1) People have asked me where I see the future of blockchain and banking five to ten years out. Right now I see a kind of mating dance taking place between the centralized and decentralized worlds, or fringe vs mainstream, (etc. etc.) which will determine this outcome, with some accommodation and movement coming from both sides. An anecdotal sign of this dynamic is the change in composition of blockchain conferences; before this year they were populated with anti-establishment types in rumpled clothes and hippie outfits, now they’ve been replaced with booths sponsored by the likes of mainstream enterprises like IBM with guys in suits handing out slick brochures and business cards. I reckon this cycle will take about two years to complete before it’s settled, but some things are already being revealed, like points 2 & 3 below …
2) On the regulatory front in the (still most important) U.S. market, after SEC Chairman Clayton’s comments at the “Consensus: Invest 2018” conference last month, there should be no further ambiguity about the agency’s overall stance on the definition of security, and on the path would-be sponsors should take prior to the offer. Toward that end they have set up their owndedicated Fintech hub to engage and interact with. I couldn’t agree more with Galaxy Digital’s founder Mike Novogratz when he said “the SEC doesn’t want to kill this innovation.” Key is to work with them, the Jobs Act of 2012 is an earlier example of productive cooperation, which established and clarified equity crowdfunding regulations. Modifying it further to accommodate native token issues to fund software platforms in the era of global decentralized exchanges would seem a useful and logical next step.
3) On the actual technology platform, thematically at least I like what I’m hearing out of Bitcoin BSV. To encourage broad scale enterprise adoption, they propose:
Stability by rolling back the platform to the original Bitcoin white paper and keeping it there (sans the bugs);
Scalability by removing block size limits, which also minimizes usage cost – present capacity encourages adoption, there should be no question of this when onboarding. If there are, you end up losing key adopters at the most critical point (consider how it would affect potential AWS customers if they had to consider the effect of capacity and pricing from their own onboarding);
Flexibility to build applications on top of the platform by restoration of the scripting language OP_Codes.
Platform sponsors should focus on mass scale adoption, not coin price, which brings me to …
4) Valuation, this being the first time in history that seed-type risk has been liquid and transparent. It’s not as if the pattern of rapid-decay in the crypto-space this year hasn’t previously been present in early stage portfolios of all kinds; it has all along, this just marks the first time it can be marked to market. This was bound to cause discomfort across the board, and will still take some getting used to. Big portfolio winners which compensate for the concentration of losers often won’t come to fruition for several years.
5) The above has implications for financial products that can be structured around the tokens of projects that represent seed risk. I wonder if thisrisk profilewill ever be suitable for traditional financial derivatives because the forward prices will be biased toward deep discounts; i.e. why would sellers want to lock in a deep forward loss, and “options” won’t look “very optional” either being way-in-the-money puts or way-out-of-the-money calls relative to spot. As an alternative, how about principal-protected notes where the investor buys a package of a zero-coupon treasury bond bundled with exposure to the risk asset? This way investors know they will receive principal at maturity, while still gaining some exposure to the riskier asset class. Traditionally this doesn’t work well in lower rate interest environments like the present because bond prices aren’t low enough [the difference between par and bond price is the amount which goes into the risky strategy] but the seed-type returns may make up the difference. I hope ways can be found to attract continued investment to the space because this cycle of quicker “creative” destruction is needed in this day and age of rapid technological experiment and development.
6) Continuing on the investment theme, traditional ETFs don’t seem suitable for anything but the largest and most established chains. To me these are luxury financial product itemsanyway, in the sense of not supporting the core mission of increasing adoption. Toward that end, how about to qualify for the initial offering (if, when, and where they happen) investors are required to prove they are accepting cryptocurrency for payment in a business or using it in some other capacity? Something like this may help bring the push for luxury goods inline with the core need for utilization.
7) There’s an interesting experimenttaking place with the less regulated (from a global perspective) token market vs regulated exchanges. When I look at coinmarketcap.com, for example, the market looks relatively efficient to me. Projects that have 4 key ingredients of success – product, team, runway, vision – and are executing on their plan, are being rewarded with out performance. From my perspective, the top 40 list is populated with projects that deserve to be there, less a few clunkers and head scratchers, same as any market.
8) Overall I can see the market strengthening in the new year, driven by some recovery in BTC, due to tax buyers: just as sellers waited until January 2018 to start selling their BTC and pushing their big gain into the new tax year, shorts are the ones sitting on large gains this time and will need to buy BTC to close their position and realize it for tax purposes in 2019. (Those who’ve been around long enough will remember the first significant tremor in the .com avalanche of 2000 came in January from tax-motivated sellers).
9) Some of the interesting projects utilizing stable platforms I can see:
Full Vertical Integration and Automation of the Digital Art Market (something I’ve been thinking about, but others may be working on): machine-learning algorithm produces original works of art based on inputs from classics, stores output on IPFS distributed file system, ownership evidenced by non-fungible token on the blockchain, via an auction smart contract sold and transferred online to an eligible crypto wallet, owner earns rent by selling rights to display art starting with micro-payments for brief moments, all protected byautomated digital rights surveillance;
Distributed Ledger Invoice, Audit and Tax Payment Platform (something I heard fromBitcoin BSV, and most likely being worked on by others): in this case a merchant puts its entire ledger on the blockchain, uses a new key pair for each transaction, serving as the basis to simplify audits and make tax payments in real-time. This could economically replace piles of paperwork and 100’s hours of manpower per audit, with a process that also provides greater transparency and precision;
Facilitate Sustainable Economic Development (something I’m working on): in this instance, proof of work cryptocurrencies are a solution to a serious problem with renewable energy. Electricity once produced must be immediately used or it simply goes to waste. Energy projects generate gaps in supply, and in emerging markets or rural areas where grids don’t exist projects are often left idle waiting for demand (which may never arrive due to the circular nature of not having supply). Placing cryptocurrency mining rigs next to renewable sources allows them to utilize the excess power to earn mining rewards, which then act as a kind of synthetic battery to store and monetize the power’s value.
10) The above examples and several others like them represent true revenue models built on top of open blockchains or tapping their value in some other manner, with disruptive powers capable of toppling existing oligopolies. Hidden costs will be exposed, and the practice of someone else earning economic rents on your data can be eliminated.
Again, adoption is the key, getting someone to use it if they haven’t. If you’ve ever used Bitcoin to pay for a cross-border transaction without friction (as I have), or activate a crypto wallet to help lift someone out of poverty because their balance wasn’t enough to maintain a bank account given a thick layer of compliance cost (as I’ve witnessed), or store immutable records on the blockchain for an expected ad infinitum at a cost of just a few pennies (as I’ve done), you’ll understand what a wonderful technology platform this really is, and why it’s the next major step in Internet scaling.
Proof of work works, it’s time to coalesce around a standard, move to wide scale adoption, and get more mainstream. Looking forward to the year ahead given the ongoing reconciliation taking place between the centralized and decentralized worlds.
I’m headed to Park City, Utah in a few days, see you on the other side. Happy New Year!