1. RISE OF THE EARLY ADOPTERS
If we plot current blockchain adoption in Roger’s bell curve for adoption of new technologies, it would look like this:
For industries that are first to implement blockchain tech, we expect mainstream adoption to start two or more years from now. There are several reasons why mainstream adoption will not likely happen sooner than that:
- State of blockchain technology – Blockchain technology is not scalable enough yet to facilitate mass usage. Technical roadmaps to achieve this scalability on stable publicly available networks are estimated to take another 1 to 2 years, and in some cases more.
- Adoption cycles – The only usage of blockchain networks is currently done by innovators. User interfaces are currently too complex for mainstream adoption. Looking at how this life cycle reaches early majority of users in comparable technology waves, we expect it to take several more years.
- Regulation – We expect regulation in a lot of countries to need one or two more years to lay a regulatory stable foundation for most companies to start comfortably building and working with this technology in some fields, like securities trading and payment infrastructure.
That being said, we expect to see the introduction of user friendly interfaces for some products in 2019, ushering an increase in real usage in markets like decentralized exchanges, digital payments, and online content. We expect the number of blockchain wallet users to grow from 32 million globally in Q4 2018 to at least 70 million in Q4 2019.
2. DECENTRALISED EXCHANGES GAIN MARKET SHARE
Exchanges, and in particular centralized exchanges have been immensely successful over the past years. They have truly capitalized on the emergence of a new asset class by providing infrastructure to facilitate trading. This resulted in significant valuations of these exchanges. For instance, Coinbase’s latest round, in October 2018, was at a 8 billion valuation and lead by leading names like Tiger Global Management.
It’s quite ironic, that what blockchain / DLT technology is trying to achieve, namely disrupting centralized structures and business models, it is failing miserably when it comes to the issuance and trading of its own coins and tokens. Decentralized exchanges (DEX) have yet failed to gain any form of significant traction and volume, although we have seen some good initiatives like 0x and IDEX. But for now DEX are far behind on its centralized counterparties, due to being hard to use and as such not being able to provide the needed liquidity and hold a steady user base. This is not surprising as building a DEX which could possible engage on 1000s of transactions per second is a lot more difficult than building a centralized exchange. And that’s only the back-end part.
We expect (hybrid) DEX to gain significant traction over the course of 2019 on the back of three developments. First of all, we foresee significant developments on building of better user interfaces for the new generation of (hybrid) DEXs. This will lead to far better customer attraction, retention and significant liquidity market share gains. It’s important to note that up till now DEX have never been an alternative to their centralized counterparts, due to the wide gap in usability. Secondly we expect that the mix of the current investors (still) out there and the new ones entering over the course of the year to be a lot more critical on current exchanges out there and not willing to run a third party risk with trading on an unregulated centralized exchange. Next to that there is a lot more awareness through “Proof of Keys” days and other “not your keys not your coins” initiatives, having a detrimental effect on centralized exchanges and liquidity. Also, we wouldn’t be surprised if we see another major hack over the course of 2019, as lots of companies are downsizing, also exchanges, and lower staffed companies will be subject to increased hacking risks.
We would not be surprised if DEXs volume will grow from 0% to around 5-8% of total market volume at the end of 2019 and believe that is just the start of an eventually bigger move towards decentralized trading and decentralized finance (DeFi).
3 SHIFT IN POPULARITY OF TOKEN DESIGNS
There will be a shift in the type of tokens that are popular:
- Utility tokens will decline in popularity
- Security tokens will rise in popularity
- Stablecoins will rise in popularity
Decline of utility tokens
Up until last year, almost all tokens that projects sold to participants during their ICO are utility tokens. These tokens have a use (utility) in the platform the project is building, like preventing spam or creating an internal currency. Utility tokens never pay dividends to the holder, because that would cause the token to be flagged as a security by financial authorities, which is a risk for the project because most ICOs are not organised in compliance with security issuance regulation. The downside of utility tokens is that for a majority of projects a share structure that pays dividends would just make most sense for its investors. But because the projects want to circumvent security regulation, they instead resort to utility tokens with far-fetched use cases that are uncertain to ever become valuable for its holders. This is not to say all utility tokens are bad, to the contrary some are in fact very useful and part of our portfolio. It’s just a model that’s not the best fit for many projects.
Emerging security tokens
The solution for these projects is security tokens: tokens that are backed by a tangible asset, being shares in a company and/or predefined profits of a project. Security tokens also result in the executives of projects being legally responsible for running the projects responsibly, just as is the case with directors of companies with traditional shares. Security tokens are more easy to valuate using traditional valuation models than utility tokens and give investors an asset with a clear legal status. Reading this, one might ask why security tokens haven’t been issued more often in the past. There are two reasons for this. Firstly, regulators didn’t yet know what to think of security tokens so they didn’t approve them. Secondly, issuing a public security token, like a traditional IPO, is a lot of work and comes with high legal advisory costs, which is hard to bear for a young project that is low on funding.
Both these issues are on the verge of being solved, which paves the way for security tokens becoming mainstream. First of all, we see regulators like the SEC approving the first few companies to issue security tokens. Examples are blockchain companies like NEX and Securitize, but also more traditional companies like lottery.com and Overstock. Next to regulators approving security tokens, we see the necessary infrastructure around these tokens develop. Several companies are developing standard frameworks for issuing security tokens and several new and existing exchanges are in the process of acquiring legal approval to trade security tokens.
Our concrete prediction is that at least eight exchanges will get licenses to offer security token trading and there will be ten security tokens among the top 100 tokens by market cap by the end of 2019.
