFi) has been rapidly gaining momentum in 2020. For more information about it, read our publication The Future of Finance – DeFi. We anticipate this market to continue to grow at a fast pace also in 2021. Therefore, we expect roughly a 10x increase in TVL ($14bln at time of writing) to above 100B. This is caused mostly by new applications going live, such as under collateralized lending, more professional trading (futures, options), improved yield aggregators and better insurance products. Overall, new developments will result in an improved and safer user experience which in consequence will attract more capital from investors.
3. Ethereum 2.0 will see over 10 million Ether staked
Ethereum 2.0 has gone live in the last month of 2020. We expect to see a lot of development on this front in 2021. First, we are anticipating a steady increase in the staked amount of Ether. We anticipate that because the uncertainty for the successful launch is already behind us, therefore more people will be willing to participate as validators and to generate yield which especially with low amount of participants, seem to be very attractive (currently close to 12% yearly). Additionally, more secure institutional grade staking services will come online allowing for more user friendly staking. Second, we predict that Phase 1 of Ethereum 2.0 will also be rolled out successfully by the Ethereum developers. We wrote a blogpost about Ethereum 2.0 in which we discussed the consequences of the launch and what we can expect in the future months given the current roadmap.
4. Regulatory the good and the bad
Regulations and regulators will be a big theme in 2021. For the past year, regulators have taken two approaches simultaneously. On one hand, they provided clarity and issued guidelines in how to be compliant in this industry. We foresee this trend of regulatory clarity to continue in 2021. This can be seen in the form of issuing frameworks such as the European Commission has done last year, by approving regulated financial products such as the CME futures or by providing clarity on which regulations apply to the token issuance. On the other hand, regulators have also been more actively enforcing regulations worldwide. This was most notably shown in the Bitmex lawsuit that started in 2020. Other indications are the Dutch Central Bank implementation of the Travel Rule and all the ICO settlements of the SEC. This trend will also continue in 2021 as regulators are trying to clear the space of bad actors. This is a good thing as these actors often result in market manipulation and taint the industry reputation. The only risk we see is that the regulators implement rules (such as the FATF travel rule) unnecessarily harshly. This will lead to introducing barriers for users while not being effective in achieving their main goal.
5. NFT’s will go mainstream
Non fungible tokens (NFTs) will be a major theme of 2021. They have already received some attention over the past couple of years but it has generally been a niche in the industry. This is about to change as the amount of creators creating NFT’s grows. Additionally, the communities around these creators will enter the space. The unique and fun thing about this is that these communities are not necessarily crypto native. This brings a diverse, new crowd into the industry which will eventually lead to new use cases being discovered and all sorts of experiments taking place on the intersection of creators, communities and digital collectibles.
NFT Artists Onboarding
NFTfi Total Users
6. Payment use-case to thrive
The payment use-case of cryptocurrencies, with the rise of Bitcoin as a hedge asset, has been somewhat on the sidelines during the last year. We believe that this trend will reverse in 2021 mainly because the digital currency project of Facebook Diem (previously called Libra) is going live in the coming months. This will enable 2 billion users worldwide to use digital assets and transform the current perception of novelty and niche to true global adoption by the average users. Additionally, PayPal move to enable buying, selling, storing and paying with cryptocurrencies for their 320 million users worldwide (expected to go live Q1 2021) will allow more payments to take place with the use of cryptocurrencies. Finally, the roll out of CBDC in China will enable its citizens to pay with the use of digital assets which will change the perception of regular users towards digital payments and prove the benefits of using cryptocurrency versus fiat money.
7. The venture model transforms
Generally, all sorts of investing, including venture capital, have been concerned with providing capital first and other perks (networking, advice and so forth) second. This is changing with the introduction of DAO’s and communities surrounding decentralized protocols. Now, an increasing number of (venture) backers of projects need to be part of the community and build value proposition together with the team. Capital provision alone is no longer enough to be noteworthy and in fact, using and participating in the protocols can provide more value to the projects than the capital itself. This being said, the usage of protocols can still be done through capital, for instance via liquidity provision, nonetheless it is materializing on a protocol level instead of an entity level in which you invest.
8. Banks will offer crypto custody and trading
The major crypto exchanges which allow for trading and storing of assets will see a new type of competitors entering the market – commercial banks. It is clear that the digital asset industry is here to stay, and (commercial) banks have started to recognize this fact. Therefore, they will leverage their brand and client base by offering their clients digital asset trading and custody solutions which will legitimize the industry further. In addition, we predict that banks will also start dipping their toes into DeFi solutions and test whether they can bring it to their clients. While this vertical is still very much underexplored by traditional finance, the possibilities in this space are too interesting to ignore.
We think that the custody services will be performed with the use of multi-party computation (MPC) which refers to specific cryptography algorithms enabling multiple parties to jointly compute a function over their inputs while keeping those inputs private. To put it into crypto custody perspective, with this method the custodian does not need to rely on a single point of failure – one unique private key to access the wallet. MPC increases the security by allowing to split the private key into multiple pieces which drastically decreases the probability of a successful hack attempt. This is exactly the type of custody technology that enterprise grade clients (e.g., banks) are looking for. We expect a lot of adoption taking place on this front.
9. The first Decacorn decentralized application will arise
We have seen a few decentralized applications reach “Unicorn” status over the last year. Aave, Yearn and Uniswap all traded above the USD 1bln valuation. We expect this trend to continue in the next year with one of these decentralized applications (all active in DeFi) to trend towards a USD 10bln valuation (so called “Decacorn”). This will be a result of increased adoption and utility derived from these applications. One of our potential picks for next year is Yearn Finance. Yearn is building an impressive product which can be seen as a decentralized asset manager. Moreover, Yearn creates a whole ecosystem of complementary projects to their platform which is why we believe this is one of the projects that will thrive in 2021 and the coming years.
10. Smart contracts will get hacked and exploited
While reading predictions 2 and 9 it is hard to not be extremely excited about decentralized finance. However, one big annotation is in order. Over the past year, we have seen a never ending flow of “hacks” taking place in DeFi. We put hacks in quotation marks because some argue that the protocols are functioning as intended when exploited. We will leave that up for debate and regardless of the outcome the main point remains – digital contracts holding millions or even billions of dollars of value remain vulnerable to exploitation. There is no reason to assume that this will end in 2021. We predict this trend to continue as DeFi grows and the stakes become higher. We also believe in increasing importance of audits of smart contracts which could lead to decreased frequency and severity of the exploits.