Crypto’s Big Rupture Is Coming in 2021
After a crazy year of predictably strong growth in crypto assets for decentralized finance (DeFi) and value storage (SoV) in general, things are soon getting strange. Diversification is the only way to stay healthy.
Crypto will split and we will see two parallel economic highways built and used. Knowing your customer-compliant “digital currencies” such as the digital currencies of the central bank (CBDC) or digital currencies supported by companies such as USDC or diem (formerly Libra) is an economic highway.
This post is part of CoinDesk's 2020 Annual Review - a collection of posts, essays, and interviews on the year in Crypto and beyond. Ryan Zurrer is the founder of Dialectic AG, a multi-family office focused on alternative assets. Previously, he was a director at the Web3 Foundation and led the investment team at Polychain Capital. He pioneered the SAFT as a legitimate investment vehicle.
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Related: The Global Challenge of Regulating Virtual Assets
In parallel, the other economic highway will be a detour full of crypto-anarchist money legos, stacked and repeated by anonymous teams that organize themselves through a variety of DAO-like governance structures. It all gets pretty strange. Diversification is the only coherent path both within crypto ecosystems and beyond in these uncertain times.
A defining narrative of 2020 was the DeFi space, mostly within the Ethereum ecosystem. Despite the goofy food memes and the 1990s-inspired user interface, DeFi is dominated by ice-cold professionals who perform platform-independent "mercenistic mining". It is interesting that, contrary to the irrational and outdated maximalism we see among Layer 1 enthusiasts, the application layer managed by DeFi turns out to be decidedly non-sticky and temporary. The cost of switching between platforms is negligible (unless gas charges are outrageous due to network congestion) and participants follow the risk-adjusted rate of return.
DeFI favorites like Uniswap, Compound, and Curve saw their platforms drop in value dramatically when anonymous, community-led alternatives that offered liquidity providers better financial terms were attacked. The back and forth war of liquidity between SushiSwap and Uniswap shows a remarkably fast race for a near perfect competition and gives an overview of how fast DeFi is developing. Coming first and having economies of scale is less important than the "4 Is": iteration, community involvement, compelling incentives and competitive interest (both interest rates for liquidity providers alongside interest in the project at hand).
While we at Dialectic tacitly looked after our DeFi farms like real Swiss farm boys and played with profit-oriented DAOs and earnings strategies, large companies and central banks took the most important steps to date towards digital currencies suitable for central banks and businesses. We saw the largest experiment with digital currencies ever quietly conducted, led by the rapidly developing BRIC countries of Brazil, Russia, India and China. Several cities and more than 100 million people have tested China's CBDC with WeChat and JD.com. This immediately makes it the most widely used crypto asset of all time. As a result, Brazil launched its own distributed ledger called Pix, in which hundreds of millions of banking banks receive instant digital transactions.
Related: Here comes the open lending era
Other central banks initiated exploratory studies and for the first time seriously discussed their projects in public. Make sure that CBDCs are a main topic at the upcoming WEF forum in Singapore (instead of Davos for 2021). China has now undoubtedly entered the early stage of its reserve currency status challenge. Rest assured that its CBDC is China's Trojan Horse for the goal of reserve currency status in the 2020s.
In 2021 we will see Layer 2 apps for the first time and not just entertained or as early experiments. We'll see whole micro-economies emerge and change the lives of thousands of people. There are currently tens of thousands of digital workers in cities like Manila playing Axie Infinity professionally and earning better wages than their now-defunct pre-COVID cast. It has become a cultural phenomenon, and will spawn a number of novel worker guilds and decentralized pools of capital that seek compelling returns, merging the concepts of non-fungible tokens (NFT) and DeFi.
As we approach 2021, users and entrepreneurs will continue to face the dilemma of which economic highway to build on, crypto-native or centralized businesses.
In 2021, more anonymous teams led by DAOs will emerge experimenting with exotic derivatives and porting real assets in the chain with NFTs. With next year being Pokémon's 25th anniversary, it is appropriate that the next generation of collecting games will have such depth of meaning, financial complexity, and global impact.
Layer 2 will also usher in crypto's own "SoMo" moment (Social + Mobile Native), in which applications appear natively and seamlessly on many apps that billions of users already have on their home screens: WeChat, WhatsApp, Facebook, the App store and so on. This is where corporate cryptos and CBDCs have a clear advantage and encourage significant innovation. We will see that the supporters of CBDCs and corporate cryptos are spending a lot of money developing ecosystems of Layer 2 app development.
We will continue to see consolidation between crypto projects. We recently saw the first signs of the impending “banker era” in cryptography as projects such as M&A transactions were acquired, merged, and liquidated. Yearn consolidated a variety of platforms under its umbrella into a series of extremely attractive transactions for YFI holders. In the meantime, Aragon has reintegrated Aragon Court into a full acquisition to fit as a central pillar in a value creation mechanism called the Aragon Protocol. However, watch out for more consolidation in DeFi competitors and Layer 1 in 2021.
See also: Marcelo Prices - The Great Choice in Central Bank Digital Currency Design
DeFi return strategies will stack on top of each other and combine debt, exchange and derivative strategies under unified liquidity, while novel Layer 1 experiments, often hideously referred to as "Eth Killers," ironically have to combine teams, government bonds and economic base in order to to persist against the acceleration of Ethereum network effects, community and compositional skills. We will also see an acceleration in Treasury Raids as huge sums of money from the ICO era (Initial Coin Offering) 2017 are pressured by their token holders to pay a dividend tying the Treasury to the token or unwind and redistribute the funds back to the project financiers.
Digital corporate currencies
For those who got into crypto because of ideals like freedom and self-sovereignty, 2021 is going to feel Orwellian. It is likely that a significant portion of the space will migrate to FATF-compliant regulations related to KYC / anti-money laundering, and will be mostly done in centralized digital currencies, as the battle for self-custody wallets evolves from a skirmish to a full-blown conflict.
I would like to strongly encourage everyone to stay open to the innovations that CBDCs and corporate currencies will bring. While it seems strange and hypocritical to build a full decentralized software stack and then just return the keys to a bank or central authority, these projects will increase adoption beyond what we have achieved so far and that is very important .
Extremism is not a good basis for allocating your capital, your attention, or your most important resource, your time.
Even as we celebrate the second semester price hike this year, I continue to hear worried whispers in the area where organic user growth has slowed sharply. Let's face it, "the masses" that we have been waiting so patiently for and who we really need for the next big step in this area have not arrived in droves and will not just because of new all-time highs in some currencies in the first place Line owned by some early insiders. Ironically, the best thing for crypto in the end could be building bridges between the crypto anarchist and the fully compliant economic highways.
As we approach 2021, users and entrepreneurs will continue to face the dilemma of which economic highway to build on, crypto-native or centralized businesses. The infrastructure between these highways will offer interesting opportunities.
Innovation and new experimentation are the only coherent way forward. In the history of this industry, maximalism has never been the optimal strategy and will certainly not work in the future. Extremism is not a good basis for allocating your capital, your attention, or your most important resource, your time. Diversifying regions, currencies, and assets is more important today than ever, and being open to the future is clearly the optimal strategy for the next decade of crypto.
The big break of crypto comes in 2021
The big break of crypto comes in 2021
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