The emergence of security tokens will impact the market in in several ways. The most important impact will be an influx of institutional investors entering the market that were until now on the fence because they were either not convinced of the value of utility tokens, or because they perceived the uncertain legal and fiscal status of utility tokens as too big a risk.
Rise of stablecoins
2018 has shown that digital assets are very volatile and not in a good way. When prices suddenly drop, investors need a safe haven to quickly trade their assets for. Stablecoins provide such safe havens. Stablecoins come in many flavours, but the bottom line is that the price of those coins is backed or otherwise supported by other assets in a way the price is practically as stable as the assets that back them.
Most exchanges have stablecoins listed, providing investors with easy transfer of their volatile tokens into stablecoins when the need arises.
One stablecoin that will not profit from the rising popularity of this asset class is Tether. Tether was one of the first stablecoins in the industry, but the issuing company has always refused audits of the dollar denominated bank accounts that are supposed to back this token. As more and more thoroughly audited stablecoins (or algorithmically stabilized tokens like DAI) enter the market and get listed on exchanges, we expect the market for unaudited tokens to disappear.
We predict that there will be five different stablecoins by the end of 2019 with a market cap of over 500M each.
4. CRYPTOCURRENCY ADOPTION IN HIGH INFLATION COUNTRIES
Some experts don’t believe in cryptocurrencies ever becoming a global Store of Value or money. Other experts think this is in fact the most impactful use case. For instance, a World Economic Forum survey suggested that 10 percent of global GDP will be stored on blockchain by 2027. The possibility of a cryptocurrency becoming a global store of Value or money is also acknowledged by IMF CEO Christine Lagarde. We agree with her that the most likely path for substitution of fiat currencies to digital currencies is to start with unregulated use by civilians in countries with poor monetary policy and hyperinflation.
Enter Venezuela, a country that has seen over 1.300.000% inflation in 2018. Cryptocurrencies like Bitcoin and Dash have seen a rise of usage in Venezuela, although it’s too early to call this usage anything more than early adopters testing the waters. Mainstream use is still far away, and the Venezuelan government is pushing back by cracking down on retailers that accept bitcoin. Authoritarian governments and central banks see cryptocurrencies as a threat for their already weak national currencies and will often react by outlawing bitcoin or other currencies. It remains to be seen how effective this is. Dollars have been a significant part of Venezuelan daily economic life due to its relative stable value. However, measures to prevent dollars from being imported have until now prevented the dollar from taking over the Venezuelan Bolivar. Cryptocurrencies have a property dollars don’t have: you can’t physically stop them at the border.
Apart from regulatory pushback, we think the major reason cryptocurrencies didn’t really gain traction in countries like Venezuela last year is that BTC was hardly a stable store of value itself. Even in countries like Argentina, Iran and Turkey, with inflation rates of 20 to 40%, local fiat currencies outperformed BTC. It’s a likely scenario BTC will perform much better in 2019 than it did last year. And if not, abovementioned stablecoins offer another interesting option for cryptocurrency adoption in high inflation countries.
Will the people prevail to find their own currency or will authoritarian governments be able to effectively stifle its adoption by outlawing cryptocurrencies? We predict there will be at least one country where the government is ineffective in prohibiting the use of cryptocurrencies as a store of value, resulting in a tenfold rise of cryptocurrency usage in that country in 2019 compared to 2018.
5. REGULATORS CLEAN THE INDUSTRY
In the past, most projects that raised funds among retail investors did this by selling utility tokens during their ICO instead of issuing securities. As described in our September newsletter, for a lot of these projects the issuance of a utility token was merely a way of getting around regulation, because most ICOs were not organized in compliance with securities laws. However, it starts to dawn on an increasing amount of projects that the way they tried to avoid securities regulation would not hold up in court if push would come to shove. Several projects decided to fix this. Rialto.ai, a crypto-focused algorithmic trading platform announced in November that it will delist their current utility token from exchanges and replace it with preferred equity shares in the company. Cofound.it, a tokenized crowdfunding ecosystem, announced in September to cease operations and pay out all remaining funds to current token holders. Iconomi, a service provider for investing in digital assets, announced a few weeks later to take all their current tokens off the market by the end of the year and replace them with equity tokens representing a legal share in the company.
Meanwhile the SEC has taken action on two relatively unknown projects that have fundraised in 2017 in a way that was not compliant with securities laws. Both projects, Airfox and Paragon Coin Inc, have settled with the SEC by paying a $250k fine, refunding investors and listing as a security.
We expect the SEC to rev up the engine and hand out fines to at least 20 projects in 2019. And we expect at least 20 other projects to follow the example of projects like Rialto and Iconomi and restructure their token structure proactively in 2019.
6. INCUMBENTS LAUNCH CRYPTOCURRENCY
Yes we know the title says 5 trends… so this is a bonus one. We expect at least two global entities to launch a cryptocurrency that will gain instant traction due to their large existing user-base. This could for instance be Facebook, who have assembled a team of blockchain heavyweights and senior managers working on an undisclosed blockchain project. Rumor goes they are working on a cryptocurrency for Whatsapp.
Another candidate for launching a cryptocurrency is the Iranian government. Continuing economic sanctions restrict the government’s access to money. Launching their own cryptocurrency could be a way for Iran to crowdfund themselves, and Tehran has already started testing viability of a national cryptocurrency.
The effect of large players launching cryptocurrencies goes further than those currencies alone. It could create a ripple effect by exposing their users to this technology, thereby accelerating adoption of blockchain technology in general.
Deep shift: Technology tipping points and societal impact, World Economic Forum, September 2015, weforum.org.